UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
__________________________
FORM 10-Q
__________________________
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 5,December 18, 2019
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)
__________________________
Delaware74-1335253
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange at which registered
Common Stock ($0.32 par value per share)LUBNew York Stock Exchange
Common Stock Purchase RightsN/ANew York Stock Exchange
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 every Interactive Data File required to be submitted 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 filerx¨
Non-accelerated filer¨xSmaller reporting companyx
  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 10, 2019,January 29, 2020, there were 30,478,97230,700,132 shares of the registrant’s common stock outstanding. 


Luby’s, Inc.
Form 10-Q
Quarter ended June 5,December 18, 2019
Table of Contents
 
 Page
  
  
  
    
    
    
  
  
  
  
  
  
  



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 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. 




Part I—FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Luby’s, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
June 5,
2019
 August 29,
2018
December 18,
2019
 August 28,
2019
 (Unaudited)   (Unaudited)  
ASSETS      
Current Assets:      
Cash and cash equivalents$3,193
 $3,722
$3,734
 $3,640
Restricted cash and cash equivalents9,588
 
9,646
 9,116
Trade accounts and other receivables, net9,667
 8,787
10,471
 8,852
Food and supply inventories3,874
 4,022
2,556
 3,432
Prepaid expenses2,725
 3,219
1,350
 2,355
Total current assets29,047
 19,750
27,757
 27,395
Property held for sale15,031
 19,469
16,488
 16,488
Assets related to discontinued operations1,813
 1,813
1,813
 1,813
Property and equipment, net127,189
 138,287
119,202
 121,743
Intangible assets, net17,105
 18,179
16,349
 16,781
Goodwill555
 555
514
 514
Operating lease right-of-use assets24,781
 
Other assets1,326
 1,936
1,002
 1,266
Total assets$192,066
 $199,989
$207,906
 $186,000
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Current Liabilities:      
Accounts payable$8,475
 $10,457
$7,553
 $8,465
Liabilities related to discontinued operations9
 14
25
 14
Current portion of credit facility debt
 39,338
3,399
 
Operating lease liabilities-current5,921
 
Accrued expenses and other liabilities24,183
 31,755
26,251
 24,475
Total current liabilities32,667
 81,564
43,149
 32,954
Credit facility debt, less current portion41,952
 
45,629
 45,439
Liabilities related to discontinued operations16
 16
Operating lease liabilities-noncurrent24,235
 
Other liabilities7,280
 5,781
844
 6,577
Total liabilities81,915
 87,361
$113,857
 $84,970
Commitments and Contingencies
 

 
SHAREHOLDERS’ EQUITY      
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 30,375,791 and 30,003,642; and shares outstanding were 29,893,592 and 29,503,642, at June 5, 2019 and August 29, 2018, respectively9,721
 9,602
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 30,646,588 and 30,478,972; and shares outstanding were 30,146,588 and 29,978,972, at December 18, 2019 and August 28, 2019, respectively$9,807
 $9,753
Paid-in capital34,955
 33,872
35,146
 34,870
Retained earnings70,250
 73,929
53,871
 61,182
Less cost of treasury stock, 500,000 shares(4,775) (4,775)(4,775) (4,775)
Total shareholders’ equity110,151
 112,628
$94,049
 $101,030
Total liabilities and shareholders’ equity$192,066
 $199,989
$207,906
 $186,000
  
The accompanying notes are an integral part of these consolidated financial statements.


Luby’s, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
Quarter Ended Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
 June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(12 weeks)
(12 weeks) (40 weeks) (40 weeks)(16 weeks)
(16 weeks)
SALES:          
Restaurant sales$65,611
 $77,803
 $222,079
 $256,737
$83,558
 $91,099
Culinary contract services7,571
 6,639
 24,610
 19,413
9,774
 9,496
Franchise revenue1,482
 1,444
 5,126
 4,732
1,707
 2,224
Vending revenue102
 118
 292
 412
110
 99
TOTAL SALES74,766
 86,004
 252,107
 281,294
95,149
 102,918
COSTS AND EXPENSES:          
Cost of food18,478
 22,255
 61,707
 73,190
23,942
 25,083
Payroll and related costs25,015
 29,392
 84,258
 96,032
32,134
 34,513
Other operating expenses11,491
 15,023
 39,404
 48,881
14,794
 16,502
Occupancy costs4,023
 4,609
 14,064
 15,577
4,990
 5,875
Opening costs6
 85
 49
 490
12
 33
Cost of culinary contract services6,791
 6,104
 22,324
 18,113
8,948
 8,815
Cost of franchise operations330
 341
 849
 1,198
565
 273
Depreciation and amortization2,927
 4,050
 11,052
 13,402
3,762
 4,903
Selling, general and administrative expenses9,426
 8,507
 29,666
 29,219
10,158
 10,010
Other charges1,238
 1,214
Provision for asset impairments and restaurant closings675
 4,464
 3,097
 6,716
1,110
 1,227
Net loss (gain) on disposition of property and equipment(434) 154
 (12,935) 172
Net loss on disposition of property and equipment30
 149
Total costs and expenses78,728
 94,984
 253,535
 302,990
101,683
 108,597
LOSS FROM OPERATIONS(3,962) (8,980) (1,428) (21,696)(6,534) (5,679)
Interest income11
 1
 30
 12
23
 
Interest expense(1,324) (1,042) (4,593) (2,235)(1,962) (1,713)
Other income, net112
 9
 198
 317
240
 30
Loss before income taxes and discontinued operations(5,163) (10,012) (5,793) (23,602)(8,233) (7,362)
Provision for income taxes132
 4,121
 346
 7,494
94
 121
Loss from continuing operations(5,295) (14,133) (6,139) (31,096)(8,327) (7,483)
Loss from discontinued operations, net of income taxes(6) (463) (18) (608)(11) (6)
NET LOSS$(5,301) $(14,596) $(6,157) $(31,704)(8,338) (7,489)
Loss per share from continuing operations:          
Basic$(0.18) $(0.47) $(0.21) $(1.04)$(0.28) $(0.25)
Assuming dilution$(0.18) $(0.47) $(0.21) $(1.04)$(0.28) $(0.25)
Loss per share from discontinued operations:          
Basic$0.00
 $(0.02) $0.00
 $(0.02)$(0.00) $(0.00)
Assuming dilution$0.00
 $(0.02) $0.00
 $(0.02)$(0.00) $(0.00)
Net loss per share:          
Basic$(0.18) $(0.49) $(0.21) $(1.06)$(0.28) $(0.25)
Assuming dilution$(0.18) $(0.49) $(0.21) $(1.06)$(0.28) $(0.25)
Weighted average shares outstanding:          
Basic29,874
 30,005
 29,732
 29,863
30,054
 30,059
Assuming dilution29,874
 30,005
 29,732
 29,863
30,054
 30,059
 The accompanying notes are an integral part of these consolidated financial statements.


Luby’s, Inc.
Consolidated Statement of Shareholders’ Equity (unaudited)
(In thousands)
Common Stock     TotalCommon Stock     Total
Issued Treasury Paid-In Retained Shareholders’Issued Treasury Paid-In Retained Shareholders’
Shares
 Amount
 Shares Amount Capital Earnings EquityShares
 Amount
 Shares Amount Capital Earnings Equity
Balance at August 30, 201729,624
 $9,480
 (500) $(4,775) $31,850
 107,497
 144,052
Net loss
 
 
 
 
 (5,537) (5,537)
Share-based compensation expense30
 10
 
 
 857
 
 867
Common stock issued under employee benefit plans163
 52
 
 
 (52) 
 
Balance at December 20, 201729,817
 $9,542
 (500) $(4,775) $32,655
 $101,960
 $139,382
Balance at August 29, 201830,003
 $9,602
 (500) $(4,775) $33,872
 $73,929
 $112,628
Cumulative effect of accounting changes from the adoption of ASC Topic 606
 
 
 
 
 2,479
 2,479
Net loss
 
 
 
 
 (11,571) (11,571)
 
 
 
 
 (7,489) (7,489)
Share-based compensation expense27
 8
 
 
 377
 
 385
42
 13
 
 
 426
 
 439
Common stock issued under employee benefit plans20
 7
 
 
 (7) 
 
81
 26
 
 
 (26) 
 
Common stock issued under nonemployee benefit plans87
 28
 
 
 (28) 
 
38
 12
 
 
 (12) 
 
Balance at March 14, 201829,951
 $9,585
 (500) $(4,775) $32,997
 $90,389
 $128,196
Net loss
 
 
 
 
 (14,596) (14,596)
Share-based compensation expense24
 7
 
 
 432
 
 439
Balance at June 6, 201829,975
 $9,592
 (500) $(4,775) $33,429
 $75,793
 $114,039
Balance at December 19, 201830,164
 $9,653
 (500) $(4,775) $34,260
 $68,919
 $108,057
Common Stock     TotalCommon Stock     Total
Issued Treasury Paid-In Retained Shareholders’Issued Treasury Paid-In Retained Shareholders’
Shares Amount Shares Amount Capital Earnings EquityShares Amount Shares Amount Capital Earnings Equity
Balance at August 29, 201830,003
 $9,602
 (500) $(4,775) $33,872
 $73,929
 $112,628
Balance at August 28, 201930,478
 $9,753
 (500) $(4,775) $34,870
 $61,182
 $101,030
Net loss
 
 
 
 
 (7,489) (7,489)
 
 
 
 
 (8,338) (8,338)
Cumulative effect of accounting changes from the adoption of ASC Topic 606
 
 
 
 
 2,479
 2,479
Cumulative effect of accounting changes from the adoption of ASC Topic 842
 
 
 
 
 1,027
 1,027
Share-based compensation expense42
 13
 
 
 426
 
 439
58
 19
 
 
 347
 
 366
Common stock issued under employee benefit plans81
 26
 
 
 (26) 
 
45
 15
 
 
 (51) 
 (36)
Common stock issued under nonemployee benefit plans38
 12
 
 
 (12) 
 
64
 20
 
 
 (20) 
 
Balance at December 19, 201830,164
 $9,653
 (500) $(4,775) $34,260
 $68,919
 $108,057
Net Income
 
 
 
 
 $6,632
 $6,632
Share-based compensation expense98
 31
 
 
 363
 
 394
Common stock issued under employee benefit plans12
 4
 
 
 (4) 
 
Common stock issued under nonemployee benefit plans15
 5
 
 
 (5) 
 
Balance at March 13, 201930,289
 $9,693
 (500) $(4,775) $34,614
 $75,551
 $115,083
Net loss

 

   

 

 $(5,301) (5,301)
Share-based compensation expense86
 $28
   $
 $341
 $
 369
Balance at June 5, 201930,375
 $9,721
 (500) $(4,775) $34,955
 $70,250
 $110,151
Balance at December 18, 201930,645
 $9,807
 (500) $(4,775) $35,146
 $53,871
 $94,049
 
The accompanying notes are an integral part of these consolidated financial statements. 


Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(40 weeks) (40 weeks)(16 weeks) (16 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss$(6,157) $(31,704)$(8,338) $(7,489)
Adjustments to reconcile net loss to net cash used in operating activities:      
Provision for asset impairments and net losses (gains) on property sales(9,838) 6,599
Provision for asset impairments and net losses on property sales1,140
 1,376
Depreciation and amortization11,052
 13,402
3,762
 4,903
Amortization of debt issuance cost1,063
 438
339
 449
Share-based compensation expense1,192
 1,691
366
 439
Deferred tax provision
 8,026
Cash used in operating activities before changes in operating assets and liabilities(2,688) (1,548)(2,731) (322)
Changes in operating assets and liabilities:      
Decrease (increase) in trade accounts and other receivables(880) 143
(1,549) 733
Decrease (increase) in food and supply inventories148
 (376)369
 (123)
Decrease in prepaid expenses and other assets1,106
 575
804
 1,881
Decrease in accounts payable, accrued expenses and other liabilities(8,567) (3,672)
Net cash used in operating activities(10,881) (4,878)
Decrease in operating lease assets1,922
 
Decrease in operating lease liabilities(2,313) 
Increase (decrease) in accounts payable, accrued expenses and other liabilities1,367
 (912)
Net cash provided by (used in) operating activities(2,131) 1,257
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from disposal of assets and property held for sale21,761
 3,363
149
 171
Insurance proceeds
 756
Purchases of property and equipment(2,866) (11,730)(694) (1,119)
Net cash provided by (used in) investing activities18,895
 (7,611)
Net cash used in investing activities(545) (948)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Revolver borrowings37,500
 83,200
3,300
 18,506
Revolver repayments(55,500) (68,600)
 (38,500)
Proceeds from term loan58,400
 

 58,400
Term loan repayments(36,107) (1,415)
 (19,506)
Debt issuance costs(3,236) (213)
 (3,155)
Taxes paid on equity withheld(12) (70)
 (8)
Net cash provided by financing activities1,045
 12,902
3,300
 15,737
Net increase in cash and cash equivalents and restricted cash9,059
 413
624
 16,046
Cash and cash equivalents and restricted cash at beginning of period3,722
 1,096
12,756
 3,722
Cash and cash equivalents and restricted cash at end of period$12,781
 $1,509
$13,380
 $19,768
Cash paid for:      
Income taxes$510
 $
Income taxes, net of (refunds)$(17) $29
Interest3,255
 1,717
1,302
 1,637
 
The accompanying notes are an integral part of these consolidated financial statements.


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”, "we", "our", "us", or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for our Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter and three quarters ended June 5,December 18, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2019.26, 2020.
 
The consolidated balance sheet dated August 29, 2018,28, 2019, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from our 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 29, 2018.28, 2019.

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.

Reportable Segments
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, the similarity of store level profit margins and the nature of the regulatory environment are alike. The Company has five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurant, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”).

Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants, Franchise operations and Culinary Contract Services. The Company-owned restaurants consisted of the three brands discussed above, which were aggregated into one reportable segment.  In the fourth quarter of fiscal 2019 we re-evaluated and disaggregated the Company-owned restaurants into three reportable segments based on brand name.  As such, as of the fourth quarter 2019, our five reportable segments are Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations and Culinary Contract Services. Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in our Annual Report on Form 10-K. The segment data for the comparable periods of fiscal 2018 has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.

Other Charges

Other charges includes those expenses that we consider related to our restructuring efforts or are not part of our recurring operations. These expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019. See Note 6 to these unaudited consolidated financial statements.

Recently Adopted Accounting Pronouncements
We transitioned toOn August 29, 2019, the Financialfirst day of fiscal 2020, (the "Effective Date") we adopted Accounting Standards BoardUpdate (“FASB”ASU”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) from ASC Topic 605, Revenue Recognition and ASC Topic 953-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on August 30, 2018. Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.

We adopted ASC 606 using the modified retrospective method applied to contracts that were not completed at August 29, 2018. Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical expedients under ASC 606 to:  (1) not adjust the consideration for the effects of a significant financing component, (2) recognize incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance obligations for contracts with an original expected duration of one year or less.

The adoption of ASC 606 did not have an impact on the recognition of revenues from our primary source of revenue from our Company owned restaurants (except for recognition of breakage and discounts on gift cards, as discussed below), revenues from our culinary contract services, vending revenue or ongoing franchise royalty fees, which are based on a percentage of franchisee sales. The adoption did impact the recognition of initial franchise fees and area development fees and gift card breakage.
The adoption of ASC 606 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the term of the franchise agreement, which is usually 20 years. Historically, we have recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we have completed all our material obligations and initial services.
Additionally, ASC 606 requires gift card breakage to be recognized as revenue in proportion to the pattern of gift card redemptions exercised by our customers. Historically, we recorded breakage income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance will be redeemed.
Upon adoption of ASC 606 we changed our reporting of marketing and advertising fund (“MAF”) contributions from franchisees and the related marketing and advertising expenditures. Under the Previous Standards, we did not reflect MAF contributions from franchisees and MAF expenditures in our statements of operations. Although the gross amounts of our revenues and expenses are impacted by the recognition of franchisee MAF fund contributions and related expenditures of MAF funds we manage, increases to gross revenues and expenses did not result in a material net impact to our statement of operations.
Our consolidated financial statements reflect the application of ASC 606 beginning in fiscal year 2019, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. The $2.5 million cumulative effect of our adoption of ASC 606 is reflected as an increase to our August 30, 2018 shareholders’ equity with a corresponding decrease to accrued expenses and other liabilities and was comprised of (1) a reduction to accrued expense and other liabilities of


$3.1 million to adjust the unused gift card liability balance as if the gift card breakage guidance had been applied prior to August 30, 2018 and (2) an increase to accrued expense and other liabilities of $0.6 million to adjust the unearned franchise fees for the fees received through the end of fiscal year 2018 that would have been deferred and recognized over the term of the franchise agreement if the new guidance had been applied prior to August 30, 2018.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This update provides clarification regarding how certain cash receipts and disbursements are presented and classified in the statement of cash flows. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. We adopted ASU 2016-15 on August 30, 2018 using the retrospective method of adoption. The adoption of this standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. This update addresses the diversity in practice on how to classify and present changes in restricted cash or restricted cash equivalents in the statement of cash flows. The update requires that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents in addition to changes in cash and cash equivalents. Entities are also required to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Also, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows. We adopted ASU 2016-18 effective August 30, 2018 using the retrospective method of adoption. Our adoption of ASU 2016-18 represents a change in accounting principle. Our consolidated statement of cash flow for the three quarters ended June 6, 2018 has been revised to reflect the application of ASU 2016-18. See Note 2 for the reconciliation and disclosures regarding the restrictions required by this update. The adoption of this standard did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements - "to be Adopted"
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Subsequently, the FASB issued ASU 2018-01, 2018-10, 2018-11, 2018-20, along with related clarifications and 2019-01, which were targeted improvements to ASU 2016-02 (collectively, with ASU 2016-02, “ASC(“ASC 842”) and provided entities with an additional (and optional) transition method to adopt the new lease standard.. ASC 842 requires a lesseelessees 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 onasset. 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 balance sheet, as well as provide additional disclosures aboutability to assess the amount, timing, and potential uncertainty of cash flows arising fromrelated to leases. ASC 842 is effective for annual and interim periods beginning after December 15, 2018. ASC 842 may be adopted using the modified retrospective method, which requires application to all comparative periods presented (the “comparative method”) or alternatively, as of the effective date of initial application without restating comparative period financial statements (the “effective date method”). We will adopt ASC 842 in the first quarter of fiscal year 2020 using the effective date method. The ASC 842 also provides several practical expedients and policies that companies may elect under either transition method.
We are implementinghave implemented a new lease tracking and accounting system in connection with the adoption of ASC 842. Based on a preliminary assessment,

We elected the optional transition method to apply ASC 842 as of the effective date and therefore, we expect that most of our operating lease commitments will be subjecthave not applied the standard to the new standard and we will record operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilitiescomparative periods presented on our consolidated balance sheet.financial statements. We expect to electalso elected the the package of practical expedients which will allowthat allowed us not to reassess previous accounting conclusions regarding lease identification, initial direct costs and classification for existing or expired leases as of the dateeffective 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 adoption. operating lease assets.

