Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto, presented elsewhere in this report and the audited consolidated financial statements
of Star Buffet, Inc., a Delaware corporation (the “Company,” “we” or “us”
),
and
Management’s Discussion and Analysis included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 29, 2018
(the “201
8
Form 10-K”)
.
Comparability of periods may be affected by the closure of restaurants or the implementation of the Company’s acquisition and strategic alliance strategies. The costs associated with integrating new restaurants or
closing
under-performing or unprofitable restaurants, if any, may have a material adverse effect on the Company’s results of operations in any individual period.
This
Q
uarterly
R
eport
on Form 10-Q
(this “Report”)
contains forward looking statements, which are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the following: general economic and business conditions; success of integrating newly acquired under-performing or unprofitable restaurants; the impact of competitive products and pricing; success of operating initiatives; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; changes in prevailing interest rates and the availability of financing; food, labor, and employee benefits costs; changes in, or the failure to comply with, government regulations; weather
and wildfire
conditions; construction schedules; implementation of the Company’s acquisition and strategic alliance strategy; the effect of the Company’s accounting polic
i
es and other risks detailed in
Item 1A of
the
201
8
Form 10-
K
, and other filings with the Securities and Exchange Commission.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this
Report.
All forward-looking statements are based on information available to the Company at this time, and the Company assumes no obligation to update any of these statements.
Executive Summary
Star Buffet, Inc. is a multi-concept restaurant holding company. The Company was incorporated on July 28, 1997. At August 13, 2018 the Company operated 27 full-service restaurants. The Company’s restaurant located in Kalispell, Montana that was temporarily closed due to fire damage reopened on June 29, 2018. During the second quarter of fiscal year ending January 28, 2019 (“Fiscal 2019”), the Company also had an additional five restaurants that were not in operation. Three restaurants were closed for remodeling and repositioning, one was leased to a third-party operator and one was used as a warehouse. The Company’s restaurants operate under trade names which are owned or licensed from others. Certain of the restaurant brands owned and operated by the Company include 4B’s Restaurants®, BuddyFreddys®, Barnhill’s Salads Buffet Desserts®, Casa Bonita®, Pecos Diamond Steakhouse and Frosty Freez. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming. The Company has an executive office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah.
Recent Developments
Please refer to Note 6 – Subsequent Events in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for recent developments.
The following table summarizes the Company’s results of operations as a percentage of total revenues for the 12 and 28 weeks ended August 14, 2017 and August 14, 2017, respectively.
|
|
Twelve Weeks Ended
|
|
|
Twenty-eight Weeks Ended
|
|
|
|
August 13,
|
|
|
August 14,
|
|
|
August 13,
|
|
|
August 14,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs, expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food costs
|
|
|
31.2
|
|
|
|
31.3
|
|
|
|
32.1
|
|
|
|
31.8
|
|
Labor costs
|
|
|
37.1
|
|
|
|
36.0
|
|
|
|
37.9
|
|
|
|
36.6
|
|
Occupancy and other expenses
|
|
|
18.7
|
|
|
|
19.4
|
|
|
|
20.0
|
|
|
|
19.8
|
|
General and administrative expenses
|
|
|
4.4
|
|
|
|
3.8
|
|
|
|
4.5
|
|
|
|
4.7
|
|
Depreciation and amortization
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
2.0
|
|
Total costs, expenses and other
|
|
|
93.2
|
|
|
|
92.3
|
|
|
|
96.6
|
|
|
|
94.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6.8
|
|
|
|
7.7
|
|
|
|
3.4
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
1.7
|
|
Other income
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.5
|
|
Income before income tax
|
|
|
5.5
|
|
|
|
6.6
|
|
|
|
1.9
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Net income
|
|
|
5.4
|
%
|
|
|
6.3
|
%
|
|
|
1.8
|
%
|
|
|
3.7
|
%
|
The table below outlines the number of operating and non-operating restaurants by the Company as of August 13, 2018 and January 29, 2018.
