Company Quick10K Filing
Quick10K
Star Buffet
10-Q 2019-08-12 Quarter: 2019-08-12
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STRZQ 2019-08-12
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements
Note 1 - Description of Business and Nature of Operations
Note 2 - Significant Accounting Policies
Note 3 - Related Party Transactions
Note 4 - Long-Term Debt
Note 5 - Operating Leases
Note 7 - Commitments and Contingencies
Note 8 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults of Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-21.1 ex_158365.htm
EX-31.1 ex_158216.htm
EX-31.2 ex_158217.htm
EX-32.1 ex_158215.htm
EX-32.2 ex_158218.htm

Star Buffet Earnings 2019-08-12

STRZQ 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 strzq20190812_10q.htm FORM 10-Q strzq20190812_10q.htm
 

 UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: August 12, 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: 0-6054

 

 STAR BUFFET, INC.


  (Exact name of registrant as specified in its charter)

 

DELAWARE    84-1430786
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)

          

2501 N. Hayden Road, Suite 103

  Scottsdale, AZ 85257

(Address of principal executive offices) (Zip Code)

 

      (480) 425-0454

(Registrant's telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock $0.001 par value

STRZ

OTC

 

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 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 such files).

    Yes [X]    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

☐ 

 

Accelerated filer

 

☐ 

Non-accelerated filer

 

☐ 

 

Smaller reporting company

 

[X]   

       

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 7(a)(2)(B) of the Securities Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  [X]

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  [X]   No  ☐

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 19, 2019 there were 3,213,075 shares of Common Stock, $ .001 par value, outstanding.

 

 

 

 

 

STAR BUFFET, INC. AND SUBSIDIARIES

 

INDEX

 

 Page

 

PART I.  FINANCIAL INFORMATION

 
   

Item 1.   Condensed Consolidated Financial Statements:

 
   

Unaudited Condensed Consolidated Balance Sheets as of August 12, 2019 and 1/28/2019

2
   

Unaudited Condensed Consolidated Statements of Operations for the 28 weeks ended August 12, 2019 and August 13, 2018

3
   

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the 12 and 28 weeks ended August 12, 2019 and August 13, 2018

4
   

Unaudited Condensed Consolidated Statements of Cash Flows for the 28 weeks ended August 12, 2019 and August 13, 2018

5
   

Notes to Unaudited Condensed Consolidated Financial Statements

6

   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

13
   

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

21

   

Item 4.  Controls and Procedures

21

   

PART II.  OTHER INFORMATION

 
   

Item 1. Legal Proceedings

22

   

Item 1A. Risk Factors

22

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

22

   

Item 3. Defaults Of Senior Securities

22

   

Item 4. Mine Safety Disclosures

22

   

Item 5. Other Information

22

   

Item 6. Exhibits

22

   

Signatures

24

 

i

 

 

 

PART I: FINANCIAL INFORMATION

 

Item 1: Condensed Consolidated Financial Statements

 

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

August 12,

2019

   

January 28,

2019

 
ASSETS                 
                 

Current assets:

               

Cash and cash equivalents

  $ 121,000     $ 163,000  

Receivables, net

    168,000       172,000  

Inventories

    213,000       254,000  

Prepaid expenses

    112,000       37,000  
                 

Total current assets

    614,000       626,000  
                 

Property, buildings and equipment, net

    5,351,000       5,560,000  

Right-to-use lease assets

    14,011,000        

Other assets, net

    195,000       205,000  

Intangible assets, net

    35,000       34,000  
                 

Total assets

  $ 20,206,000     $ 6,425,000  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable-trade

  $ 1,233,000     $ 1,014,000  

Checks written in excess of bank balance

    71,000        

Payroll and related taxes

    1,798,000       1,767,000  

Sales and property taxes

    489,000       593,000  

Rent, licenses and other

    1,162,000       1,045,000  

Income tax payable

    36,000       35,000  

Current maturities of lease liabilities

    609,000        

Current maturities of obligations under long-term debt

    348,000       570,000  
                 

Total current liabilities

    5,746,000       5,024,000  

 

Deferred Rent Payable

          386,000  

Lease liabilities, net of current maturities

    14,344,000        

Other long-term liabilities

    233,000       308,000  

Note payable to officer

    1,992,000       1,992,000  

Long-term debt, net of current maturities

    2,268,000       2,168,000  
                 

Total liabilities

    24,583,000       9,878,000  
                 

Stockholders’ equity:

               