We have made an accounting policy election to account for lease components and nonlease 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 nonlease component are the same . We have also expect to electelected the short-term lease recognition exemption which provides the optionfor all of our leases that allows us to not recognize right-of-use assets and related liabilities for leases with termsan initial term of 12 months or less. Weless and that do not include an option to purchase the underlying asset that we are continuing our assessmentreasonably 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 $32.5 million based on the present value of the other practical expedients and policy elections available under ASC 842. We are continuing our assessmentremaining 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 derecognize the deferred gain 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.



The impact of adoption, which may identify additional impactsadopting ASC 842 on effected lines of our opening consolidated balance sheet was as follows:
 Balance at August 28, 2019ASC 842 AdjustmentBalance at August 29, 2019
 (In thousands)
ASSETS   
Trade accounts and other receivables, net$8,852
$70
$8,922
Prepaid expenses2,355
(225)2,130
Total Current Assets27,395
(155)27,240
Intangible assets, net16,781
(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 liabilities24,475
(1,002)23,473
Total Current Liabilities32,954
7,059
40,013
Operating lease liabilities-non-current
24,360
24,360
Other liabilities6,577
(5,600)977
Total Liabilities$84,970
$25,819
$110,789
SHAREHOLDERS’ EQUITY   
Retained earnings$61,182
$1,027
$62,209
Total Shareholders Equity101,030
1,027
102,057
Total Liabilities and Shareholders Equity$186,000
$26,846
$212,846
New Accounting Pronouncements - "to be Adopted"
There are no issued accounting pronouncements that we have yet to adopt that we believe would have a material effect on our consolidated financial statements.

Subsequent Events
We evaluated events subsequent to June 5,December 18, 2019 through the date the financial statements were issued to determine if the nature and significance of the events warrant inclusion in our consolidated financial statements.
Note 2. Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:


June 5,
2019
 August 29,
2018
December 18,
2019
 August 28,
2019
(in thousands)(in thousands)
Cash and cash equivalents$3,193
 $3,722
$3,734
 $3,640
Restricted cash and cash equivalents9,588
 
9,646
 9,116
Total cash and cash equivalents shown in the statement of cash flows$12,781
 $3,722
Total cash and cash equivalents shown in our consolidated statements of cash flows$13,380
 $12,756

Amounts included in restricted cash represent those required to be set aside for (1) maximum amount of interest payable in the next 12 months under the 2018 Credit Agreement (see Note 13), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire in 2019within 12 months and (3) pre-funding of the credit limit under our corporate purchasing card program.



Note 3. Revenue Recognition



Restaurant Sales
Restaurant sales consist of sales of food and beverage products to restaurant guests at our Luby’s Cafeteria,cafeterias and our Fuddruckers and Cheeseburger in Paradise restaurants. Revenue from restaurant sales is recognized at the point of sale and is presented net of discounts, coupons, employee meals and complimentary meals. Sales taxes that we collect and remit to the appropriate taxing authority related to these sales are excluded from revenue.
We sell gift cards to our customers in our venues and through certain third-party distributors. These gift cards do not expire and do not incur a service fee on unused balances. Sales of gift cards to our restaurant customers are initially recorded as a contract liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards are redeemed, we recognize revenue and reduce the contract liability. Discounts on gift cards sold by third parties are recorded as a reduction to accrued expenses and other liabilities and are recognized, as a reduction to revenue, over a period that approximates redemption patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. Under ASC 606 weWe recognize gift card breakage revenue in proportion to the pattern of gift card redemptions exercised by our customers, using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance would be redeemed.
Culinary contract services revenue
Our Culinary Contract Services segment provides food, beverage and catering services to our clients at their locations. Depending on the type of client and service, we are either paid directly by our client and/or directly by the customer to whom we have been provided access by our client.
We typically use one of the following types of client contracts:
Fee-Based Contracts.Contracts Revenue from fee-based contracts is based on our costs incurred and invoiced to the client along with the agreed management fee, which may be calculated as a fixed dollar amount or a percentage of sales or other variable measure. Some fee-based contracts entitle us to receive incentive fees based upon our performance under the contract, as measured by factors such as sales, operating costs and client satisfaction surveys. This potential incentive revenue is allocated entirely to the management services performance obligation. We recognize revenue from our management fee and payroll cost reimbursement over time as the services are performed. We recognize revenue from our food and 3rd party purchases reimbursement at the point in time when the vendor delivers the goods or performs the services.
Profit and Loss Contracts.Contracts Revenue from profit and loss contracts consist primarily of sales made to consumers, typically with little or no subsidy charged to clients. Revenue is recognized at the point of sale to the consumer. Sales taxes that we collect and remit to the appropriate taxing authority related to these sales are excluded from revenue.
As part of client contracts, we sometimes make payments to clients, such as concession rentals, vending commissions and profit share. These payments are accounted for as operating costs when incurred.
Revenue from the sale of frozen foods includes royalty fees based on a percentage of frozen food sales and is recognized at the point in time when product is delivered by our contracted manufacturers to the retail outlet.


Franchise revenues
Franchise revenues consist primarily of royalties, marketing and advertising fund (“MAF”) contributions, initial and renewal franchise fees, and upfront fees from area development agreements related to our Fuddruckers restaurant brand. Our performance obligations under franchise agreements consist of: (1) a franchise license, including a license to use our brand and MAF management, (2) pre-opening services, such as training and inspections and (3) ongoing services, such as development of training materials and menu items as well as restaurant monitoring and inspections. These performance obligations are highly interrelated, so we do not consider them to be individually distinct. We account for them under ASC 606 as a single performance obligation, which is satisfied over time by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee MAF contributions, are calculated as a percentage of franchise restaurant sales. MAF contributions paid by franchisees are used for the creation and development of brand advertising, marketing and public relations, merchandising research and related programs, activities and materials. The initial franchisee fee is payable upon execution of the franchise agreement and the renewal fee is due and payable at the expiration of the initial term of the franchise agreement. Our franchise agreement royalties, including advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.
Initial and renewal franchise fees and area development fees are recognized as revenue over the term of the respective agreement. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro-rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
Under the Previous Standards, initial franchise fees and area development fees were recognized as revenue when the related restaurant commenced operations and we completed all material pre-opening services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. MAF contributions from franchisees and the related MAF expenditures were accounted for on a net basis in our consolidated balance sheets.

Revenue from vending machine sales is recorded at the point in time when the sale occurs.
Contract Liabilities
Contract liabilities consist of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement, (2) liability for unused gift cards and (3) unamortized discount on gift cards sold to 3rd party retailers. These contract liabilities are included in accrued expenses and other liabilities in our consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (August 30, 2018) and June 5, 2019:liabilities:
  Gift Cards, net of discounts Franchise Fees
  (In thousands)
Balance at August 30, 2018 $2,707
 $1,891
Revenue recognized that was included in the contract liability balance at the beginning of the year (1,163) (512)
Increase (decrease), net of amounts recognized as revenue during the period 1,514
 (40)
Balance at June 5, 2019 $3,058
 $1,339
  Gift Cards, net of discounts Franchise Fees
  (In thousands)
Balance at August 28, 2019 $2,882
 $1,287
Revenue recognized that was included in the contract liability balance at the beginning of the year (657) (12)
Increase, net of amounts recognized as revenue during the period 1,593
 
Balance at December 18, 2019 $3,818
 $1,275
The following table illustrates the estimated revenues expected to be recognized in the future related to our deferred franchise fees that are unsatisfied (or partially unsatisfied) as of June 5, 2019 (in thousands):


December 18, 2019:
 Franchise Fees Franchise Fees
(In thousands)(In thousands)
Remainder of fiscal 2019 $9
Fiscal 2020 40
Remainder of fiscal 2020 $38
Fiscal 2021 40
 37
Fiscal 2022 39
 38
Fiscal 2023 39
 37
Fiscal 2024 38
Thereafter 401
 332
Total operating franchise restaurants $568
 520
Franchise restaurants not yet opened(1)
 771
 755
Total $1,339
 $1,275
(1) Amortization of the deferred franchise fees will begin when the restaurant commences operations and revenue will be recognized straight-line over the franchise term (which is typically 20 years). If the franchise agreement is terminated, the deferred franchise fee will be recognized in full in the period of termination.
Disaggregation of Total Revenues
For the three quartersquarter ended June 5,December 18, 2019, total sales of $252.1$95.1 million was comprised of revenue from performance obligations satisfied over time of $17.7$6.9 million and revenue from performance obligations satisfied at a point in time of $234.4$88.3 million. For the quarter ended June 5, 2019,December 19, 2018, total sales of $74.8$102.9 million was comprised of revenue from performance obligations satisfied over time of $5.4$7.1 million and revenue from performance obligations satisfied at a point in time of $69.4$95.8 million. See Note 5. Reportable Segments for disaggregation of revenue by reportable segment.
With
Note 4. Leases
Lessee
We determine if a contract contains a lease at the exceptioninception date of the cumulative effect adjustment describedcontract. Our material operating leases consist of restaurant locations and administrative facilities ("Property Leases"). U.S. GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the date on which the leased asset is available for our use (the “Commencement Date”) and the��lease term used in Note 1, the adoptionevaluation includes the non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise of ASC 606the


renewal option is reasonably certain and failure to exercise such option would result in an economic penalty (the "Reasonably Certain Lease Term"). Our lease agreements generally contain a primary term of five to 30 years with one or more options to renew or extend the lease generally from one to five years each. In addition to leases for our restaurant locations and administrative facilities, we also lease vehicles and administrative equipment under operating leases. As of December 18, 2019, we did not have any finance leases.
At the inception of a material effectnew lease, we recognize an operating lease liability and a corresponding right of use asset, which are calculated as the the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date.
Property lease agreements may include rent holidays, rent escalation clauses and contingent rent provisions based on a percentage of sales in excess of specified levels. Contingent rental expenses (“variable lease cost”) are recognized prior to the achievement of a specified target, provided that the achievement of the target is considered probable. Most of our lease agreements include renewal periods at our option. We include the rent holiday periods and scheduled rent increases in our calculation of straight-line rent expense.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the right-of-use asset and interest expense related to the operating lease liability. We use the reasonably certain lease term in our calculation of straight-line rent expense. We expense rent from commencement date through restaurant open date as opening expense. Once a restaurant opens for business, we record straight-line rent expense plus any additional variable contingent rent expense (such as common area maintenance, insurance and property tax costs) to the extent it is due under the lease agreement as occupancy expense for our restaurants and selling, general and administrative expense for our corporate office and support facilities. The interest expense related to the lease liability for abandoned leases is recorded to provision for asset impairments and store closings. Rental expense for lease properties that are subsequently subleased to franchisees or other third parties is recorded as other income.
We make judgments regarding the reasonably certain lease term for each property lease, which can impact the classification and accounting for a lease as a finance lease or an operating lease, the rent holiday and/or escalations in payments that are taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
The discount rate used to determine the present value of the lease payments is the Company’s estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the Company generally cannot determine the interest rate implicit in the lease.
Lessor
We occasionally lease or sublease certain restaurant properties to our franchisees or to third parties. The lease descriptions, terms, variable lease payments and renewal options are generally similar to our lessee leases described above. Similar to our lessee accounting, we elected the lessor practical expedient that allows us to not separate non-lease components from lease components in regard to all property leases where we are the lessor. As of December 18, 2019, we did not have any sales-type or direct financing leases.
Supplemental balance sheet information related to our leases was as follows:
Operating Leases Classification December 18, 2019
    (in thousands)
Right-of-use assets Operating lease right-of-use assets $24,781
     
Current lease liabilities Operating lease liabilities-current $5,921
Non-current lease liabilities Operating lease liabilities-noncurrent 24,235
Total lease liabilities   $30,156
Weighted-average lease terms and discount rates were as follows:
Weighted-average remaining lease term6.09 years
Weighted-average discount rate9.18%
Components of lease expense were as follows:


  16 Weeks Ended
  December 18, 2019
  (in thousands)
Operating lease expense $2,597
Variable lease expense 296
Short-term lease expense 63
Sublease expense 221
Total lease expense $3,177
Operating lease income is included in other income on our consolidated financial statements forof operations, For the three quartersquarter ended June 5, 2019.December 18, 2019, our operating lease income was comprised of:
  16 Weeks Ended
  December 18, 2019
  (in thousands)
Operating lease income $290
Sublease income 172
Variable lease income 74
Total lease income $536
Supplemental disclosures of cash flow information related to leases were as follows:
  16 Weeks Ended
  December 18, 2019
  (in thousands)
Cash paid for amounts included in the measurement of lease liabilities $2,850
   
Right-of-use assets obtained in exchange for lease liabilities $
Operating lease obligations maturities in accordance with Topic 842 as of December 18, 2019 were as follows:
  (in thousands)
Remainder of FY 2020 $8,421
FY 2021 7,287
FY 2022 5,352
FY 2023 4,670
FY 2024 5,023
Thereafter 9,498
Total lease payments 40,251
Less: imputed interest (10,095)
Present value of operating lease obligations $30,156
The operating lease obligation and rent expense tables above include amounts related to two leases with related parties, which are further described at Note 12. Related Parties.
Annual future minimum lease payments under noncancelable operating leases with terms in excess of one year as of August 28, 2019 in accordance with the previous lease accounting standard (ASC 840) are as follows:


Fiscal Year Ending:(In thousands)
August 26, 2020$8,841
August 25, 20217,155
August 31, 20225,643
August 30, 20234,410
August 28, 20243,768
Thereafter10,312
Total minimum lease payments$40,129

Note 4. Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.

Note 5. Reportable Segments
 
TheAs more fully discussed at Note 1. Nature of Operations and Significant Accounting Policies, in the fourth quarter of fiscal 2019, the Company reevaluated its reportable segments and has disaggregated its Company-owned restaurants into three reportable segments; Luby’s cafeterias, Fuddruckers restaurants and Cheeseburger in Paradise restaurants. We began reporting on the new structure in the fourth quarter of fiscal 2019. The segment data for the comparable periods presented has been recast to conform to the current period presentation. We have five reportable segments: Company-ownedLuby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”), and Franchise Operations.contract services.
 
Company-owned restaurants
 
Company-owned restaurants consists of several brands which are aggregatedLuby’s cafeterias, Fuddruckers restaurants and Cheeseburger in Paradise restaurant reportable segments. We consider each restaurant to be an operating segment because operating results and cash flow can be determined for each restaurant. We aggregate our operating segments into one reportable segmentsegments by restaurant brand because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the long-term store level profit margins, and the nature of the regulatory environment and store level profit margins are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is defined as restaurant sales and vending revenue, less cost of food, payroll and related costs, other operating expenses and occupancy costs. The primary brands areAll Company-owned Luby’s Cafeterias,cafeterias, Fuddruckers - World’s Greatest Hamburgers® and Cheeseburger in Paradise. All company-ownedParadise restaurants are casual dining restaurants. Each restaurant is an operating

The Luby’s cafeterias segment because operatingincludes the results and cash flow can be determined for each restaurant.
of our company-owned Luby’s Cafeterias restaurants. The total number of Company-owned restaurants was 130Luby’s cafeterias at June 5,December 18, 2019 and 146 at August 29, 2018.28, 2019 were 78 and 79, respectively.