|
|
August 13, 2018
|
|
|
January 29, 2018
|
|
Operating Restaurants:
|
|
|
|
|
|
|
|
|
4B’s
(1) (2)
|
|
|
15
|
|
|
|
13
|
|
JB’s
|
|
|
5
|
|
|
|
5
|
|
Steakhouses
(3)
|
|
|
4
|
|
|
|
4
|
|
Buffets
(4)
|
|
|
2
|
|
|
|
2
|
|
Casa Bonita
|
|
|
1
|
|
|
|
1
|
|
|
|
|
27
|
|
|
|
25
|
|
Non-Operating Restaurants:
|
|
|
|
|
|
|
|
|
Leased to Third Parties
|
|
|
1
|
|
|
|
1
|
|
Warehouse
|
|
|
1
|
|
|
|
1
|
|
Held for Future Use
|
|
|
3
|
|
|
|
3
|
|
|
|
|
5
|
|
|
|
5
|
|
Total
|
|
|
32
|
|
|
|
30
|
|
|
(1)
|
Includes one
Frosty Freez
restaurant
,
one Antler’s
restaurant
and one 4 Aces
’
restaurant
.
|
|
(2)
|
The 4B’s Café in Deer Lodge Montana operates
seasonally
from
approximately
May to September.
|
|
(3)
|
Includes two Pecos Diamon
d, one Bar H and one Rancher’s Grill
restaurants.
|
|
(4)
|
Inc
l
udes
one
Barn
h
ill’s
Salads
Buffet
Desserts
restaurant
and
one
BuddyFreddys
restaurant
.
|
Twelve
Weeks Ended August 13, 2018 compared to Twelve Weeks Ended August 14, 2017
Overview -
The Company has a consolidated net income for the 12-week period ended August 13, 2018 of $389,000 or $0.12 per diluted share as compared with net income of $465,000 or $0.14 per diluted share for the 12 weeks end August 14, 2017, a decrease of approximately $76,000 from the comparable prior fiscal year period. The decrease in net income was primarily from the result of approximately $79,000 decrease from income from operations due primarily to a $160,000 decrease in revenues and higher labor costs as a percentage of revenues.
Revenues -
Total revenues decreased by approximately $161,000, or 2.2%, from $7.4 million in the 12 weeks ended August 14, 2017 to $7.3 million in the 12 weeks ended August 13, 2018. The decrease in revenues was primarily the result of an approximately $237,000 decrease in revenue from the closure of two restaurants plus the temporary closure of one restaurant and an approximately $349,000 or 5.1% decrease in comparable same store sales. The decrease in revenues was partially offset by approximately $425,000 attributable to the opening of one restaurant in Fiscal 2019 and three restaurants in the fiscal year ending January 29, 2018 (“Fiscal 2018”).
Food Costs -
Food costs as a percentage of total revenues decreased from 31.3% during the 12-week period ended August 14, 2017 to 31.2% during the 12-week period ended August 13, 2018. The food cost decreased in the second quarter of Fiscal 2019 as compared to the same period in Fiscal 2018 as a percentage of sales primarily from slightly lower wholesale costs and lower revenue in the second quarter of Fiscal 2019 compared to the second quarter of Fiscal 2018.
Labor -
Labor costs as a percentage of total revenues increased from 36.0% during the 12-week period ended August 14, 2017 to 37.1% during the 12-week period ended August 13, 2018. The increase as a percentage of total revenues was primarily attributable to a higher minimum wages in the States of Arizona, Colorado, Florida and Montana and $161,000 in lower revenue in the second quarter of Fiscal 2019 compared to the second quarter of Fiscal 2018.
Occupancy and Other Expenses -
Occupancy and other expenses as a percentage of total revenues decreased from 19.4% during the 12-week period ended August 14, 2017 to 18.7% during the 12-week period ended August 13, 2018. The decrease as a percentage of total revenues was primarily attributable to lower rent and repair expense in second quarter of Fiscal 2019 compared to same period in Fiscal 2018. The lower rent was primarily attributable to a rent reimbursement regarding the fire in Kalispell. Occupancy and other expense decreased approximately $86,000 in the second quarter of Fiscal 2018 primarily due to the decrease of $161,000 in revenues and lower rent and repair expense in the second quarter of Fiscal 2019 compared the same period in Fiscal 2018.