Preferred stock, $.001 par value; authorized 1,500,000 shares; none issued or outstanding

           
Common stock, $.001 par value; authorized 8,000,000 shares; issued and outstanding 3,213,075 and 3,213,075 shares     3,000       3,000  

Additional paid-in capital

    17,743,000       17,743,000  

Accumulated deficit

    (22,123,000 )     (21,199,000 )
                 

Total stockholders’ equity

    (4,377,000 )     (3,453,000 )
                 

Total liabilities and stockholders’ equity

  $ 20,206,000     $ 6,425,000  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

 

 

STAR BUFFET, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Twelve Weeks Ended

   

Twenty-eight Weeks Ended

 
   

August 12,

   

August 13,

   

August 12,

   

August 13,

 
   

2019

   

2018

   

2019

   

2018

 

Total revenues

  $ 6,725,000     $ 7,251,000     $ 14,084,000     $ 14,846,000  
                                 

Costs, expenses and other

                               

Food costs

    2,044,000       2,259,000       4,483,000       4,767,000  

Labor costs

    2,605,000       2,692,000       5,674,000       5,631,000  

Occupancy and other expenses

    1,278,000       1,355,000       2,861,000       2,971,000  

General and administrative expenses

    295,000       320,000       880,000       668,000  

Depreciation and amortization

    164,000       133,000       384,000       316,000  
                                 

Total costs, expenses and other

    6,386,000       6,759,000       14,282,000       14,353,000  
                                 

Income from operations

    339,000       492,000       (198,000 )     493,000  
                                 

Interest expense

    105,000       115,000       249,000       267,000  

Other income

    13,000       22,000       39,000       49,000  
                                 

Income before income taxes

    247,000       399,000       (408,000 )     275,000  

Income tax provision

    (10,000 )     (10,000 )     (15,000 )     (20,000 )
                                 

Net income

  $ 237,000     $ 389,000     $ (423,000 )   $ 255,000  
                                 

Net income per common share – basic and diluted

  $ 0.07     $ 0.12     $ (0.13 )   $ 0.08  
                                 

Weighted average shares outstanding – basic and diluted

    3,213,075       3,213,075       3,213,075       3,213,075  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

 

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

 

Twelve Weeks Ended August 12, 2019

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-In

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 

Balance at May 20, 2019

    3,213,000     $ 3,000     $ 17,743,000     $ (22,360,000 )   $ (4,614,000 )

Net income

                      237,000       237,000  

Balance at August 12, 2019

    3,213,000     $ 3,000     $ 17,743,000     $ (22,123,000 )   $ (4,377,000 )

 

Twenty-eight Weeks Ended August 12, 2019

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-In

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 

Balance at January 28, 2019

    3,213,000     $ 3,000     $ 17,743,000     $ (21,199,000 )   $ (3,453,000 )

Adoption of new lease accounting

                      (501,000 )     (501,000 )

Net loss

                      (423,000 )     (423,000 )

Balance at August 12, 2019

    3,213,000     $ 3,000     $ 17,743,000     $ (22,123,000 )   $ (4,377,000 )

 

Twelve Weeks Ended August 13, 2018

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-In

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 

Balance at May 21, 2018

    3,213,000     $ 3,000     $ 17,743,000     $ (20,792,000 )   $ (3,046,000 )

Net income

                      389,000       389,000  

Balance at August 13, 2018

    3,213,000     $ 3,000     $ 17,743,000     $ (20,403,000 )   $ (2,657,000 )

 

Twenty-eight Weeks Ended August 13, 2018

 

                   

Additional

           

Total

 
   

Common Stock

   

Paid-In

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 

Balance at January 29, 2018

    3,213,000     $ 3,000     $ 17,743,000     $ (20,658,000 )   $ (2,912,000 )

Net income

                      255,000       255,000  

Balance at August 13, 2018

    3,213,000     $ 3,000     $ 17,743,000     $ (20,403,000 )   $ (2,657,000 )

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

 

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

   

Twenty-eight Weeks Ended

 
   

August 12, 2019

   

August 13, 2018

 

Cash flows from operating activities:

               

Net (loss) income

  $ (423,000 )   $ 255,000  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

               

Depreciation

    384,000       316,000  

Amortization of franchise, loan cost, licenses and other

    3,000       3,000  

Noncash lease expense

    56,000       -  

Change in operating assets and liabilities:

               

Receivables, net

    4,000       (198,000 )

Inventories

    41,000       15,000  

Prepaid expenses

    (76,000 )     (82,000 )