The Fuddruckers restaurant segment includes the results of our company-owned Fuddruckers restaurants. The total number of Fuddruckers restaurants at December 18, 2019 and August 28, 2019 were 40 and 44, respectively.

The Cheeseburger in Paradise restaurant segment includes the results of our Cheeseburger in Paradise restaurants. The total number of Cheeseburger in Paradise restaurants at both December 18, 2019 and August 28, 2019 was one.

Culinary Contract Services ("CCS")
 
CCS, branded as Luby’s Culinary Services, isconsists 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 hashad contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, retail grocery stores, behavioral hospitals, a senior living facility, sports stadiums, a senior care facility, government, 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 Servicesculinary contract services on theour consolidated statements of operations includes all food, payroll and related costs, other operating expenses, and other direct general and administrative expenses related to CCS sales. The total number of CCS locations was 32contracts at June 5,December 18, 2019 and August 28, at August 29, 2018.2019 were 33 and 31, respectively.

CCS began selling Luby's Famous Fried Fish, Macaroni & Cheese and Chicken Tetrazzini in February 2017, December 2016, and May, 2019, respectively, in the freezer section of H-E-B stores, a Texas-born retailer. H-E-B stores now stock the family-sized versions of Luby's Classic Macaroni and Cheese , Chicken Tetrazzini, and Luby's Jalapeño Macaroni and Cheese varietiesFried Fish. HEB also stocks single serve versions of these three items as well as Luby's Fried Fish.Jalapeno Macaroni and Cheese.

Fuddruckers 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 generally 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 provideswe provide franchise 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, as well asand operations and accounting and operational guidelines set forth in various policies and procedures manuals.
  
All franchisees are required to operate their restaurants in accordance with Fuddruckers’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 standardstandards evaluation reports.
 
The number of franchised restaurants was 107 at June 5,December 18, 2019 and 105 at August 29, 2018.  
Licensee
In November 1997, a prior owner of the Fuddruckers – World’s Greatest Hamburgers®28, 2019 brand granted to a licensee the exclusive right to use the Fuddruckers proprietary marks, trade dresswere 97 and system to develop Fuddruckers restaurants in a territory consisting of certain countries in Africa, the Middle East and parts of Asia. As of January 2019, this licensee operated 33 restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, United Arab Emirates, Qatar, Jordan, and Bahrain. The Company does not receive revenue or royalties from these restaurants.102, respectively.

Segment Table

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


 Quarter Ended Three Quarters Ended
 June 5,
2019
 June 6,
2018
 June 5,
2019
 June 6,
2018
 (12 weeks) (12 weeks) (40 weeks) (40 weeks)
 (In thousands)
Sales:       
Company-owned restaurants (1)
$65,713
 $77,921
 $222,371
 $257,149
Culinary contract services7,571
 6,639
 24,610
 19,413
Franchise operations1,482
 1,444
 5,126
 4,732
Total$74,766
 $86,004
 $252,107
 $281,294
Segment level profit:    
 
Company-owned restaurants$6,706
 $6,642
 $22,938
 $23,469
Culinary contract services780
 535
 2,286
 1,300
Franchise operations1,152
 1,103
 4,277
 3,534
Total$8,638
 $8,280
 $29,501
 $28,303
Depreciation and amortization:    
 
Company-owned restaurants$2,498
 $3,381
 $9,502
 $11,155
Culinary contract services25
 18
 70
 54
Franchise operations177
 178
 590
 592
Corporate227
 473
 890
 1,601
Total$2,927
 $4,050
 $11,052
 $13,402
Capital expenditures:    
 
Company-owned restaurants$991
 $3,152
 $2,553
 $9,569
Culinary contract services12
 55
 22
 185
Corporate82
 493
 291
 1,976
Total$1,085
 $3,700
 $2,866
 $11,730
     
 
Loss before income taxes and discontinued operations    
 
Segment level profit$8,638
 $8,280
 $29,501
 $28,303
Opening costs(6) (85) (49) (490)
Depreciation and amortization(2,927) (4,050) (11,052) (13,402)
Selling, general and administrative expenses(9,426) (8,507) (29,666) (29,219)
Provision for asset impairments and restaurant closings(675) (4,464) (3,097) (6,716)
Net gain (loss) on disposition of property and equipment434
 (154) 12,935
 (172)
Interest income11
 1
 30
 12
Interest expense(1,324) (1,042) (4,593) (2,235)
Other income, net112
 9
 198
 317
Loss before income taxes and discontinued operations$(5,163) $(10,012) $(5,793) $(23,602)

 June 5,
2019
 August 29,
2018
Total assets:(in thousands)
Company-owned restaurants(2)
$148,800
 $152,281
Culinary contract services7,033
 4,569
Franchise operations(2)
10,263
 10,212
Corporate25,970
 32,927
Total$192,066
 $199,989
 Quarter Ended
 December 18, 2019 December 19, 2018
 (In thousands)
Sales:   
Luby's cafeterias$67,144
 $68,614
Fuddruckers restaurants(1)
15,679
 21,633
Cheeseburger in Paradise restaurants845
 959
Culinary contract services9,774
 9,488
Fuddruckers franchise operations1,707
 2,224
Total$95,149
 $102,918
Segment level profit:   
Luby's cafeterias$7,909
 $8,993
Fuddruckers restaurants(33) 457
Cheeseburger in Paradise restaurants(67) (225)
Culinary contract services826
 681
Fuddruckers franchise operations1,141
 1,951
Total$9,776
 $11,857
Depreciation and amortization:   
Luby's cafeterias$2,451
 $3,002
Fuddruckers restaurants550
 1,332
Cheeseburger in Paradise restaurants28
 55
Culinary contract services10
 22
Fuddruckers franchise operations236
 236
Corporate487
 256
Total$3,762
 $4,903
Capital expenditures:   
Luby's cafeterias$586
 $956
Fuddruckers restaurants55
 109
Cheeseburger in Paradise restaurants1
 
Culinary contract services
 54
Fuddruckers franchise operations7
 
Corporate44
 
Total693
 $1,119

(1)Includes vending revenue of approximately $102$110 thousand and $118$99 thousand for the quarterquarters ended June 5,December 18, 2019 and June 6,December 19, 2018, respectively, and amortization of discounts on gift cards sold partially offset by gift card breakage of approximately $131 thousand in the quarter ended June 5, 2019. Includes vending revenue of approximately $292 thousand and $412 thousand for the three quarters ended June 5, 2019 and June 6, 2018, respectively, and amortization of discounts on gift cards sold partially offset by gift card breakage of approximately $375 thousand in the three quarters ended June 5, 2019.respectively. 
(2)Company-owned restaurants segment includes $7.7 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles. Franchise operations segment includes approximately $9.4 million in royalty intangibles.




 Quarter Ended
 December 18, 2019 December 19, 2018 
 (In thousands)
Loss before income taxes and discontinued operations:    
Segment level profit$9,776
 $11,857
 
Opening costs(12) (33) 
Depreciation and amortization(3,762) (4,903) 
Selling, general and administrative expenses(10,158) (10,010) 
Other charges(1,238) (1,214) 
Provision for asset impairments and restaurant closings(1,110) (1,227) 
Net loss on disposition of property and equipment(30) (149) 
Interest income23
 
 
Interest expense(1,962) (1,713) 
Other income, net240
 30
 
Total$(8,233) $(7,362) 
  
 December 18, 2019 August 28, 2019 
 (In thousands)
Total assets:    
Luby's cafeterias$121,680
 $107,287
 
Fuddruckers restaurants (1)
39,010
 25,725
 
Cheeseburger in Paradise restaurants (2)
1,057
 829
 
Culinary contract services7,670
 6,703
 
Fuddrucker franchise operations (3)
9,860
 10,034
 
Corporate28,629
 $35,422
 
Total$207,906
 $186,000
 

(1) Includes Fuddruckers trade name intangible of 7.3 million and 7.5 million at December 18, 2019 and August 28, 2019, respectively.
(2) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $45 thousand and $46 thousand at December 18, 2019 and August 28, 2019, respectively.
(3) Fuddruckers franchise operations segment includes royalty intangibles of $9.0 million and $9.2 million at December 18, 2019 and August 28, 2019 respectively.



Note 6. Derivative Financial InstrumentsOther Charges

The Company enters into derivative instruments, from timeOther charges includes those expenses that we consider related to time, to manage its exposure to changes in interest rates on a percentageour restructuring efforts or are not part 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 paid was 1.965% and the variable rate we received was one-month LIBOR. The term of the interest rate swap was 5 years. The Company did not apply hedge accounting treatment to this derivative; therefore, changes in fair value of the instrument were recognized in Other income (expense), net. The changes in the interest rate swap fair value resulted in an expense of approximately $0.1 million during the three quarters ended June 5, 2019 and a credit to expense of approximately $0.7 million in the three quarters ended June 6, 2018. The Company terminated its interest rate swap in the quarter ended December 19, 2018 and received approximately $0.3 million in cash proceeds.our ongoing operations.

The Company does not hold or use derivative instruments for trading purposes.
 Quarter Ended December 18, 2019 Quarter Ended December 19, 2018
 (In thousands)
Proxy communication related$
 742
Employee severances619
 472
Restructuring related619
 
Total Other charges$1,238
 $1,214




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 authoritative accounting guidance requires or permits 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.

The fair values of the Company's cash and cash equivalents, restricted cash and cash equivalents, trade receivables and other receivables, net, and accounts payable approximate their carrying value due to their short duration. The carrying value of the Company's total credit facility debt, net of unamortized discounts and debt issue costs, at June 5,December 18, 2019 and August 29, 201828, 2019 was approximately $42.0$49.0 million and $39.3$45.4 million, respectively, which approximates fair value because the applicable interest rate is adjusted frequently based on short-term market rates (Level 2).

 RecurringThere were no recurring fair value measurements related to assets are presented below:
Fair Value
Measurement Using
June 5, 2019Quoted
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)
$
$
$
$
(1) The Companyat December 18, 2019 or December 19, 2018 . We terminated itsour interest rate swap in the first quarter of fiscal 2019 and received cash proceeds of approximately $0.3 million which is recorded in other income.


   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 was recorded in other assets on our consolidated balance sheet.

RecurringThere were no recurring fair value measurements related to liabilities are presented below:
Fair Value
Measurement Using
June 5, 2019Quoted
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)
$
$
$
$
Monte Carlo Simulation
(1)at December 18, 2019. The fair value of the Company's 2017 Performance Based Incentive Plan liabilities was zero.zero at December 19, 2018.

   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
Total liabilities at Fair Value$229
 $
 $229
 $
  
(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 was recorded in other liabilities on our consolidated balance sheet.










Non-recurring fair value measurements related to impaired property held for sale and property and equipment consisted of the following:
  
Fair Value
Measurement Using
    
Fair Value
Measurement Using
  
June 5, 2019 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(3)
December 18, 2019 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(3)
Nonrecurring Fair Value Measurements  (In thousands)      (In thousands)    
Continuing Operations                  
Property held for sale(1)
$8,030
 $
 $
 $8,030
 $(70)$4,661
 $
 $
 $4,661
 $(19)
Property and equipment related to company-owned restaurants(2)
704
 
 
 704
 (3,476)
Operating lease right-of-use assets (2)

 
 
 
 (488)
Total Nonrecurring Fair Value Measurements$8,734
 $
 $
 $8,734
 $(3,546)$4,661
 $
 $
 $4,661
 $(507)
Discontinued Operations         
Property held for sale(5)
$
 $
 $
 $
 $
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $8.1$4.7 million were written down to their fair value, less cost to sell, of approximately $8.0$4.7 million, resulting in an impairment charge of approximately $0.1 million.$19 thousand.
(2) In accordance with Subtopic 360-10, long-livedoperating lease right-to-use assets held and used with a carrying value of approximately $4.2$0.5 million were written down to their fair value of approximately $0.7 million,zero, resulting in an impairment charge of approximately $3.5$0.5 million.
(3) Total impairments for continuing operations are included in provision for asset impairments and restaurant closings in our consolidated statement of operations for the three quartersquarter ended June 5,December 18, 2019.



  
Fair Value
Measurement Using
    
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)
December 19, 2018 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(3)
Nonrecurring Fair Value Measurements  (In thousands)      (In thousands)    
Continuing Operations                  
Property held for sale(1)
$9,074
 $
 $
 $9,074
 $(2,808)$8,374
 $
 $
 $8,374
 $(76)
Property and equipment related to company-owned restaurants (2)
1,519
 
 
 1,519
 (2,721)
 
 
 
 (1,145)
Goodwill (3)

 
 
 
 (513)
Total Nonrecurring Fair Value Measurements$10,593
 $
 $
 $10,593
 $(6,042)$8,374
 $
 $
 $8,374
 $(1,221)
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$8.4 million were written down to their fair value, less approximately $1.0 million net proceeds on sales,costs to sell, of approximately $9.1$8.4 million, resulting in an impairment charge of approximately $2.8 million.$76 thousand.
(2) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $4.2$1.1 million were written down to their fair value of approximately $1.5 million,zero, resulting in an impairment charge of approximately $2.7$1.1 million.
(3) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately $513 thousand was written down to zero, resulting in an impairment charge of approximately $513 thousand.
(4) Total impairments are included in provision for asset impairments and restaurant closings in our unaudited consolidated statement of operations for the three quartersquarter 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 from discontinued operations, net of income on our unaudited consolidated statement of operations for the three quarters ended June 6,December 19, 2018.

Note 8. Income Taxes
 
The effects of the U.S. tax reform legislation that is commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) on the Company's income tax accounts were reflected in the fiscal 2018 financial statements as determined 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 has completed its determination of the effects of the Tax Act on its income tax accounts.

No cash payments of estimated federal income taxes were made during the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018, 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, scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. As of June 5,December 18, 2019, management determined that for the three quarters ended June 5, 2019continues to maintain a full valuation allowance on the Company'sagainst net deferred tax assets was necessary.assets.

The effective tax rate ("ETR") for continuing operations was a negative 2.6%1.1% for the quarter ended June 5,December 18, 2019 and a negative 41.2%1.6% for the quarter ended June 6,December 19, 2018. The ETR for the quarter ended June 5,December 18, 2019 differs from the federal statutory rate of 21% due to management's full valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.



The ETR for continuing operations was a negative 6.0% for the three quarters ended June 5, 2019 and a negative 31.8% for the three quarters ended June 6, 2018. The ETR for the three quarters ended June 5, 2019 differs from the federal statutory rate of 21% due to full management's valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.

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 our consolidated financial statements. Amounts considered probable of settlements 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 5,December 18, 2019 and August 29, 2018,28, 2019, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
 
June 5,
2019
 August 29,
2018
 
Estimated
Useful Lives
(years)
December 18,
2019
 August 28,
2019
 
Estimated
Useful Lives
(years)
(In thousands)      (In thousands)      
Land$46,336
 $46,817
     $45,845
 $45,845
     
Restaurant equipment and furnishings70,181
 69,678
 3 to 1567,562
 67,015
 3 to 15
Buildings129,866
 131,557
 20 to 33127,007
 126,957
 20 to 33
Leasehold and leasehold improvements23,229
 27,172
 Lesser of lease term or estimated useful life22,121
 22,098
 Lesser of lease term or estimated useful life
Office furniture and equipment3,405
 3,596
 3 to 103,302
 3,364
 3 to 10
273,017
 278,820
      265,837
 265,279
      
Less accumulated depreciation and amortization(145,828) (140,533)      (146,635) (143,536)      
Property and equipment, net$127,189
 $138,287
      $119,202
 $121,743
      
Intangible assets, net$17,105
 $18,179
 15 to 21$16,349
 $16,781
 15 to 21


During the quarter ended March 13, 2019, the Company completed the sale of two properties with a total net sales price of approximately $19.6 million. The properties sold had been included in the previously announced asset sales program. The sales included lease back periods of 36 and 60 months and average annual lease payments of approximately $450 thousand and $295 thousand, respectively. The Company recorded a total net gain on the two sales of approximately $15.3 million of which $12.9 million was recognized in the quarter ended March 13, 2019 and the remainder will be recognized over the respective lease back periods. The deferred gain on the sale of the two properties is included in other liabilities on our consolidated balance sheet at June 5, 2019. Net proceeds from the sales were used in accordance with the 2018 Credit Agreement, to reduce the balance on its outstanding 2018 Term Loan (as defined below) and for general business purposes.
Intangible assets, net, includes 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 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, July 2010, 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 2012.
 