General and Administrative Expenses -
General and administrative expense as a percentage of total revenues increased from 3.8% during the 12-week period ended August 14, 2017 to 4.4% during the 12-week period ended August 13, 2018. General and administrative expense increased from $283,000 during the 12-week period ended August 14, 2017 to $320,000 during the 12-week period ended August 13, 2018. The increase was primarily attributable to higher legal costs in second quarter of Fiscal 2019 compared same period in Fiscal 2018.
Depreciation and Amortization -
Depreciation and amortization expense increased from $131,000 during the 12-week period ended August 14, 2017 to $133,000 during the 12-week period ended August 13, 2018. The increase was primarily attributable to additional restaurants acquired.
Interest Expense -
Interest expense decreased from $120,000 during the 12-week period ended August 14, 2017 to $115,000 during the 12-week period ended August 13, 2018. The decrease was attributable to lower debt balance primarily relating to loans for the purchase and remodel of the 4B’s restaurant in Missoula, Montana in the 12-week period ended August 13, 2018 as compared to the 12-week period ended August 14, 2017.
Other Income -
Other income is primarily rental income from the Company’s leased properties. Rental income was $34,000 for three properties leased for the 12-week period ended August 14, 2017. Rental income was $22,000 for two properties leased for the 12-week period ended August 13, 2018. Rental income was adversely impacted by the loss of one tenant.
Income Taxes -
The income tax provision totaled $20,000 for the 12-week period ended August 14, 2017 and $10,000 for the 12-week period ended August 13, 2018. The Company has net deferred income tax assets of $0 on August 13, 2018 and January 29, 2018. The Company has a net operating loss for tax and financial reporting purposes. The Company has full valuation against its existing deferred tax assets as of August 13, 2018.
Twenty-eight
Weeks Ended August 13, 2018 compared to Twenty-eight Weeks Ended August 14, 2017
Overview -
The Company has a consolidated net income for the 28-week period ended August 13, 2018 of $255,000 or $0.08 per diluted share as compared with net income of $581,000 or $0.18 per diluted share for the 28-weeks ended August 14, 2017, a decrease of approximately $326,000 from the comparable prior fiscal year period. The decrease in net income was primarily from the result of approximately $313,000 decrease from income from operations due primarily to a $829,000 decrease in revenues and higher food and labor costs as a percentage of revenues.
Revenues -
Total revenues decreased by approximately $829,000, or 5.3%, from $15.7 million in the 28 weeks ended August 14, 2017 to $14.8 million in the 28 weeks ended August 13, 2018. The decrease in revenues was primarily the result of an approximately $648,000 decrease in revenue from the closure of two restaurants plus the temporary closure of one restaurant and an approximately $946,000 or 6.5% decrease in comparable same store sales. The decrease in revenues was partially offset by approximately $765,000 attributable to the opening of two restaurants in Fiscal 2019 and three restaurants in Fiscal 2018.
Food Costs -
Food costs as a percentage of total revenues increased from 31.8% during the 28-week period ended August 14, 2017 to 32.1% during the 28-week period ended August 13, 2018. The food cost decreased in the current fiscal year as compared to the same period in the prior year as a percentage of sales primarily from stable wholesale costs and higher guest check average in Fiscal 2018 as compared to Fiscal 2017. Food costs decreased by approximately $214,000 in the 28-week period ended August 13, 2018 compared to the same period ended August 14, 2017 primarily due a $829,000 decrease in revenues.
Labor -
Labor costs as a percentage of total revenues increased from 36.6% during the 28-week period ended August 14, 2017 to 37.9% during the 28-week period ended August 13, 2018. The increase as a percentage of total revenues was primarily attributable to a higher minimum wages in the States of Arizona, Colorado, Florida and Montana and $829,000 in lower revenue in the first two quarters of Fiscal 2019 compared to the first two quarters of Fiscal 2018.
Occupancy and Other Expenses -
Occupancy and other expenses as a percentage of total revenues increased from 19.8% during the 28-week period ended August 14, 2017 to 20.0% during the 28-week period ended August 13, 2018. The increase as a percentage of total revenues was primarily attributable to a higher rent expense in first two quarters of Fiscal 2019 compared to same period in Fiscal 2018. Occupancy and other expense decreased approximately $132,000 in the 28-week period ended August 13, 2018 primarily due to the decrease of $829,000 in revenues in the first two quarters of Fiscal 2019 compared the same period in Fiscal 2018.
General and Administrative Expenses -
General and administrative expense as a percentage of total revenues decreased from 4.7% during the 28-week period ended August 14, 2017 to 4.5% during the 28-week period ended August 13, 2018. General and administrative expense decreased from $741,000 during the 28-week period ended August 14, 2017 to $668,000 during the 28-week period ended August 14, 2017. The decrease as a percentage of total revenues was primarily due to a decrease in insurance expense in the first two quarters of Fiscal 2019 compared the same period in Fiscal 2018.
Depreciation and Amortization -
Depreciation and amortization expense increased from $306,000 during the 28-week period ended August 14, 2017 to $316,000 during the 28-week period ended August 13, 2018. The increase was primarily attributable to additional restaurants acquired.
Interest Expense -
Interest expense decreased from $277,000 during the 28-week period ended August 14, 2017 to $267,000 during the 28-week period ended August 13, 2018. The decrease was attributable to lower debt balance primarily relating to loans for the purchase and remodel of the 4B’s restaurant in Missoula, Montana in the 28-week period ended August 13, 2018 as compared to the 28-week period ended August 14, 2017.
Other Income -
Other income consists primarily of rental income from the Company’s leased properties. Rental income was $82,000 for three properties leased for the 28-week period ended August 14, 2017. Rental income was $49,000 for two properties leased for the 28-week period ended August 13, 2018. Rental income was adversely impacted by the loss of one tenant.
Income Taxes -
The income tax provision totaled $30,000 for the 28-week period ended August 14, 2017 and $20,000 for the 28-week period ended August 13, 2018. The Company has net deferred income tax assets of $0 on August 13, 2018 and January 29, 2018. The Company has a net operating loss for tax and financial reporting purposes. The Company has full valuation against its existing deferred tax assets as of August 13, 2018.
Impact of Inflation
The impact of inflation on food, labor, equipment and construction and remodeling of restaurants could affect the Company’s margins. Many of the Company’s employees are paid hourly rates related to state minimum wage laws
that are tied to inflation indexes so that changes in these laws would result in higher labor costs to the Company. In addition, food items purchased by the Company are subject to market supply and demand pressures. Over time, the Company believes that modest increases in these costs can be offset through price changes and other cost control efforts. However, in periods in which costs are increasing rapidly, such as the current period in which minimum wages have increased significantly in some states, the Company is generally not able to pass significant costs on to its customers in a short period of time.
Liquidity and Capital Resources
In recent years, the Company has financed operations through a combination of cash on hand, cash provided from operations and loans from our principal shareholders.
As of August 13, 2018, the Company had $137,000 in cash. Cash and cash equivalents increased by $9,000 during the 28-weeks ended August 13, 2018. The net working capital deficit was $3.7 million at August 13, 2018 and January 29, 2018. To the extent that we need to raise additional capital to grow our business, we anticipate raising such capital through some combination of the issuance of common stock, preferred stock or debt. We have recently been borrowing required capital to grow our business from our principal shareholder. We have no commitment from this shareholder to provide additional capital or assurance that this shareholder will voluntarily continue to provide capital as needed. We may be unable to raise additional capital as needed, or if successful, we will likely be required to pay a higher price for any capital.