The aggregate amortization expense related to intangible assets subject to amortization was approximately $1.0$0.4 million and $1.1$0.4 million for the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018, respectively. The 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 5,December 18, 2019 and August 29, 2018:28, 2019:
 
June 5, 2019 
August 29, 2018(1)
December 18, 2019 August 29, 2018
(In thousands) (In thousands)(In thousands) (In thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
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
 $(12,429) $17,057
 $29,701
 $(11,653) $18,048
$29,486
 $(13,183) $16,303
 $29,486
 $(12,752) $16,734
                      
Cheeseburger in Paradise trade name and license agreements146
 (98) 48
 206
 (75) 131
146
 (100) 46
 146
 (99) 47
                      
Intangible assets, net$29,632
 $(12,527) $17,105
 $29,907
 $(11,728) $18,179
$29,632
 $(13,283) $16,349
 $29,632
 $(12,851) $16,781
(1) The amounts as of August 29, 2018 reflect a reclassification of amounts from the Cheeseburger in Paradise trade name and license agreements to the Fuddruckers trade name and franchise agreements lines on the table, netting to approximately $88 thousand.  


Goodwill, net of accumulated impairments of approximately $1.9 million, was approximately $555$514 thousand as of June 5,December 18, 2019 and August 29, 2018, respectively, and relates to our Company-owned restaurants reportable segment.28, 2019, respectively. Goodwill has been allocated and impairment is assessed at the reporting level, which is the individual restaurants within our Fuddruckers and Cheeseburger in Paradise brandsreporting segments that were acquired in fiscal 2010 and fiscal 2013, respectively. The net Goodwill balance at June 5,December 18, 2019 is comprised of amounts assigned to one Cheeseburger in Paradise restaurant that is still operated by us, and the goodwill from the Fuddruckers acquisition in 2010. The Company performs a goodwill impairment test annually as of the end of the second fiscal quarter of each year and more frequently when negative conditions or a triggering event arises. Management prepares valuations for each of its restaurants using a discounted cash flow analysis (Level 3 inputs) to determine the fair value of each reporting unit for comparison with the reporting unit's carrying value in determining if there has been an impairment of goodwill at the reporting level.
 
The Company recorded no goodwill impairment charges during the three quarters ended June 5,December 18, 2019 and approximately $0.6 million during the three quarters ended June 6,December 19, 2018.

Note 10. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
 
Impairment of Long-Lived Assets and Store Closings
 
We periodically evaluate 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. We analyze historical cash flows of operating locations and comparescompare results of poorer performing locations to more profitable locations. We also analyze 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, we estimate future cash flows using assumptions based on possible outcomes of the areas analyzed. If the estimated undiscounted future cash flows are less than the carrying value of the location’s assets, we record 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 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. We consider 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.
 
We recognized the following impairment charges to income from operations:


 
Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(40 weeks) (40 weeks)(16 weeks) (16 weeks)
(In thousands, except per share data)(In thousands, except per share data)
Provision for asset impairments and restaurant closings$3,097
 $6,716
$1,110
 $1,227
Net loss (gain) on disposition of property and equipment(12,935) 172
   
Net loss on disposition of property and equipment30
 149
$(9,838) $6,888
$1,140
 $1,376
Effect on EPS:      
Basic$0.33
 $(0.23)$(0.04) $(0.05)
Assuming dilution$0.33
 $(0.23)$(0.04) $(0.05)
 
The approximate $3.1$1.1 million impairment chargeprovision for asset impairments and restaurant closings for the three quartersquarter ended June 5,December 18, 2019 iswas due primarily to the impairment of the right-of-use asset for two of our leased locations where we ceased operations during the period and certain surplus equipment written down to fair value.

The $1.2 million provision for asset impaiments and restaurant closings for the quarter ended December 19, 2018 was primarily related to assets at nine6 property locations held for use, sixand 6 properties held for sale written down to their fair value and one international joint venture investment.values.

The approximate $6.7 million impairment charge for the three quarters ended June 6, 2018 is primarily related to assets at ten property locations held for use, ten properties held for sale written down to their fair value, goodwill at 3 locations, and approximately $0.7 million in net lease termination costs at five property locations.
The approximate $12.9 million net gain for the three quarters ended June 5, 2019 is primarily related to gains on the sale and leaseback of two properties and gains on the sale of one undeveloped property that was held for sale, partially offset by routine asset retirements.
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 gains on the sale of 3 property locations.
Discontinued Operations 


 
As a result of the first quarter fiscal 2010 adoption of our Cash Flow Improvement and Capital Redeployment Plan, we reclassified 24 Luby’s Cafeterias to discontinued operations. As of June 5,December 18, 2019, one location remains held for sale.

The following table sets forth the assets and liabilities for all discontinued operations:
 
June 5,
2019
 August 29,
2018
December 18,
2019
 August 28,
2019
(In thousands)(In thousands)
Property and equipment$1,813
 $1,813
$1,813
 $1,813
Assets related to discontinued operations—non-current$1,813
 $1,813
$1,813
 $1,813
Accrued expenses and other liabilities$9
 $14
$25
 $14
Liabilities related to discontinued operations—current$9
 $14
$25
 $14
Other liabilities$16
 $16
Liabilities related to discontinued operations—non-current$16
 $16

As of June 5,December 18, 2019, we 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. We are 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 EndedQuarter Ended
June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(40 weeks) (40 weeks)(16 weeks) (16 weeks)
(In thousands)(In thousands)
Sales$
 $
$
 $
      
Pretax loss$(18) $(73)$(11) $(6)
Income tax expense from discontinued operations
 (535)
 
Loss from discontinued operations, net of income taxes$(18) $(608)$(11) $(6)

The following table summarizes discontinued operations for the threefirst quarters of fiscal 20192020 and 2018:2019: 
Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(40 weeks) (40 weeks)(16 weeks) (16 weeks)
(In thousands, except per share data)(In thousands, except per share data)
Discontinued operating loss$(18) $(14)$(11) $(6)
Impairments
 (59)
 
Pretax loss(18) (73)(11) (6)
Income tax expense from discontinued operations
 (535)
 
Loss from discontinued operations, net of income taxes$(18) $(608)$(11) $(6)
Effect on EPS from discontinued operations—basic$(0.00) $(0.02)$(0.00) $(0.00)
  
Property Held for Sale
 
We periodically review long-lived assets against itsour 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, actively marketed and recorded at fair value less transaction costs. We analyze market conditions each reporting period and record 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 ours. Gains are not recognized until the properties are sold.
 


Property held for sale includes unimproved land, closed restaurant properties, properties with operating restaurants thethat our Board of Directors has approved for sale, and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciabledepreciated value or net realizable value.
 
At June 5,December 18, 2019, and August 28, 2019 we had 1314 owned properties with a carrying value of approximately $15.1$16.5 million in property held for sale. During the three quartersquarter ended June 5,December 18, 2019, twono properties were sold that were previously classified as held for sale. The pretax profit (loss) for the disposal group of locations operating for the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018 was a pretax incomeloss of approximately $13.1 million and a pretax loss of $0.9 million, respectively. Included in the pretax income (loss) for the three quarters ended June 5, 2019 and June 6, 2018 was net gains of $13.1 million and $0.3 million, respectively.
At August 29, 2018, we had 15 owned properties, of which two restaurants are located on one property, with a carrying value of approximately $19.5$(0.1) million in property held for sale. The pretax loss for the disposal group of locations operating in fiscal 2018 was approximately $1.2 million.each quarter.
 
We are actively marketing the locations currently classified as property held for sale.



Abandoned Leased Facilities - ReserveLiability for Store Closings

As of June 5,December 18, 2019, we classified as abandoned 87 leased restaurants locationedlocated in Arizona, Florida, Illinois, Maryland, Texas and Virginia .as abandoned. Although we remain obligated under the terms of the leases for the rent and other costs that may be associated with the leases, we decided to cease operations and we have no foreseeable plans to occupy the spaces as a company restaurant in the future. In connection with the adoption of ASC 842 (see Note 1.), we reclassified the rent portion of the liability for store closings in the amount of $1.0 million to operating lease liabilities-current. During the three quartersquarter ended June 5,December 18, 2019, two of the leases we recorded a decreaseconsidered abandoned as of August 28, 2019 expired and the operating lease liability-current of $0.3 million for these two locations was reclassified to the liability for lease termination expense and a credit to earnings, in provision for asset impairments and restaurant closings of approximately $0.5 million.store closings. The liability at August 28, 2019 is equal to the total amountour estimate of rent and other direct costs for the remaining period of time the properties will be unoccupied plusas well as unpaid rent and direct costs for the present value, calculated using a credit-adjusted risk free rate, of the amount by which the rent we paid by to the landlord exceeds any rent paid to us by a tenant under a sublease over the remaining period of the lease terms.two expired leases discussed above. Accrued lease termination expense liability was approximately $1.7$0.8 million and $2.1$1.4 million as of June 5,December 18, 2019 and August 29, 2018,28, 2019, respectively. 

Note 11. Commitments and Contingencies
 
Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements, except for operating leases.arrangements. 
 
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.

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 location 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, former director, and 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. Collectively, Messrs. Pappas and the Pappas entities own greater than 5 percent of the Company's common stock.
 


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 $15 thousandzero and $31$13 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018, respectively, and incurred $2 thousand dollars in other operating costs in the three quarters ended June 6, 2018.respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Board.our Board of Directors.
 


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 pays 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 new lease agreement was approved by the Finance and Audit Committee.Committee of our Board of Directors.
 
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement with Pappas Restaurants, Inc. for one of our Fuddruckers locations in Houston, Texas. 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$28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until November 30, 2016.May 31, 2020. Currently, the lease agreement provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee.Committee of our Board of Directors.

For the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018, affiliated costsrents incurred as a percentage of relative total Company cost was 0.55%0.50% and 0.47%0.66%, respectively. Rent payments under the two lease agreements described above were $454$154 thousand and $470$209 thousand, respectively.

Key Management Personnel
 
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. The newUnder the employment agreement, contains a termination datethe initial term of Mr. Pappas' employment ended on August 28, 2019.2019 and automatically renews for additional one year periods, unless terminated in accordance with its terms. 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 former director and officer The employment agreement was unanimously approved by the Executive Compensation Committee (the “Committee”) of our Board of Directors as well as by the Company, is an attorney and stepson of Frank Markantonis, who is a director of the Company.full Board. Effective June 13, 2019, Mr. Tropoli resigned fromAugust 1, 2018, the Company and is no longer our General Counsel and Corporate Secretary.Christopher J. Pappas agreed to reduce his fixed annual base salary to one dollar.
 
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.


Note 13. Debt

The following table summarizes credit facility debt, less current portion at June 5,December 18, 2019 and August 29, 2018: 
  
June 5,
2019
 August 29,
2018
December 18,
2019
 August 28,
2019
Long-Term Debt      
2016 Credit Agreement - Revolver$
 $20,000
2016 Credit Agreement - Term Loan
 19,506
2018 Credit Agreement - Revolver2,000
 
$8,600
 $5,300
2018 Credit Agreement - Term Loan43,399
 
43,399
 43,399
Total credit facility debt45,399
 39,506
51,999
 48,699
Less:      
Unamortized debt issue costs(2,000) (168)(1,696) (1,887)
Unamortized debt discount(1,447) 
(1,275) (1,373)
Total credit facility debt, less unamortized debt issuance costs41,952
 39,338
49,028
 45,439
Current portion of credit facility debt
 39,338
3,399
 
Credit facility debt, less current portion$41,952
 $
$45,629
 $45,439

2018 Credit Agreement
On December 13, 2018, the Company entered into a credit agreement (the(as amended by the First Amendment (as defined below), the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital, MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80.0$80 million consisting of a $10.0$10 million revolving credit facility (the “2018 Revolver”), a $10.0$10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60.0$60 million term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 2018 Credit Agreement and (b) September 13, 2020. On December 18, 2019, the Company entered into the Second Amendment to the 2018 Credit Agreement which did not change any terms of the agreement permanently. The amendment only decreased the amount of mandatory prepayment related to the sale of two properties in the second quarter.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80.0 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018 Credit Agreement. The pre-funded amount at December 18, 2019 of approximately $6.9$6.3 million is recorded in Restricted cash and cash equivalents on the Company's consolidated balance sheet. LIBOR is set to terminate in December, 2021. We expect to agree to a replacement rate with MSD prior to the LIBOR termination.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10.0 million; 2nd anniversary: $10.0 million; 3rd anniversary: $15.0 million; and 4th anniversary: $15.0 million.
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.50% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed from the date of the pre-payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present and future personal property (other than certain excluded assets), all of the personal property of its guarantors (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0


million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00. As of June 5,December 18, 2019, the Company was in full compliance with all covenants with respect to the 2018 Credit Facility.
All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.
As of June 5, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum as of June 5, 2019. As of June 5,December 18, 2019 we had approximately $1.3$1.7 million committed under


letters of credit, which isare used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million in other indebtedness.
As of July 15, 2019,February 3, 2020, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement
On November 8, 2016, the Company 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, prior to the amendments discussed below, was comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at 1) a base rate equal to the greater of (a) the federal funds effective rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the London InterBank Offered Rate (“LIBOR”), as adjusted for any Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more frequent intervals if LIBOR applies.
The Company was 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 upon the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company 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 customary covenants and was secured by an all asset lien on all of the Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
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, as amended and restated effective February 9, 2018. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
 
Of the aggregate 2.12.10 million shares approved for issuance under the Nonemployee Director Stock Plan, as amended, 1.51.68 million options, restricted stock units and restricted stock awards have been granted to date, and 0.10.14 million options were canceled or expired and added back into the plan since the plan’s inception. Approximately 0.7As of December 18, 2019, approximately 0.56 million shares remain available for future issuance as of June 5, 2019.issuance. Compensation costs for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses, for the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018 was approximately $440$153 thousand and $432$122 thousand, respectively, and approximately $151 thousand and $111 thousand for the quarters ended June 5, 2019 and June 6, 2018, respectively.

Of the aggregate 4.14.10 million shares approved for issuance under the Employee Stock Plan, as amended, 7.37.29 million options and restricted stock units have been granted to date, and 4.14.55 million options and restricted stock units were canceled or expired and added back into the plan since the plan’s inception in 2005. Approximately 0.9As of December 18, 2019, approximately 1.36 million shares remain available for future issuance as of June 5, 2019.issuance. Compensation costs for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses, for the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018 was approximately $397$212 thousand and $659$303 thousand, respectively, and approximately $101 thousand and $204 thousand for the quarters ended June 5, 2019 and June 6, 2018, respectively.
 


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 quartersquarter ended June 5,December 18, 2019. No options to purchase shares were outstanding under this plan as of June 5,December 18, 2019.
 
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary date of the grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. No options were granted in the three quartersquarter ended June 5,December 18, 2019. Options to purchase 1,464,0101,174,247 shares at option prices of $2.82 to $5.95 per share remain outstanding as of June 5,December 18, 2019.
 


A summary of the Company’s stock option activity for the three quartersquarter ended June 5,December 18, 2019 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 29, 20181,653,414
 $4.10
 6.5
 $
Forfeited(102,102) 4.10
 
 
Expired(87,302) 5.54
 
 
Outstanding at June 5, 20191,464,010
 $4.01
 6.0
 $
Exercisable at June 5, 20191,217,957
 $4.19
 5.6
 $
 
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 28, 20191,387,412
 $4.06
 5.7
 $
Cancelled / Forfeited(53,165) $4.54
 
 
Expired(160,000) $3.44
 
 
Outstanding at December 18, 20191,174,247
 $4.12
 6.1
 $
Exercisable at December 18, 20191,108,153
 $4.20
 6.0
 $

The intrinsic value for stock options is defined as the difference between the current market value, or closing price on June 5,December 18, 2019, and the grant price on the measurement dates in the table above.

At June 5,December 18, 2019, there was approximately $0.2 million$59 thousand of total unrecognized compensation cost related to unvested options that are expected to be recognized over a weighted-average period of 1.31.0 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 quartersquarter ended June 5,December 18, 2019 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 29, 2018517,291
 $3.79
 1.8
Vested(153,757) 4.66
 
Forfeited(22,491) 3.60
 
Unvested at June 5, 2019341,043
 $3.41
 1.3
 
Restricted
Stock
Units
 
Weighted
Average
Fair Value
 
Weighted-
Average
Remaining
Contractual
Term
   (Per share) (In years)
Unvested at August 28, 2019274,009
 $3.40
 1.2
Granted5,236
 $1.92
 
Vested(115,270) $4.26
 
Unvested at December 18, 2019163,975
 $2.80
 1.1
 
At June 5,December 18, 2019, there was approximately $0.4$0.1 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.31.1 years.



Performance Based Incentive Plan

The 2018 TSR Performance Based Incentive Plan (the "2018 TSR 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 grant date fair value of the 2018 TSR Plan was determined based on a Monte Carlo simulation model for the three-year period. The target number of shares for distribution at 100% of the award was 373,294 on the grant date. The 2018 TSR Plan is accounted for as an equity award since it 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, recorded in selling, general and administrative expenses, was approximately $355$118 thousand and $69$120 thousand in the three quarters ended June 5,December 18, 2019 and June 6,December 19, 2018, respectively, and approximately $118 thousand and $(4) thousand for the quarters ended June 5, 2019 and June 6, 2018, respectively.


A summary of the Company’s restricted stock Performance Based Incentive Plan activity during the three quartersquarter ended June 5,December 18, 2019 is presented in the following table:
 Units Weighted
Average
Fair Value
   (Per share)
Unvested at August 29, 2018373,294
 $3.68
Forfeited(19,864) 3.68
Unvested at June 5, 2019353,430
 $3.68
 Units Weighted
Average
Fair Value
   (Per share)
Unvested at August 28, 2019266,443
 $3.68
Unvested at December 18, 2019266,443
 $3.68

At June 5,December 18, 2019, there was approximately $0.6$0.3 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 1.20.7 years.

Restricted Stock Awards
 
Under the Nonemployee Director Stock Plan, directors aremay be 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 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 and three quarters ended June 5,ended December 18, 2019 and December 19, 2018 include 1,464,0101,174,247 shares and 1,494,129 shares, respectively with exercise prices exceeding market prices whose inclusion would also be anti-dilutive. 

The components of basic and diluted net loss per share are as follows:
 
Quarter Ended Three Quarters EndedQuarter Ended 
June 5,
2019
 June 6,
2018
 June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
 
(12 weeks) (12 weeks) (40 weeks) (40 weeks)(16 weeks) (16 weeks) 
(In thousands, expect per share data)(In thousands, except per share data) 
Numerator:           
Loss from continuing operations$(5,295) $(14,133) $(6,139) $(31,096)$(8,327) $(7,483) 
Loss from discontinued operations, net of income taxes(6) (463) (18) (608)(11) (6) 
NET LOSS$(5,301) $(14,596) $(6,157) $(31,704)$(8,338) $(7,489) 
Denominator:           
Denominator for basic earnings per share—weighted-average shares29,874
 30,005
 29,732
 29,863
30,054
 30,059
 
Effect of potentially dilutive securities:           
Employee and non-employee stock options

 
 
 

 
 
Denominator for earnings per share assuming dilution29,874
 30,005
 29,732
 29,863
30,054
 30,059
 
    
Loss per share from continuing operations:           
Basic$(0.18) $(0.47) $(0.21) $(1.04)$(0.28) $(0.25) 
Assuming dilution$(0.18) $(0.47) $(0.21) $(1.04)$(0.28) $(0.25) 
Loss per share from discontinued operations:           
Basic$0.00
 $(0.02) $0.00
 $(0.02)$(0.00) $(0.00) 
Assuming dilution$0.00
 $(0.02) $0.00
 $(0.02)$(0.00) $(0.00) 
Net loss per share:           
Basic$(0.18) $(0.49) $(0.21) $(1.06)$(0.28) $(0.25) 
Assuming dilution$(0.18) $(0.49) $(0.21) $(1.06)$(0.28) $(0.25) 



Note 16: Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a shareholder rights plan with a 10% triggering threshold and declared a dividend distribution of one right initially representing the right to purchase one half of a share of Luby’s common stock, upon specified terms and conditions. The rights plan was effective immediately.
The Board adopted the shareholder rights plan in view of the concentrated ownership of Luby’s common stock as a means to ensure that all of Luby’s stockholders are treated equally. The shareholder rights plan is designed to limit the ability of any person or group to gain control of Luby’s without paying all of Luby’s stockholders a premium for that control. The shareholder rights plan was not adopted in response to any specific takeover bid or other plan or proposal to acquire control of Luby’s.
If a person or group acquires 10% or more of the outstanding shares of Luby’s common stock (including in the form of synthetic ownership through derivative positions), each right will entitle its holder (other than such person or members of such group) to purchase, for $12, 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 adoption of the rights plan. However, the rights will be exercisable if any such person or group acquires any additional shares of Luby’s common stock (including through derivative positions) other than as a result of equity grants made by Luby’s to its directors, officers or employees in their capacities as such.
Prior to the acquisition by a person or group of beneficial ownership of 10% or more of the outstanding shares of Luby’s common stock, the rights are redeemable for 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 shareholder rights plan.
On February 11, 2019, the Board of Directors approved the first amendment to the shareholder rights plan extending the term of the shareholder rights plan to February 15, 2020.




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 5,December 18, 2019 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 29, 2018.28, 2019.
 
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.

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 in the table on the following page may not total due to rounding. 



Quarter Ended Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
 June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(12 weeks) (12 weeks) (40 weeks) (40 weeks)(16 weeks) (16 weeks)
Restaurant sales87.8 % 90.5 % 88.1 % 91.3 %87.8 % 88.5 %
Culinary contract services10.1 % 7.7 % 9.8 % 6.9 %10.3 % 9.2 %
Franchise revenue2.0 % 1.7 % 2.0 % 1.7 %1.8 % 2.2 %
Vending revenue0.1 % 0.1 % 0.1 % 0.1 %0.1 % 0.1 %
TOTAL SALES100.0 % 100.0 % 100.0 % 100.0 %100.0 % 100.0 %
          
STORE COSTS AND EXPENSES:          
(As a percentage of restaurant sales)          
          
Cost of food28.2 % 28.6 % 27.8 % 28.5 %28.7 % 27.5 %
Payroll and related costs38.1 % 37.8 % 37.9 % 37.4 %38.5 % 37.9 %
Other operating expenses17.5 % 19.3 % 17.7 % 19.0 %17.7 % 18.1 %
Occupancy costs6.1 % 5.9 % 6.3 % 6.1 %6.0 % 6.4 %
Vending revenue(0.2)% (0.2)% (0.1)% (0.2)%(0.1)% (0.1)%
Store level profit10.2 % 8.5 % 10.3 % 9.1 %9.3 % 10.1 %
          
COMPANY COSTS AND EXPENSES:          
(As a percentage of total sales)          
          
Opening costs0.0 % 0.1 % 0.0 % 0.2 %0.0 % 0.0 %
Depreciation and amortization3.9 % 4.7 % 4.4 % 4.8 %4.0 % 4.8 %
Selling, general and administrative expenses12.6 % 9.9 % 11.8 % 10.4 %10.7 % 9.7 %
Net loss (gain) on disposition of property and equipment(0.6)% 0.2 % (5.1)% 0.1 %
Other Charges1.3 % 1.2 %
Provision for asset impairments and restaurant closings1.2 % 1.2 %
Net loss on disposition of property and equipment0.0 % 0.1 %
          
Culinary Contract Services Costs          
(As a percentage of Culinary Contract Services sales)          
          
Cost of culinary contract services89.7 % 91.9 % 90.7 % 93.3 %91.5 % 92.8 %
Culinary segment profit10.3 % 8.1 % 9.3 % 6.7 %8.5 % 7.2 %
          
Franchise Operations Costs          
(As a percentage of Franchise revenue)
          
          
Cost of franchise operations22.3 % 23.6 % 16.6 % 25.3 %33.1 % 12.3 %
Franchise segment profit77.7 % 76.4 % 83.4 % 74.7 %66.9 % 87.7 %
          
(As a percentage of total sales)          
Total costs and expenses   
LOSS FROM OPERATIONS(5.3)% (10.4)% (0.6)% (7.7)%(6.9)% (5.5)%
Interest income0.0 % 0.0 % 0.0 % 0.0 %0.0 % 0.0 %
Interest expense(1.8)% (1.2)% (1.8)% (0.8)%(2.1)% (1.7)%
Other income, net0.1 % 0.0 % 0.1 % 0.1 %0.3 % 0.0 %
Loss before income taxes and discontinued operations(6.9)% (11.6)% (2.3)% (8.4)%(8.7)% (7.2)%
Provision for income taxes0.2 % 4.8 % 0.1 % 2.7 %0.1 % 0.1 %
Loss from continuing operations(7.1)% (16.4)% (2.4)% (11.1)%(8.8)% (7.3)%
Loss from discontinued operations, net of income taxes(0.0)% (0.6)% 0.0 % (0.2)%0.0 % 0.0 %
NET LOSS(7.1)% (17.0)% (2.4)% (11.3)%(8.8)% (7.3)%




Although store level profit, defined as restaurant sales less cost of food, payroll and related costs, other operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows the results of our most significant reportable segment. The following table reconciles between store level profit, a non-GAAP measure, to loss from continuing operations, a GAAP measure:
  
Quarter Ended Three Quarters EndedQuarter Ended
June 5,
2019
 June 6,
2018
 June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(12 weeks) (12 weeks) (40 weeks) (40 weeks)(16 weeks) (16 weeks)
(In thousands) (In thousands)(In thousands)
Store level profit$6,706
 $6,642
 $22,938
 $23,469
$7,808
 $9,225
          
Plus:          
Sales from culinary contract services7,571
 6,639
 24,610
 19,413
9,774
 9,496
Sales from franchise operations1,482
 1,444
 5,126
 4,732
1,707
 2,224
          
Less:          
Opening costs6
 85
 49
 490
12
 33
Cost of culinary contract services6,791
 6,104
 22,324
 18,113
8,948
 8,815
Cost of franchise operations330
 341
 849
 1,198
565
 273
Depreciation and amortization2,927
 4,050
 11,052
 13,402
3,762
 4,903
Selling, general and administrative expenses9,426
 8,507
 29,666
 29,219
10,158
 10,010
Other charges1,238
 1,214
Provision for asset impairments and restaurant closings675
 4,464
 3,097
 6,716
1,110
 1,227
Net loss (gain) on disposition of property and equipment(434) 154
 (12,935) 172
Net loss on disposition of property and equipment30
 149
Interest income(11) (1) (30) (12)(23) 
Interest expense1,324
 1,042
 4,593
 2,235
1,962
 1,713
Other income, net(112) (9) (198) (317)(240) (30)
Provision for income taxes132
 4,121
 346
 7,494
94
 121
Loss from continuing operations$(5,295) $(14,133) $(6,139) $(31,096)$(8,327) $(7,483)
  
The following table shows our restaurant unit count as of August 29, 201828, 2019 and June 5,December 18, 2019.
 
Restaurant Counts:
 
August 29,
2018
 FY19 YTD Q3
Openings
 FY19 YTD Q3
Closings
 June 5,
2019
August 28,
2019
 FY20 Q1
Openings
 FY20 Q1
Closings
 December 18,
2019
Luby’s Cafeterias84
 
 (4) 80
79
 
 (1) 78
Fuddruckers Restaurants60
 
 (11) 49
44
 
 (4) 40
Cheeseburger in Paradise2
 
 (1) 1
1
 
 
 1
Total146
 
 (16) 130
124
 
 (5) 119
 










Overview
 
Luby’s, Inc. (“Luby’s”, the “Company”, "we", "us", or "our") is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our primary brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers®, Luby’s Culinary Contract Services and Cheeseburger in Paradise.
 
Our Company’s vision is that our guests, employees and shareholders stay loyal to our restaurant brands and value them as a significant part of their lives. We want our company’s performance to make it a leader in our industry.
 
We are headquartered in Houston, Texas. Our corporate headquarters is located at 13111 Northwest Freeway, Suite 600, Houston, Texas 77040, and our telephone number at that address is (713) 329-6800. Our website is www.lubysinc.com. The information on our website is not, and shall not be deemed to be, a part of this Form 10-Q or incorporated by reference into any of our other filings with the SEC.
 
As of June 5,December 18, 2019, we owned and operated 130119 restaurants, of which 8078 are traditional cafeterias, 4940 are gourmet hamburger restaurants, and one is a casual dining restaurant and bar. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. Included in the 130119 restaurants that we own and operate are 12 restaurants located at six property locations where we operate a side-by-side Luby’s Cafeteria and Fuddruckers on the same property. We refer to these locations as “Combo locations.”
 
As of June 5,December 18, 2019, we operated 3233 Culinary Contract Services locations. We operated 22 of these locations in the Houston, Texas area, three in Dallas, Texas, three in the Texas Lower Rio Grande Valley, two in Dallas, Texas, and two in San Antonio, Texas, one in northwest Texas one in Kansas, and one in northwest Texas. Outside of Texas we operated one location in North Carolina and one in Kansas.Carolina. Luby’s Culinary Contract Services currently provides food service management to hospitals, corporate dining facilities, sports stadiums, and a senior care facility.
 
As of June 5,December 18, 2019, we had 42 franchisees37 franchise owners operating 10797 Fuddruckers restaurants. Our largest six6 franchise owners own five to twelve restaurants each. Fourteeneach and 12 franchise owners each own two to four restaurants. The 2219 remaining franchise owners each own one restaurant.
 
Accounting Periods
 
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes 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. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
 
Same-Store Sales
 
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. A restaurant’s sales results are included in the same-store sales calculation in the quarter after a store has been open for six consecutive fiscal quarters. Stores that close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the quarter when operations cease at the restaurant, but remain in the same-store group for previously reported quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies. 



RESULTS OF OPERATIONS
 
Quarter Ended June 5,December 18, 2019 Compared to Quarter Ended June 6,December 19, 2018
 
Comparability between quarters is affected by the varying lengths of the quarters and quarters ending at different points in the calendar year when seasonal patterns for sales are different. Both the quarter ended June 5,December 18, 2019 and the quarter ended June 6,December 19, 2018 consisted of 1216 weeks.

Sales 
 Quarter
Ended
 Quarter
Ended
  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (12 weeks) (12 weeks) (12 weeks vs 12 weeks)
Restaurant sales$65,611
 $77,803
 $(12,192) (15.7)%
Culinary contract services7,571
 6,639
 932
 14.0 %
Franchise revenue1,482
 1,444
 38
 2.6 %
Vending revenue102
 118
 (16) (13.6)%
TOTAL SALES$74,766
 $86,004
 $(11,238) (13.1)%

Three Quarters Ended Three Quarters Ended  Quarter
Ended
 Quarter
Ended
  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18,
2019
 December 19,
2018
 Increase/
(Decrease)
(40 weeks) (40 weeks) (40 weeks vs 40 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Restaurant sales$222,079
 $256,737
 $(34,658) (13.5)%$83,558
 $91,099
 $(7,541) (8.3)%
Culinary contract services24,610
 19,413
 5,197
 26.8 %9,774
 9,496
 278
 2.9 %
Franchise revenue5,126
 4,732
 394
 8.3 %1,707
 2,224
 (517) (23.2)%
Vending revenue292
 412
 (120) (29.1)%110
 99
 11
 11.1 %
TOTAL SALES$252,107
 $281,294
 $(29,187) (10.4)%$95,149
 $102,918
 $(7,769) (7.5)%

The Company has threefive reportable segments: Company-ownedLuby's cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise, Fuddruckers franchise operations, and culinaryCulinary contract services.
 
Company-Owned Restaurants
 
Restaurant Sales 
($000s)
Quarter
Ended
 
Quarter
Ended
  
Quarter
Ended
 
Quarter
Ended
  
Restaurant BrandJune 5, June 6, Increase/(Decrease)December 18, December 19, Increase/(Decrease)
2019 2018 $ Amount % Change2019 2018 $ Amount % Change
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Luby’s Cafeterias$45,062
 $49,067
 $(4,005)
(8.2)%$60,785
 $62,643
 $(1,858) (3.0)%
Fuddruckers15,312
 20,622
 (5,310)
(25.7)%
Combo locations4,591
 4,821
 (230)
(4.8)%6,359
 5,964
 395
 6.6 %
Cheeseburger in Paradise778
 3,293
 (2,515)
(76.4)%
Other Revenue(132) 
 (132)  
Luby's cafeteria segment67,144
 68,607
 (1,463) (2.1)%
Fuddruckers restaurants segment15,569
 21,533
 (5,964) (27.7)%
Cheeseburger in Paradise segment845
 959
 (114) (11.9)%
Total Restaurant Sales$65,611
 $77,803
 $(12,192)
(15.7)%$83,558
 $91,099
 $(7,541) (8.3)%
 


Total restaurant sales decreased approximately $7.5 million in the quarter ended December 18, 2019 compared to the quarter ended December 19, 2018. The decrease in restaurant sales included an approximate $6.0 million decrease in sales at stand-alone Fuddruckers restaurants, and approximate $1.9 million decrease in sales at stand-alone Luby's Cafeterias, and an approximate $0.1 million decrease in sales at Cheeseburger in Paradise restaurants, partially offset by an approximate $0.4 million increase in sales from Combo locations.

The approximate $4.0$1.9 million sales decrease in sales at stand-alone Luby's Cafeteria restaurants was the result of the closure of six locations (accounting for approximately $2.5$2.8 million of this sales decline) andin reduced sales) partially offset by a 3.1% decrease1.7% increase in Luby’s Cafeteria same-store sales in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The 3.1% decrease1.7% increase in Luby's Cafeteria same-store sales was the result of a 1.2% decrease2.0% increase in guest traffic andpartially offset by a 2.0%0.3% decrease in average spend per guest.
The approximate $5.3$6.0 million sales decrease at stand-alone Fuddruckers restaurants was the result of 13 restaurant closings and fiveseven restaurant transfers to a franchise owner's operations (accounting for approximately $4.3$6.0 million of this sales decline combined) andpartially offset by a 6.1% decrease0.1% increase in same-store sales in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The 6.1% decrease0.1% increase in same-store sales was the result of a 8.7% decrease2.7% increase in guest traffic, partially offset by a 2.8% increase2.5% decrease in average spend per guest. All six



The approximate $0.4 million increase in sales from Combo locations are includedreflects a 6.6% increase in our same-store grouping and sales at this group of restaurants decreased 4.8% inthe six locations that operated throughout the quarter ended June 5,December 18, 2019 compared toand the quarter ended June 6,December 19, 2018.