The Company generates cash flow daily from sales in its restaurants and manages its cash balances to meet its current operating obligations. The Company spent approximately $198,000 on capital expenditures during the 28-weeks ending August 13, 2018, primarily on existing restaurants. The Company spent approximately $576,000 on capital expenditures during the 28-weeks ending August 14, 2017.
Cash provided from operations was approximately $533,000 for the 28-weeks ending August 13, 2018 and $542,000 for the 28-weeks ending August 14, 2017, respectively.
Cash used by financing activities was approximately $326,000 for the 28-weeks ending August 13, 2018 compared to cash used by financing activities of approximately $12,000 for the 28-weeks ending August 14, 2017. In the first two quarters of Fiscal 2019, cash used by financing activities was as follows: The Company made net debt payments of approximately $196,000 and had checks written in excess of bank balance of $108,000, a change of $130,000. In the first two quarters of Fiscal 2018, cash used by financing activities was as follows: The Company made net debt payments of approximately $190,000, had loan proceeds of approximately $285,000, had loan costs of $7,000 and had checks written in excess of bank balance of $0, a change of $100,000.
The following table is a summary of the Company’s outstanding debt obligations.
|
|
August 13, 2018
|
|
|
August 13, 2018
|
|
|
January 29, 2018
|
|
|
January 29, 2018
|
|
Type of Debt
(1)
|
|
Total Debt
|
|
|
Current Portion
|
|
|
Total Debt
|
|
|
Current Portion
|
|
Real Estate Mortgages
|
|
$
|
2,606,000
|
|
|
$
|
561,000
|
|
|
$
|
2,787,000
|
|
|
$
|
315,000
|
|
Other-Miscellaneous
|
|
|
254,000
|
|
|
|
15,000
|
|
|
|
269,000
|
|
|
|
23,000
|
|
Note Payable to Officer
|
|
|
1,992,000
|
|
|
|
-
|
|
|
|
1,992,000
|
|
|
|
-
|
|
Total Debt
|
|
$
|
4,852,000
|
|
|
$
|
576,000
|
|
|
$
|
5,048,000
|
|
|
$
|
338,000
|
|
|
(1)
|
The interest rates range from 6% to 11.5%. The maturity dates of the obligations range from April 2019 to October 2035.
|
During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Wheaton. In June 2008, the Company borrowed an additional $592,000 from Mr. Wheaton under the same terms. This resulted in an increase in the note balance from $1,400,000 to $1,992,000, the balance as of August 13, 2018 and January 29, 2018. The principal balance and any unpaid interest was due and payable in full on June 5, 2012. The loan was subsequently modified as a result of the Company’s bankruptcy filing and pursuant to the plan of reorganization approved by the Bankruptcy Court on December 17, 2012 (the “Bankruptcy Plan”), the principal balance was not eligible to be repaid until all obligations owed to other creditors have been fully satisfied. Interest accrued on the principal amount of $1,991,936 and the interest of $196,957 from September 28, 2011 to December 7, 2016 at the Bankruptcy Plan rate. When the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. on December 7, 2016, the Company reverted back to the original interest rate of 8.5%. The Company expensed $105,000 to Robert E. Wheaton for interest during the first two quarters of Fiscal 2019 and Fiscal 2018.
On November 9, 2016, the Company borrowed $450,000 from Mr. Robert E. Wheaton to remodel the 4B’s Restaurant in Missoula, Montana. The three-year fully amortized secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid Mr. Wheaton approximately $81,100 and $66,000 in principal during the first two quarters of Fiscal 2019 and Fiscal 2018, respectively, under this mortgage. In addition, the Company paid approximately $13,900 and $23,000 in interest during the first two quarters of Fiscal 2019 and Fiscal 2018, respectively.
Critical Accounting Policies and Judgments
The Company prepares its condensed consolidated financial statements in conformity with US GAAP. The Company's condensed consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1—Summary of Significant Accounting Policies to the audited financial statements for Fiscal 2018 included in the 2018 Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or be subject to variations and which may significantly affect the Company's results and financial position for the reported period or in future periods. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations.