The approximate $2.5$0.1 million decrease in Cheeseburger in Paradise restaurants sales in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018 was primarily the result of six store closures. Other revenue in the quarter ended June 5, 2019 reflects a $0.1 million net reduction in revenue due to amortization of the discounts on gift cards sold to third parties, partially offset by recognizing revenue associated with gift card breakage.

 Three Quarters Ended Three Quarters Ended  
Restaurant BrandJune 5, June 6, Increase/(Decrease)
($000s) 2019 2018 $ Amount % Change
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Luby’s Cafeterias$152,214
 $163,757
 $(11,543) (7.0)%
Fuddruckers53,001
 67,476
 (14,475) (21.5)%
Combo locations14,911
 16,219
 (1,308) (8.1)%
Cheeseburger in Paradise2,328
 9,285
 (6,957) (74.9)%
Other Revenue(375)   (375)  
Total Restaurant Sales$222,079
 $256,737
 $(34,658) (13.5)%

The approximate $11.5 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of one store closure and a 2.8% decrease in same-store sales and the closure of eight locations (accounting for approximately $7.2 million of this sales decline) compared to the three quarters ended June 6, 2018. The 2.8% decrease in Luby's Cafeteria same-store sales was the result of a 5.9% decrease in guest traffic partially offset by a 3.3% increase in average spend per guest. The approximate $14.5 million sales1.0% decrease at stand-alone Fuddruckers restaurants was the result of 17 restaurant closures and five restaurant transfers to a franchise owner's operations (accounting for approximately $11.2 million of this sales decline combined) and a same-store sales decrease of 8.0%. Fuddruckers same-store sales decrease of 8.0% was the result of a 12.4% decrease in guest traffic partially offset by a 5.0% increase in average spend per guest. The approximate $1.3 million decrease in sales at our Combo locations was due to an 8.1% decrease in same-store sales. The approximate $7.0 million decrease in Cheeseburger in Paradise restaurants sales in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 was primarily the result of seven store closures. Other revenue in the three quarters ended June 5, 2019 reflects an approximate 0.4 million net reduction in revenue due to amortization of the discounts on gift cards sold to third parties, partially offset by recognizing revenue associated with gift card breakage.remaining location.

Cost of Food 
Quarter 
Ended
 
Quarter 
Ended
  Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18, 2019 December 19, 2018 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Cost of food$18,478
 $22,255
 $(3,777) (17.0)%
Cost of food:       
Luby's cafeteria segment$19,396
 $19,257
 $139
 0.7 %
Fuddruckers restaurants segment4,284
 5,553
 (1,269) (22.9)%
Cheeseburger in Paradise segment262
 273
 (11) (4.0)%
Total Restaurants$23,942
 $25,083
 $(1,141) (4.5)%
       
As a percentage of restaurant sales28.2% 28.6%   (0.4)%       
Luby's cafeteria segment28.9% 28.1%   0.8 %
Fuddruckers restaurants segment27.5% 25.8%   1.7 %
Cheeseburger in Paradise segment31.0% 28.5%   2.5 %
Total Restaurants28.7% 27.5%   1.2 %

Cost of food is comprised of the cost associated with the sale of food and beverage products that are consumed while dining in our restaurants, as take-out, and as catering. Cost of food decreased approximately $3.8$1.1 million, or 17.0%4.5%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018 with lowerdue to operation of 27 fewer locations (primarily Fuddruckers restaurants), partially offset by higher guest traffic levels at continually operated locations as well as higher average food commodity costs. Cost of food is variable and operations at 30 fewer locations.generally fluctuates with sales and guest traffic volume. As a percentage of restaurant sales, cost of food


decreased 0.4% costs increased 1.2% to 28.2%28.7% in the quarter ended June 5,December 18, 2019 compared to 28.6%27.5% in the quarter ended June 6, 2018 dueDecember 19, 2018. The Cost of food as percentage of sales was impacted by (1) higher food commodity costs, including increases in part to higher average menu pricing at Fuddruckersthe cost of beef commodities and changes(2) a change in the mix of menu offerings purchased by guests as well as further focus on efficient operations, including minimizing waste.part of the company's strategy of offering everyday value pricing.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Cost of food$61,707
 $73,190
 $(11,483) (15.7)%
As a percentage of restaurant sales27.8% 28.5%   (0.7)%


Cost of food decreased approximately $11.5 million, or 15.7%, for the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 with lower guest traffic levels and operations at 37 fewer locations. As a percentage of restaurant sales, cost of food decreased 0.7% to 27.8% in the three quarters ended June 5, 2019 compared to 28.5% in the three quarters ended June 6, 2018 due in part to higher menu pricing and changes in the mix of menu offerings as well as further focus on efficient operations, including minimizing waste.

Payroll and Related Costs 
Quarter 
Ended
 
Quarter 
Ended
  Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18, 2019 December 19, 2018 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Payroll and related costs$25,015
 $29,392
 $(4,377) (14.9)%
Payroll and related Costs:       
Luby's Cafeteria Segment$25,538
 $25,622
 $(84) (0.3)%
Fuddruckers Restaurants Segment6,254
 8,453
 (2,199) (26.0)%
Cheeseburger in Paradise Segment342
 438
 (96) (21.9)%
Total Restaurants$32,134
 $34,513
 $(2,379) (6.9)%
       
As a percentage of restaurant sales38.1% 37.8%   0.3 %       
Luby's Cafeteria Segment38.0% 37.3%   0.7 %
Fuddruckers Restaurants Segment:40.2% 39.3%   0.9 %
Cheeseburger in Paradise Segment40.5% 45.7%   (5.2)%
Total Restaurants38.5% 37.9%   0.6 %

Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees.
Payroll and related costs decreased approximately $4.4$2.4 million, or 6.9%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The decrease reflects (1) operating 3027 fewer restaurants (reducing cost by approximately $4.0$3.6 million) and a reduction; partially offset by (2) an increase in hourly labor costs with fewer hours deployed on reducedwith increased guest traffic counts.counts and continuation of elevating guest service levels; and (3) higher hourly wage rates due to labor marketplace inflation. As a percentage of restaurant sales, payroll and related costs increased 0.3%0.6% to 38.1%38.5% in the quarter ended June 5,December 18, 2019 compared to 37.8%37.9% in the quarter ended June 6,December 19, 2018 due primarily to (1) higher hourly wage rates due to labor market inflation; and (2) the impact of a decrease in average spend per guest as part of a strategy to increase guest traffic; partially offset by (3) the fixed cost component of labor costs (especially salaried restaurant managers) with declinesincrease in same-store sales.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Payroll and related costs$84,258
 $96,032
 $(11,774) (12.3)%
As a percentage of restaurant sales37.9% 37.4%   0.5 %

Payroll and related costs decreased approximately $11.8 million in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 due to operating 37 fewer restaurants (reducing cost by approximately $11.0 million), lower associate hours scheduled and deployed on the decreased level of guest traffic, and an approximate $0.7 million reduction in workers' compensation liability estimates, partially offset by higher average hourly wage rates, and increased restaurant management headcount expenses, including increases in group health insurance costs. As a percentage of restaurant sales, payroll and related costs increased 0.5%, to 37.9% in the three quarters ended June 5, 2019 compared to 37.4% in the three quarters ended June 6, 2018 due to (1) the fixed cost component of labor costs (especially salaried restaurant managers) with declines in same-store sales; and (2) an environment of rising hourly wage rates; partially offset by (3) a $0.7 million reduction to workers' compensation liability estimates (or 0.3% as a percent of restaurant sales).





Other Operating Expenses 
Quarter 
Ended
 
Quarter 
Ended
  Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18, 2019 December 19, 2018 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Other operating expenses$11,491
 $15,023
 $(3,532) (23.5)%
Other operating expenses:       
Luby's Cafeteria Segment$11,554
 $11,794
 $(240) (2.0)%
Fuddruckers Restaurants Segment3,038
 4,329
 (1,291) (29.8)%
Cheeseburger in Paradise Segment202
 379
 (177) (46.7)%
Total Restaurants$14,794
 $16,502
 $(1,708) (10.4)%
       
As a percentage of restaurant sales17.5% 19.3%   (1.8)%       
Luby's Cafeteria Segment17.2% 17.2%   0.0 %
Fuddruckers Restaurants Segment:19.5% 20.1%   (0.6)%
Cheeseburger in Paradise Segment23.9% 39.5%   (15.6)%
Total Restaurants17.7% 18.1%   (0.4)%




Other operating expenses include restaurant-related expenses for utilities, repairs and maintenance, local store advertising, property and liability insurance uninsured losses, above insurance deductibles, services and supplies. Other operating expenses decreased approximately $3.5$1.7 million, or 23.5%10.4%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. Of the approximate $3.5$1.7 million decrease in total other operating expenses, approximately $2.6an approximate $2.2 million is attributed to store closures andclosures; partially offset by approximately $0.9$0.5 million is attributedincrease attributable to stores that continue to operate. The $0.9$0.5 million reductionincrease in other operating expenses at stores that continue to operate is attributable to (1) an approximate $0.6 million reduction in restaurant supplies expense; and (2) an approximate $0.5 million reduction in repairs and maintenance expense; partially offset by (3) an approximate $0.2 million increase in restaurantthe costs of various services expenses.provided to restaurants (including networking/telecommunication costs, point of sale equipment maintenance, fees to third-party delivery services, as well as higher credit card processing fees); (2) an approximate $0.2 increase in store-level local marketing expenses, including the cost of logo merchandise purchased for resale to guests in the restaurants; and (3) an approximate $0.1 million increase in uninsured property losses. As a percentage of restaurant sales, other operating expenses decreased 1.8%, to 17.5%, in the quarter ended June 5, 2019, compared to 19.3% in the quarter ended June 6, 2018 due primarily to (1) reductions in restaurant supplies expenses at continually operated stores; (2) reductions in repairs and maintenance at continually operated stores and to a lesser extent at closed stores; and (3) closures of underperforming locations that on average had higher operating expenses relative to their sales volumes; partially offset by (4) higher restaurant services expense.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Other operating expenses$39,404
 $48,881
 $(9,477) (19.4)%
As a percentage of restaurant sales17.7% 19.0%   (1.3)%

Other operating expenses decreased by approximately $9.5 million, or 19.4%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018. Of the approximate $9.5 million decrease in total other operating expenses, approximately $6.9 million is attributed to store closures and approximately $2.6 million is attributed to stores that continue to operate. The $2.6 million reduction in other operating expenses at stores that continue to operate is attributable to (1) an approximate $1.6 million reduction in restaurant supplies expense; (2) an approximate $0.9 million reduction in repairs and maintenance expense; and (3) an approximate $0.4 million reduction in other expenses, including the benefit from the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in the three quarters ended June 6, 2018; and (4) an approximate $0.1 million decrease in local store marketing; partially offset by (5) an approximate $0.4 million increase in electricity utility expense. As a percentage of restaurant sales, other operating expenses decreased 1.3%0.4%, to 17.7%, in the three quartersquarter ended June 5,December 18, 2019, compared to 19.0% for18.1% in the three quartersquarter ended June 6,December 19, 2018 due primarily to cost decreasesthe reason enumerated above for continually operated stores, partially offset by higher electric utility expense.related.

Occupancy Costs 
Quarter 
Ended
 
Quarter 
Ended
 
Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18, 2019 December 19, 2018 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Occupancy costs$4,023
 $4,609
 $(586) (12.7)%
Occupancy costs:       
Luby's Cafeteria Segment$2,746
 $2,940
 $(194) (6.6)%
Fuddruckers Restaurants Segment2,137
 2,841
 (704) (24.8)%
Cheeseburger in Paradise Segment107
 94
 13
 13.8 %
Total Restaurants$4,990
 $5,875
 $(885) (15.1)%
       
As a percentage of restaurant sales6.1% 5.9%   0.2 %       
Luby's Cafeteria Segment4.1% 4.3%   (0.2)%
Fuddruckers Restaurants Segment:13.7% 13.2%   0.5 %
Cheeseburger in Paradise Segment12.7% 9.8%   2.9 %
Total Restaurants6.0% 6.4%   (0.4)%
 


Occupancy costs include property lease expense, property taxes, and common area maintenance charges, and property insurance, expense.and permits and licenses. Occupancy costs decreased approximately $0.6$0.9 million, or 15.1%, to approximately $4.0$5.0 million in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The decrease was primarily due to a decrease in rent and property taxes associated with operating 3027 fewer restaurants in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018, partially offset by the additional lease expense at three properties that were sold and leased back. As a percentage of restaurant sales, occupancy costs increased 0.2%,decreased to 6.1%6.0%, in the quarter ended June 5,December 18, 2019 compared to 5.9%6.4% in the quarter ended June 6,December 19, 2018 primarily as a result of the change in the mix of the portfolio of owned versus leased stores, after the closuresales and lease back of 29 locations and sale of certain owned property locations as well as adjustments to property tax estimates.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Occupancy costs$14,064
 $15,577
 $(1,513) (9.7)%
As a percentage of restaurant sales6.3% 6.1%   0.2 %

Occupancy costs decreased approximately $1.5 million to approximately $14.1 million in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018. The decrease was primarily due to a decrease in rent and property taxes associated with operating 37 fewer restaurants in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018, partially offset by the additional lease expense at threetwo properties, that were sold and leased back. As a percentage of restaurant sales, occupancy costs increased 0.2%, to 6.3%, in three quarters ended June 5, 2019 compared to 6.1% in the three quarters ended June 6, 2018 primarily as a result of the change in the mix of the portfolio of owned versus leased stores after the closure of 36 locations and sale of certain owned property locations as well as adjustments to property tax estimates.

 Franchise Operations  

We 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. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand; (2) funds paid to us as the franchisor for pooled advertising expenditures; and (3) amortization of initial and renewal franchise fees paid to us when franchise units are openedand remaining unamortized franchisee fees for business or transferred to new owners and when franchise agreements are renewed or certain milestones in franchise agreements are reached.that terminate early. Cost of franchise operations includes the direct costs associated with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise owners and the development of new franchise locations.

Beginning with the first quarter fiscal 2019, as a result of our adoption of the new revenue accounting standards more fully described in Note 1 to our unaudited consolidated financial statements:
We recognize as revenue the amounts due to us from franchisees for pooled advertising expenditures.


We recognize initial and renewal franchise fees evenly over the term of franchise area development agreements.agreements and we recognize revenue when a franchise agreement is terminated early.
Additionally, we record an expense and liability in an amount equal to the unspent funds paid to us from franchisees for pooled advertising expenditures that will be incurred in a future period.

Quarter 
Ended
 
Quarter 
Ended
 
Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18,
2019
 December 19,
2018
 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Franchise revenue$1,482
 $1,444
 $38
 2.6 %$1,707
 $2,224
 $(517) (23.2)%
Cost of franchise operations330
 341
 (11) (3.2)%565
 273
 292
 107.0 %
Franchise profit$1,152
 $1,103
 $49
 4.4 %$1,142
 $1,951
 $(809) (41.5)%
Franchise profit as a percentage of franchise revenue77.7% 76.4%   1.3 %66.9% 87.7%   (20.8)%

Franchise revenue increased $38 thousanddecreased approximately $0.5 million in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The $38 thousand increase$0.5 million decrease in franchise revenue reflects primarily (1) recognition of $113$451 thousand owed to us as franchisorin remaining unamortized initial franchise fees in the quarter ended December 19, 2018 for pooled advertising expenditures;certain franchise agreements that terminated early and (2) $9 thousand in amortized fees earned related to franchise development agreements; partially offset by (3) a declinenet decrease in franchise royalties, franchise marketing allocation fund contributions, and franchise fees of $84$66 thousand on fewer franchise locations in operation during the quarter.quarter ended December 18, 2019 compared to the quarter ended December 19, 2018

Cost of franchise operations decreased $11 thousandincreased approximately $0.3 million in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The increase in Cost of franchise operations primarily reflects (1) timing of recognizing marketing and advertising fee expenses; and (2) reimbursements from various vendors offsetting costs related to a franchise network meeting in the quarter ended December 19, 2018. Franchise segment profit, defined as franchise revenue less cost of franchise operations, increased $49 thousanddecreased approximately $0.8 million in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018 due primarily to the funds paid to us asreasons noted above for the franchisor for pooled advertising expendituresdecrease in Franchise revenue and a modest declineincrease in the costCost of franchise operations; partially offset by a decline in franchise royalties. Fiveoperations.

In the quarter ended December 18, 2019, two locations in the San Antonio, Texas area transferred from company-operated locations to franchise-operated locations during the quarter. As of June 5, 2019, there were 107 franchise locations in operation.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Franchise revenue$5,126
 $4,732
 $394
 8.3 %
Cost of franchise operations849
 1,198
 (349) (29.1)%
Franchise profit$4,277
 $3,534
 $743
 21.0 %
Franchise profit as a percentage of franchise revenue83.4% 74.7%   8.7 %

Franchise revenue increased $0.4 million in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018. The $0.4 million increase in franchise revenue reflects (1) an approximate $0.5 million increase in franchise fees earned; and (2) recognition of approximately $0.3 million of revenue related to funds owed to us as the franchisor for pooled advertising expenditures; partially offset by (3) an approximate $0.4 million decline in franchise royalties on fewer franchise locations in operation during the three quarters.

Cost of franchise operations decreased approximately $0.3 million, or 29.1%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018. Franchise profit, defined as Franchise revenue less Cost of franchise operations, increased approximately $0.7 million in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018, due primarily to the $0.4 million increase in franchise revenue discussed above combined with a $0.3 million reduction in franchise costs. Two franchise locations opened, five locations closed, and five locations in the San Antonio,Austin, Texas area transferred from company operated locations to franchise operated locations, in the three quarters ended June 5, 2019.and seven locations closed. As of June 5,December 18, 2019, there were 10797 Fuddruckers franchise locationsrestaurants in operation.

Culinary Contract Services
 
Culinary Contract Services is 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. Culinary Contract Services has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, sports stadiums, and business and industry clients. Culinary Contract Services 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. We operated 32 Culinary Contract Services locations at the end of the quarter ended June 5, 2019 and 25 at the end of the quarter ended June 6, 2018. We focus on clients who are able to enter into agreements in which all operating costs are reimbursed to us and we generally charge a fixed fee. Thesefee as opposed to agreements where we retain all revenues and operating costs and we are exposed to the variability of the operating results of the location. The fixed fee agreements typically present lower financial risk to the company. We operated 33 Culinary Contract Services locations as of December 18, 2019 and 28 as of December 19, 2018.



Quarter 
Ended
 
Quarter 
Ended
 
Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18,
2019
 December 19,
2018
 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Culinary contract services sales$7,571
 $6,639
 $932
 14.0%$9,774
 $9,496
 $278
 2.9%
Cost of culinary contract services6,791
 6,104
 687
 11.3%8,948
 8,815
 133
 1.5%
Culinary contract services profit$780
 $535
 $245
 45.8%$826
 $681
 $145
 21.3%
Culinary contract services profit as a percentage of Culinary contract services sales10.3% 8.1%   2.2%8.5% 7.2%   1.3%
 
Culinary contract services sales increased approximately $0.9$0.3 million, or 14.0%2.9%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The $0.9$0.3 million sales increase was primarily related to the sales contribution from newer accounts that areincrease in their first year of operations with Luby's Culinary Contract services.culinary contract service locations.
 
Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary Contract Services sales. Cost of culinary contract services increased approximately $0.7$0.1 million, or 11.3%1.5%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. Culinary contract services segment profit, defined as Culinary contract services sales less Cost of culinary contract services, increased to 10.3%8.5% in the quarter ended June 5,December 18, 2019 from 8.1%7.2% in the quarter ended June 6, 2018 due to the change in the mix of our culinary agreements with clients.
 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Culinary contract services sales$24,610
 $19,413
 $5,197
 26.8%
Cost of culinary contract services22,324
 18,113
 4,211
 23.2%
Culinary contract services profit$2,286
 $1,300
 $986
 75.8%
Culinary contract services profit as a percentage of Culinary contract services sales9.3% 6.7%   2.6%

Culinary Contract Services sales increased approximately $5.2 million, or 26.8%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018.  The $5.2 million sales increase consisted of (1) an increase in sales of approximately $4.1 million from newer accounts that were not in operation for the entire three quarters ended June 6, 2018; (2) approximately $0.7 million from a location that was transferred from our restaurant business segment to our culinary contract services business segment; and (3) approximately $0.7 million increase in sales from locations continually operated over the prior full year; partially offset by loss of sales of approximately $0.3 million for locations that ceased operations.
Cost of Culinary Contract Services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary Contract Services sales. Cost of Culinary Contract Services increased approximately $4.2 million, or 23.2%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018, consistent with an increase in Culinary Contract Services sales. Culinary contract services segment profit, defined as Culinary contract services sales less Cost of culinary contract services, increased to 9.3% in the three quarters ended June 5, 2019 from 6.7% in the three quarters ended June 6,December 19, 2018 due to the change in the mix of our culinary agreements with clients.



 Company-wide Expenses
 
Opening Costs
 
Opening costs include labor, supplies, occupancy, and other costs necessary to support a restaurant through its opening period. Opening costs were $6$12 thousand in the quarter ended June 5,December 18, 2019 compared to $0.1 million$33 thousand in the quarter ended June 6,December 19, 2018. The $6 thousand in opening costs for the quarter ended June 5, 2019 related to one location that we lease for a potential future Fuddruckers opening. The approximate $0.1 million in opening costs for the quarter ended June 6, 2018 included the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant, the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business in the quarter ended June 6,December 18, 2019 and in the quarter ended December 19, 2018 as well asprimarily reflects the carrying cost for one location that we lease for a potential future Fuddruckers opening.

Opening costs were $49 thousand in the three quarters ended June 5, 2019 compared to approximately $0.5 million in the three quarters ended June 6, 2018. The $49 thousand in opening costs for the three quarters ended June 5, 2019 related to one location that we lease for a potential future Fuddruckers opening. The approximate $0.5 million in opening costs for the three quarters ended June 6, 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business just prior to the quarter ended June 6, 2018 as well as the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease for a potential future Fuddruckers opening.

Depreciation and Amortization Expense 
Quarter 
Ended
 
Quarter 
Ended
 
Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18,
2019
 December 19,
2018
 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
Depreciation and amortization$2,927
 $4,050
 $(1,123) (27.7)%$3,762
 $4,903
 $(1,141) (23.3)%
As a percentage of total sales3.9% 4.7%   (0.8)%4.0% 4.8%   (0.8)%
 
Depreciation and amortization expense decreased by approximately $1.1 million, or 27.7%23.3%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018 due primarily to certain assets reaching the end of their depreciable lives and the removal of certain assets upon sale. As a percentage of total revenue, depreciationDepreciation and amortization expense decreased to 3.9%4.0% in the quarter ended June 5,December 18, 2019, compared to 4.7%4.8% in the quarter ended June 6,December 19, 2018.

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
Depreciation and amortization$11,052
 $13,402
 $(2,350) (17.5)%
As a percentage of total sales4.4% 4.8%   (0.4)%

Depreciation and amortization expense decreased by approximately $2.4 million, or 17.5%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018 due primarily to certain assets reaching the end of their depreciable lives and the removal of certain assets upon sale. As a percentage of total revenue, depreciation and amortization expense decreased to 4.4%in the three quarters ended June 5, 2019, compared to 4.8%in the three quarters ended June 6, 2018.




Selling, General and Administrative Expenses 
Quarter 
Ended
 
Quarter 
Ended
 
Quarter Ended Quarter Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
December 18,
2019
 December 19,
2018
 Increase/
(Decrease)
(12 weeks) (12 weeks) (12 weeks vs 12 weeks)(16 weeks) (16 weeks) (16 weeks vs 16 weeks)
General and administrative expenses$8,135
 $7,779
 $356
 4.6%$8,497
 $9,085
 $(588) (6.5)%
Marketing and advertising expenses1,291
 728
 563
 77.3%1,661
 925
 736
 79.6 %
Selling, general and administrative expenses$9,426
 $8,507
 $919
 10.8%$10,158
 $10,010
 $148
 1.5 %
As a percentage of total sales12.6% 9.9%   2.7%10.7% 9.7%   1.0 %
 
Selling, general and administrative expenses include marketing and advertising expenses, corporate salaries and benefits-related costs, including restaurant area leaders and regional directors, share-based compensation, marketing and advertising expenses, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses increased approximately $0.9$0.1 million, or 10.8%1.5%, in the quarter ended June 5,December 18, 2019 compared to the quarter ended June 6,December 19, 2018. The increase in selling, general and administrative expenses reflects (1) an approximate $1.2 million increase in outside professional services, including professional service contractors performing responsibilities in our information technology, accounting, and other functions, inclusive of approximately $0.7 million in other one-time restructuring related consulting fees surrounding software upgrades, evaluations of our cost structure and revenue enhancing priorities; and (2) an approximate $0.6 million increase in marketing and advertising, as we invest in ourincluding increased expenditures for various digital media strategy;advertising, increased advertising support leading into Thanksgiving, and other efforts to reach our guests in an effective manner, as well as comparison to the quarter ended December 19, 2018 when marketing and advertising efforts were reduced while new approaches were developed; and (2) an approximate $0.3 million increase due to de-recognition of a bonus accrual in the quarter ended December 19, 2018; partially offset by (3) an approximate $0.6$0.7 million decreasereduction in salarysalaries and benefits expenses on reduced headcount;expense and (4) an approximate a $0.3$0.2 million decrease in other corporate overhead expenses, including primarily lower corporatecomponents of Selling, general administrative expense (professional service fees, travel, expense and corporate softwaresupplies, occupancy, and other supplies expense.general overhead costs). As a percentage of total revenue, Selling, general and administrative expenses increased to 12.6%10.7% in the quarter ended June 5,December 18, 2019, compared to 9.9%9.7% in the quarter ended June 6,December 19, 2018 due to a decrease in largesales resulting from a reduced number of stores in operations.

Other Charges

Other charges include those expenses that we consider related to our restructuring efforts or not part of our recurring operations. We have identified these expenses amounting to approximately $1.2 million in the first quarter of fiscal 2020 and $1.2 million in the first quarter of fiscal 2019 and recorded in Other charges. These expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019.
 Quarter Ended Quarter Ended
($000s)December 18,
2019
 December 19,
2018
 (16 weeks) (16 weeks)
Proxy communication related$
 $742
Employee severances619
 472
Restructuring related619
 
Total Other Charges$1,238
 $1,214

In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the increaseBoard of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the Company’s annual meeting. We incurred approximately $1.7 million (approximately $0.7 million in the quarter ended December 19, 2018) in proxy communication expense which was primarily for outside professional services and consulting feesrelated costs in order to communicate with shareholders about management's strategy and increased investmentthe experience of the Company's members on the Board of Directors. In fiscal 2020, there is no known contested proxy contest driving one-time costs. In fiscal 2019, we separated a number of employees as part of our efforts to streamline our corporate overhead costs and to support a reduced number of restaurants in marketingoperation. Employees who were separated from the company were paid severance based on the number of years of service and advertising, concurrentearnings with the reductionorganization, resulting in sales from operating fewer restaurants.an approximate $1.3 million charge ($0.5 million million in the December 19, 2018). In fiscal 2020, we separated with an additional number of employees to further streamline our corporate overhead costs. Severance payments to these employees, based on the same criteria as in 2019, resulted in an approximately $0.6 million charge in the quarter ended December 18, 2019. Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size

 Three Quarters Ended Three Quarters Ended  
($000s)June 5,
2019
 June 6,
2018
 Increase/
(Decrease)
 (40 weeks) (40 weeks) (40 weeks vs 40 weeks)
General and administrative expenses$26,680
 $26,328
 $352
 1.3%
Marketing and advertising expenses2,986
 2,891
 95
 3.3%
Selling, general and administrative expenses$29,666
 $29,219
 $447
 1.5%
As a percentage of total sales11.8% 10.4%   1.4%

Selling, general and administrative expenses increased approximately $0.4 million, or 1.5%, in the three quarters ended June 5, 2019 compared to the three quarters ended June 6, 2018. The increase in selling, general and administrative expenses includes (1) an approximate $2.9 million increase in outside professional services, inclusive of approximately $1.7 million in one-time proxy solicitation and communicationcorporate overhead costs as well as approximately $1.1 million in other one-time restructuring related consulting fees surrounding software upgrades, evaluations of our cost structure and revenue enhancing priorities and severance costs; and (2) an approximate $0.1 million increase in marketing and advertising expense; mostly offset by (3) an approximate $1.8 million decrease in salaries, benefits,measures. In addition, we engaged other outside consultants to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other compensation expenses; and (4) an approximate $0.5 million decrease relateback-office functions to lower general liability insurance expense, and lower corporate supplies expense; and (5) an approximate $0.3 million reduction in corporate travel expense. As a percentage of total sales, selling, general and administrative expenses increased to 11.8%leading multi-unit restaurant outsourcing firm. We anticipate completing the transition in the three quarters ended June 5, 2019, comparedsecond calendar quarter of 2020 and expect to 10.4%realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $0.6 million for these restructuring efforts in the three quartersquarter ended June 6, 2018.

December 18, 2019
Provision for Asset Impairments and Restaurant Closings

The approximate $0.7$1.1 million impairment charge for the quarter ended June 5,December 18, 2019 is primarily related to onetwo property location held forlocations where the right of use asset was written off as well as spare inventory of restaurant equipment and parts at our maintenance facility written down to itstheir estimated fair value, partially offset by a reversal of previously recorded lease termination reserve.value. The approximate $4.5$1.2 million impairment charge for the quarter ended June 6,December 19, 2018 wasis primarily related to assets at threesix property


locations, goodwill at one location, eightand six properties held for sale written down to their fair value, and net lease termination costs of approximately $0.1 million at five property locations.

The approximate $3.1 million impairment charge for the three quarters ended June 5, 2019 is primarily related to assets at nine property locations held for use, six properties held for sale, and one international joint venture investment, each written down to their fair value. 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.

Net Loss (Gain) on Disposition of Property and Equipment
 
GainLoss on disposition of property and equipment was approximately $0.4 million$30 thousand in the quarter ended June 5,December 18, 2019 and was primarily related to (1) the sale of one undeveloped property that was previously held for sale; (2) amortization of deferred gain on two other properties that were sold and leased back; and (3) sale of additional property at one location, net of normal asset retirement activity at various properties.properties, partially offset by gains on sale of equipment at certain locations. The loss on disposition of property and equipment was approximately $0.2$0.1 million in the quarter ended June 6,December 19, 2018 and primarily reflects a write-off at one location partially offset by the net gain on the sale of one property.

Gain on disposition of property and equipment was approximately $12.9 million in the three quarters ended June 5, 2019 and primarily reflects (1) the sale and leaseback of two property locations where we operate a total of three restaurants, including a portion related to amortization of deferred gains; (2) sale of one undeveloped property that was previously held for sale; (3) partially offset by net lease termination costs at other locations as well as routine asset retirement activity. The loss on disposition of property and equipment

Interest Income

Interest income was approximately $0.2 million$23 thousand in the three quartersquarter ended June 6, 2018 is primarily relatedDecember 18, 2019 compared to asset retirements at six property location closures partially offset by net gains onzero in the sale of three property locations of approximately $0.2 million.quarter ended December 19, 2018.

Interest Expense
 
Interest expense was approximately $1.3$2.0 million in the quarter ended June 5,December 18, 2019 and $1.0$1.7 million in the quarter ended June 6,December 19, 2018. The increase reflects higher interest rates in the credit agreement entered into on December 13, 2018, and higher amortization expense related to pre-paid interest and fees associationassociated with the credit agreement into on December 13, 2018, as well as marginally higher average debt balances.

Interest expense was approximately $4.6 million in the three quarters ended June 5, 2019 compared to $2.2 million in the three quarters ended June 6, 2018. The increase in interest expense reflects higher average debt balances, higher interest rates in the credit agreement entered into on December 13, 2018, and higher amortization expense related to pre-paid interest and fees association with the credit agreement into on December 13, 2018, as well as acceleration of the expensing of deferred financing fees associated with our previouspartially offset by lower average debt agreement.balances.

Other Income, Net
 
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and changes in the fair value of our interest rate swap agreement prior to its termination in December 2018.

Other income net, was approximately $0.1$0.2 million in the quarter ended June 5,December 18, 2019 compared to $9$30 thousand in the quarter ended June 6,December 19, 2018. The approximate $0.1$0.2 million of other income in the quarter ended June 5,December 18, 2019 is primarily net rental income and sales tax discount benefit. The $9$30 thousand of income in the quarter ended June 6,December 19, 2018 primarily reflects net rental income and an increase to the fair value of our interest rate swap, partially offset by gift card expenses (specifically the expense of discounting gift card sales).

Other income, net, was approximately $0.2 million in the three quarters ended June 5, 2019 compared to approximately $0.3 million in the three quarters ended June 6, 2018. The approximate $0.2 million of income in the quarter ended June 5, 2019 is primarily net rental income, partially offset by sales tax discount expense, and a reduction in the fair value of our interest rate swap. The $0.3 million of income in the three quarters ended June 6, 2018 primarily reflects net rental income and an increase indecrease to the fair value of our interest rate swap partially offset by gift card expenses (specifically the expense of discounting gift card sales).


prior to its termination.