Earnings or Loss Per Common Share
Net (loss) income per common share - basic is computed based on the weighted-average number of common shares outstanding during the period. Net (loss) income per common share – diluted is computed based on the weighted-average number of common shares outstanding during the period plus the effect of dilutive common stock equivalents outstanding during the period. Dilutive stock options are considered to be common stock equivalents and are included in the diluted calculation using the treasury stock method.
Basic earnings or loss per common share is computed on the basis of the weighted average number of shares outstanding during the periods. Diluted earnings or loss per common share is calculated based on the weighted-average number of common shares outstanding during the period plus the effect of dilutive common stock equivalents outstanding during the period. Dilutive stock options are considered to be common stock equivalents and are included in the diluted calculation using the treasury stock method. The Company did not have any outstanding stock options for the fiscal quarters ending August 13, 2018 and August 14, 2017.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment”. The Company assesses whether an impairment write-down is necessary whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any impairment is recognized as a charge to earnings, which would adversely affect operating results in the affected period.
Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted net cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected net cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge and could adversely affect operating results in any period.
Buildings and Equipment
Buildings and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives:
|
|
Years
|
|
Buildings
|
|
|
40
|
|
|
Leasehold improvements
|
|
15
|
-
|
20
(1)
|
|
Furniture, fixtures and equipment
|
|
5
|
-
|
8
|
|
|
(1)
|
Leasehold improvements are amortized over the lesser of the life of the lease or the estimated economic life of the assets. The life of the lease includes renewal options determined by management at lease inception as reasonably likely to be exercised. If a previously scheduled lease option is not exercised, any remaining unamortized leasehold improvements may be required to be expensed immediately which could result in a significant charge to operating results in that period.
|
Equipment in non-operating units or stored in warehouses, which is held for remodeling or repositioning, is depreciated and is recorded on the balance sheet as property, building and equipment held for future use.
Buildings and equipment placed on the market for sale is not depreciated and is recorded on the balance sheet as property held for sale and recorded at the lower of cost or market.
Repairs and maintenance are charged to operations as incurred. Major equipment refurbishments and remodeling costs are generally capitalized.
The Company's accounting policies regarding buildings and equipment include certain management judgments regarding the estimated useful lives of such assets, the residual values to which the assets are depreciated and the determination as to what constitutes the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used.
Income Taxes
Our current provision for income taxes is based on our estimated taxable income in each of the jurisdictions in which we operate, after considering the impact on our taxable income of temporary differences resulting from disparate treatment of items, such as depreciation, estimated liability for closed restaurants, estimated liabilities for self-insurance, tax credits and net operating losses (“NOL”) for tax and financial reporting purposes. Deferred income taxes are provided for the estimated future income tax effect of temporary differences between the financial and tax bases of assets and liabilities using the asset and liability method. Deferred tax assets are also provided for NOL and income tax credit carryforwards. A valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and expectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change
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Currently, the Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities.
Adopted and Recently Issued Accounting Standards
During 2014 and 2015, the FASB issued Accounting Standards Update 2014-09 and 2015-14,
Revenue from Contract with Customers
(Topic 606), which revises previous revenue recognition standards to improve guidance on revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides additional disclosure requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
During the 16-weeks ending May 21, 2018, we retrospectively adopted ASU 2014-09 “Revenue from Contracts with Customers (Topic 606),” which requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption did not have an impact on our consolidated balance sheets, statements of income, or cash flows. The primary impact of adoption was the enhancement of our disclosures related to revenue recognition as mentioned previously.
In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases
(Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020 using a modified retrospective approach. While early adoption is permitted, the Company has selected a transition date of January 29, 2019. We are evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures.
In July 2018, the FASB issued Accounting Standards Update 2018-11,
Leases
(Topic 842). This update provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. The Company will adopt this transition method in the first quarter of fiscal 2020.
Off-Balance Sheet Arrangements
As of August 13, 2018, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.