Taxes
 
For the quarter ended June 5,December 18, 2019, the income taxes related to continuing operations resulted in a tax provision of approximately $0.1 million$94 thousand compared to a tax provision of approximately $4.1 million$121 thousand for the quarter ended June 6,December 19, 2018. The effective tax rate ("ETR") for continuing operations was a negative 2.6%1.1% for the quarter ended June 5,December 18, 2019 and a negative 41.2%1.6% for the quarter ended June 6,December 19, 2018. The ETR for the quarter ended June 5,December 18, 2019 and the quarter ended June 6,December 19, 2018 differs from the federal statutory rate of 21.0% due to management's full valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.

For the three quarters ended June 5, 2019, the income taxes related to continuing operations resulted in a tax provision of approximately $0.3 million compared to a tax provision of approximately $7.5 million for the three quarters ended June 6, 2018. The ETR for continuing operations was a negative 6.0% for the three quarters ended June 5, 2019 and a negative 31.8% for the three quarters ended June 6, 2018. The ETR for the three quarters ended June 5, 2019 and three quarters ended June 6, 2018 differs from the federal statutory rate of 21.0% due to management's full valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.


Discontinued Operations
 
Discontinued operations resulted in a loss of $6$11 thousand in the quarter ended June 5,December 18, 2019 compared to a loss of approximately $0.5 million$6 thousand in the quarter ended June 6,December 19, 2018. The loss from discontinued operations of $6 thousand in the quarter ended June 5,December 18, 2019 and in the quarter ended December 18, 2019 was related to carrying costs associated with assets related to discontinued operations. Loss from discontinued operations of approximately $0.5 million in the quarter ended June 6, 2018 consisted of (1) $6 thousand in carrying costs associated with assets related to discontinued operations; (2) a $59 thousand impairment charge for assets related to discontinued operations; and (3) and income tax provision of approximately $0.4 million for assets related to discontinued operations.

Loss from discontinued operations was $18 thousand in the three quarters ended June 5, 2019 compared to a loss of approximately $0.6 million in the three quarters ended June 6, 2018. The loss from discontinued operations of $18 thousand in the three quarters ended June 5, 2019 was related to carrying costs associated with assets related to discontinued operations. Loss from discontinued operations of approximately $0.6 million in the three quarters ended June 6, 2018 consisted of (1) $14 thousand in carrying costs associated with assets related to discontinued operations (2) a $59 thousand impairment charge for assets related to discontinued operations; and (3) an approximate $0.5 million income tax provision for assets related to discontinued operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash and Cash Equivalents
 
Our primary sources of short-term and long-term liquidity are cash flows from operations and our 2018 Credit Facility (as defined below). Cash and cash equivalents and restricted cash increased approximately $9.1$0.6 million at June 5,December 18, 2019 to $12.8$13.4 million from 3.7$12.8 million at the beginning of the fiscal year. We expect to continue to invest our available liquidity to reduce our debt, maintain our existing restaurants and infrastructure and provide working capital requirements as necessary. We plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.

As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical for culinary contract services and franchises. We also strategically invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets. 

The following table summarizes our cash flows from operating, investing, and financing activities:
 


Three Quarters Ended Quarters Ended
June 5,
2019
 June 6,
2018
December 18,
2019
 December 19,
2018
(40 weeks) (40 weeks)(16 weeks) (16 weeks)
(In thousands)(In thousands)
Total cash provided by (used in):      
Operating activities$(10,881) $(4,878)$(2,131) $1,257
Investing activities18,895
 (7,611)(545) (948)
Financing activities1,045
 12,902
3,300
 15,737
Net increase in cash and cash equivalents and restricted cash$9,059
 $413
$624
 $16,046
 
Operating Activities. Cash used in operating activities was approximately $10.9$2.1 million in the three quartersquarter ended June 5,December 18, 2019, an approximate $6.0$3.4 million increase from the three quartersquarter ended June 6,December 19, 2018. The approximate $6.0$3.4 million increase in cash used in operating activities is due to an approximate $4.9$1.0 million increase in cash used for working capital purposes and an approximate $1.1$2.4 million increase in net loss after adjusting for non-cash items.
  
Net loss after adjusting for non-cash items (a use of cash) was approximately $2.7 million in the three quartersquarter ended June 5,December 18, 2019, an approximate $1.1$2.4 million increase compared to the three quartersquarter ended June 6,December 19, 2018. The $1.1$2.4 million increase in net loss after adjusting for non-cash items was primarily due to decreased store-level profit from our Company-owned restaurants and higher selling general and administrative costs, mostly resulting from one-time expenses.restaurants.
 


Changes in working capital were an approximate $8.2$0.6 million usesource of cash in the three quartersquarter ended June 5,December 18, 2019 and an approximate $3.3$1.6 million usesource of cash in the three quartersquarter ended June 6,December 19, 2018. The approximate $4.9$1.0 million increasedecrease in the usesource of cash was due to greater reductions in our accounts payable and accrued balances (in part due to the operation of 36 fewer restaurants) between the three quartersquarter ended June 5,December 18, 2019 and the three quartersquarter ended June 6, 2018.December 19, 2018 is described below.

Increases in current asset accounts are a use of cash while decreases in current asset accounts are a source of cash. During the three quartersquarter ended June 5,December 18, 2019, the change in trade accounts and other receivables, net, was an approximate $0.9$1.5 million use of cash which was an approximate $1.0$2.3 million increasedecrease from the source of cash in the three quartersquarter ended June 6,December 19, 2018. The change in food and supplies inventory during the three quartersquarter ended June 5,December 18, 2019 was an approximate $0.1$0.4 million source of cash which was an approximate $0.5 million increase from the use of cash in the three quartersquarter ended June 6,December 19, 2018. The change in prepaid expenses and other assets was an approximate $1.1$0.8 million source of cash during the three quartersquarter ended June 5,December 18, 2019, compared to a $0.6$1.9 million source of cash in the three quartersquarter ended June 6,December 19, 2018.
 
Increase in current liability accounts are a source of cash, while decreases in current liability accounts are a use of cash. During the three quartersquarter ended June 5,December 18, 2019, changes in the balances of accounts payable, accrued expenses and other liabilities was an approximate $8.6$1.4 million usesource of cash, compared to a use of cash of approximately $3.7$0.9 million during the three quartersquarter ended June 6,December 19, 2018.
 
Investing Activities. We generally reinvest available cash flows from operations to maintain and enhance existing restaurants and support Culinary Contract Services. Cash provided byused in investing activities was approximately $18.9$0.5 million in the three quartersquarter ended June 5,December 18, 2019 and an approximate $7.6$0.9 million use of cash in the three quartersquarter ended June 6,December 19, 2018. Capital expenditures were approximately $2.9$0.7 million in the three quartersquarter ended June 5,December 18, 2019 and approximately $11.7$1.1 million in the three quartersquarter ended June 6,December 19, 2018. Proceeds from the disposal of assets were approximately $21.8$0.1 million in the three quartersquarter ended June 5,December 18, 2019 and approximately $3.4$0.2 million in the three quartersquarter ended June 6, 2018. Insurance proceeds received as a result of claims made from property damage caused by Hurricane Harvey were approximately $0.8 million in the three quarters ended June 6,December 19, 2018.
 
Financing Activities. Cash provided by financing activities was $1.0$3.3 million in the three quartersquarter ended June 5,December 18, 2019 compared to an approximate $12.9$15.7 million source of cash during the three quartersquarter ended June 6,December 19, 2018. Cash flows from financing activities was primarily the result of our 2018 Credit Agreement. During the three quartersquarter ended June 5,December 18, 2019 net cash provided by our 2018 Term Loan was $58.4 million, cash used in Revolver borrowings was approximately $18.0 million, cash used for Term Loan re-payments was approximately $36.1 million, cash used for debt issuance costs was approximately $3.2 million, and cash used for equity shares withheld to cover taxes was $12 thousand.$3.3 million. During the three quartersquarter ended June 6,December 19, 2018, cash provided by borrowings on our Revolver2018 Term Loan were approximately $14.6$58.4 million, cash used for to repay our 2016 Term Loan re-payments was approximately $1.4$19.5 million, net repayments on our 2016 Revolver was approximately $20.0 million and cash used for equity shares withheld to cover taxesdebt issue costs was $70 thousand.approximately $3.2 million.
 


Status of Long-Term Investments and Liquidity
 
At June 5,December 18, 2019, we did not hold any long-term investments.

Status of Trade Accounts and Other Receivables, Net
 
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectable accounts, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
 
Capital Expenditures
 
Capital expenditures consist of purchases of real estate for future restaurant sites, Culinary Contract Services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the three quartersquarter ended June 5,December 18, 2019 were approximately $2.9$0.7 million primarily related to recurring maintenance of our existing units. We expect to be able to fund all capital expenditures in fiscal 20192020 using proceeds from the sale of assets, cash flows from operations and our 2018 Credit Agreement. We expect to spend less than $4.5 million on capital expenditures in fiscal 2019.2020. 


DEBT

The following table summarizes credit facility debt, less current portion at June 5,December 18, 2019 and August 29, 2018: 
  
June 5,
2019
 August 29,
2018
December 18,
2019
 August 28,
2019
Long Term Debt(In thousands)
2016 Credit Agreement - Revolver$
 $20,000
2016 Credit Agreement - Term Loan
 19,506
Long-Term Debt   
2018 Credit Agreement - Revolver2,000
 
$8,600
 $5,300
2018 Credit Agreement - Term Loan43,399
 
43,399
 43,399
Total credit facility debt45,399
 39,506
51,999
 48,699
Less:      
Unamortized debt issue costs(2,000) (168)(1,695) (1,887)
Unamortized debt discount(1,447) 
(1,275) (1,373)
Total credit facility debt, less unamortized debt issuance costs41,952
 39,338
49,029
 45,439
Current portion of credit facility debt
 39,338
3,399
 
Total Credit facility debt, less current portion$41,952
 $
Credit facility debt, less current portion$45,630
 $45,439
2018 Credit Agreement
On December 13, 2018, wethe Company entered into a credit agreement (the(as amended by the First Amendment (as defined below), the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital, MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80.0$80 million consisting of a $10.0$10 million revolving credit facility (the “2018 Revolver”), a $10.0$10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60.0$60 million term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 2018 Credit Agreement and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Date Term Loan will bear interest at the London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80.0 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018 Credit Agreement. The pre-funded amount at December 18, 2019 of approximately $8.4$6.3 million is recorded in Restricted cash and cash equivalents on the Company's Balance Sheet.consolidated balance sheet. LIBOR is set to terminate in December, 2021. We expect to agree to a replacement rate with MSD prior to the LIBOR termination.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10.0 million; 2nd anniversary: $10.0 million; 3rd anniversary: $15.0 million; and 4th anniversary: $15.0 million.


We payThe Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.50% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed from the date of the pre-payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of ourthe Company’s present and future personal property (other than certain excluded assets), all of the personal property of ourits guarantors (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of oursthe Company and ourits subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on ourthe Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, we arethe Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00. As of December 18, 2019, the Company was in full compliance with all covenants with respect to the 2018 Credit Facility.


All amounts owing by usthe Company under the 2018 Credit Facility are guaranteed by us and allthe subsidiaries of our subsidiaries.the Company.
As of June 5,December 18, 2019 we had approximately $1.3$1.7 million committed under letters of credit, which we useis used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million in other indebtedness.
As of July 15, 2019, we wereFebruary 3, 2020, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 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”).
On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
See Note 13 of the accompanying unaudited consolidated financial statements for more details regarding the Company's credit agreements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The unaudited consolidated financial statements included in Item 1 of Part 1 of this Form 10-Q were prepared in conformity with GAAP. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when preparing our unaudited consolidated financial statements, management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board. Actual results may differ from these estimates, including our estimates of future cash flows, which are subject to the current economic environment and changes in estimates. Other than the implementation of ASC 606842 as discussed in Note 1 and 34 of the accompanying unaudited consolidated financial statements, we had no changes in ourthe critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended August 29, 2018.28, 2019.   
 
NEW ACCOUNTING PRONOUNCEMENTS
 
See Note 1 to the accompanying unaudited consolidated financial statements for a discussion of recent accounting guidance adopted and not yet adopted. The adopted accounting guidance discussed in Note 1 did not have a significant impact on our consolidated financial position or results of operations. We expect thethat accounting guidance not yet adopted will not have a significant impact on our consolidated financial position or results of operations or we are currently evaluating the impact of adopting the accounting guidance.

INFLATION
 
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
 


FORWARD-LOOKING STATEMENTS
 
This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions, including any statements regarding:
 
future operating results,
future capital expenditures and expected sources of funds for capital expenditures,
future debt, including liquidity and the sources and availability of funds related to debt, and expected repayment of debt,
expected sources of funds for working capital requirements,
plans for our new prototype restaurants,
plans for expansion and revisions to our business,
scheduled openings of new units,
closing existing units,
effectiveness of management's disposal plans,
future sales of assets and the gains or losses that may be recognized as a result of any such sales, and
continued compliance with the terms of our 2018 Credit Agreement.



In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are relevant. Although management believes that its assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of its control. The following factors, as well as the factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 29, 201828, 2019 and any other cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
 
our ability to pursue strategic alternatives
general business and economic conditions,
the impact of competition,
decisions made in the allocation of capital resources,
our operating initiatives, changes in promotional, couponing and advertising strategies and the success of management’s business plans,
fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce,
ability to raise menu prices and customer acceptance of changes in menu items,
increases in utility costs, including the costs of natural gas and other energy supplies,
changes in the availability and cost of labor, including the ability to attract qualified managers and team members,
the seasonality of the business,
collectability of accounts receivable,
changes in governmental regulations, including changes in minimum wages and health care benefit regulation,
the effects of inflation and changes in our customers’ disposable income, spending trends and habits,
the ability to realize property values,
the availability and cost of credit,
the effectiveness of our credit card controls and PCIPayment Card Industry ("PCI") compliance,
weather conditions in the regions in which our restaurants operate,
costs relating to legal proceedings,
impact of adoption of new accounting standards,
effects of actual or threatened future terrorist attacks in the United States,
unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations, and
the continued service of key management personnel.

Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-Q could have material adverse effect on our business, results of operations, cash flows and financial condition.  



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
We are exposedAs a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to interest rate risk due to changes in interest rates affecting our variable-rate debt. As of June 5, 2019, the total amount of debt subject to interest rate fluctuations outstanding under our 2018 Credit Facility was $45.4 million Assuming an average debt balance with interest rate exposure of $45.4 million, a 100 basis point increase in prevailing interest rates would increase our annual interest expense by $0.5 million.
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside of the United States, which can adversely impact our net income and cash flows. Sales to customers and royalties from franchisees outside the contiguous United States as a percentage of our total revenues were not significant in the quarter ended June 5, 2019 and June 6, 2018, respectively.

Many ingredients in the products sold in our restaurants are commodities subject to unpredictable price fluctuations. We attempt to minimize price volatility by negotiating fixed price contracts for the supply of key ingredients and in some cases by passing increased commodity costs through to the customer by adjusting menu prices or menu offerings. Our ingredients are available from multiple suppliers so we are not dependent on a single vendor for our ingredients.provide this information.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of June 5,December 18, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 5,December 18, 2019, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Changes in Internal Control over Financial Reporting 
 
There were no changes in our internal control over financial reporting during the quarter ended June 5,December 18, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Part II—OTHER INFORMATION
 
Item 1. Legal Proceedings
 
There have been no material changes to our legal proceedings as disclosed in “Legal Proceedings” in Item 3 of Part I of our Annual Report on Form 10-K for the fiscal year ended August 29, 2018.28, 2019.
 
Item 1A. Risk Factors
 
There have been no material changes during the quarter ended June 5,December 18, 2019 to the Risk Factors discussed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended August 29, 2018.28, 2019.
 
Item 5. Other Information

NoneOn January 29, 2020, the Company announced that its Board of Directors has unanimously determined to amend its existing shareholder rights agreement, adopted February 15, 2018, in order to extend its expiration date from February 15, 2020 to February 15, 2021. The Board anticipates that the amendment will be adopted on or about February 14, 2020 and intends to seek stockholder approval of the amendment as soon as practicable thereafter. The shareholder rights agreement is more fully described at Note 16. of our unaudited consolidated financial statements included herein.

Item 6. Exhibits
Second Amendment to Credit Agreement, dated as of December 13, 2018, among the Company, the lenders from time to time party thereto, and MSD PCOF Partners VI, LLC, as Administrative Agent.
Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Rule 13a-14(a)/15d-14(a) certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
Section 1350 certification of the Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document
  
101.SCHXBRL Schema Document
  
101.CALXBRL Calculation Linkbase Document
  
101.DEFXBRL Definition Linkbase Document
  
101.LABXBRL Label Linkbase Document
  
101.PREXBRL Presentation Linkbase Document


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
LUBY’S, INC.
(Registrant)
       
Date:7/15/20192/3/2020By:/s/ Christopher J. Pappas
     Christopher J. Pappas
     President and Chief Executive Officer
     (Principal Executive Officer)
       
Date:7/15/20192/3/2020By:/s/ K. Scott Gray
     K. Scott Gray
     Senior Vice President and Chief Financial Officer
     (Principal Financial and Accounting Officer)

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