Deposits and other

    10,000       (3,000 )

Deferred rent payable

    -       42,000  

Accounts payable-trade

    218,000       275,000  

Income taxes payable

    1,000       (11,000 )

Other accrued liabilities

    (31,000 )     (79,000 )

Net cash provided by operating activities

    187,000       533,000  
                 

Cash flows from investing activities:

               

Acquisition of property, buildings and equipment

    (175,000 )     (198,000 )

Net cash (used) in investing activities

    (175,000 )     (198,000 )
                 

Cash flows from financing activities:

               

Checks written in excess of bank balance

    71,000       (130,000 )

Payments on long term debt

    (125,000 )     (196,000 )

Net cash (used) in financing activities

    (54,000 )     (326,000 )
                 

Net change in cash and cash equivalents

    (42,000 )     9,000  
                 

Cash and cash equivalents at beginning of period

    163,000       128,000  
                 

Cash and cash equivalents at end of period

  $ 121,000     $ 137,000  
                 

Supplemental disclosures of cash flow information:

               
                 

Cash paid during the period for:

               

Interest

  $ 107,000     $ 128,000  
                 

Income taxes

  $ 14,000     $ 31,000  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

 

Star Buffet, Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

 

Note 1 – Description of Business and Nature of Operations

 

Star Buffet, Inc., a Delaware corporation (the “Company,” “we” or “us”), is a multi-concept restaurant holding company. The Company was incorporated on July 28, 1997. At August 12, 2019, the Company operated 26 full-service restaurants. During the first two quarters of fiscal year ending January 27, 2020 (“Fiscal 2020”), the Company also had three restaurants that were not in operation. One restaurant was leased to a third-party operator, one was closed for remodeling and repositioning and one was used as a warehouse. The Company’s restaurants operate under trade names owned by the Company and include 4B’s Restaurants®, BuddyFreddys®, Barnhill’s Salads Buffet Desserts®, and Casa Bonita®. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, and Utah. The Company has an executive office in Scottsdale, Arizona and management information systems in Salt Lake City, Utah.

 

 

Note 2 – Significant Accounting Policies

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2019 (the “2019 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in the 2019 Form 10-K. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of the Company’s management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included.

 

a) Principles of Consolidation

 

The condensed consolidated financial statements include the consolidated operations of the Company and its subsidiaries through August 12, 2019. The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each fiscal year contains 28 weeks while the other three quarters each contain 12 weeks, except the fourth quarter has 13 weeks if the fiscal year has 53 weeks. All significant intercompany balances and transactions have been eliminated in consolidation.

 

b) Earnings or Loss Per Common Share

 

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, if any, 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 dilutive stock options as of August 12, 2019 or August 13, 2018.

 

c) Fair Value of Financial Instruments

 

The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

Level 1 Inputs: Quoted prices for identical instruments in active markets.

 

Level 2 Inputs: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3 Inputs: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

  

6

 

 

The carrying amounts of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments. The carrying amounts of the Company’s notes receivable and long-term debt approximate fair value and are based on discounted cash flows using market rates at the balance sheet dates. The Company does not estimate the fair value of the note payable to its Chief Executive Officer because of the related party nature of the transaction.

 

d) Inventories

 

Inventories consist of food, beverages, gift shop items and certain restaurant supplies and are valued at the lower of cost or net realizable value, determined by the first-in, first-out method.

 

e) 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.  The Company recorded no impairment losses associated with certain restaurant facilities for the 28 weeks ended August 12, 2019 and August 13, 2018.

 

f) Building and Equipment

 

Building 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

 

Building

      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 would 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.

 

7

 

 

The Company's accounting policies regarding buildings and equipment include certain management judgments regarding the estimated useful lives of such assets and the residual values of such assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used.

 

The components of property, buildings and equipment as of August 12, 2019 consist of 26 operating restaurant properties, one restaurant property that is leased to third party, one non-operating restaurant that remain closed for remodeling and repositioning and one non-operating property that is used as warehouse for equipment. The components of property, buildings and equipment as of January 28, 2019 consisted of 26 operating restaurant properties, one restaurant property that is leased to a third party, two non-operating restaurants that remain closed for remodeling and repositioning and one non-operating property that is used as warehouse for equipment. The Company recorded depreciation expense of $384,000 and $316,000 for the twenty-eight weeks ended August 12, 2019 and August 13, 2018, respectively

 

   

August 12, 2019

   

January 28, 2019

 

Property, building and equipment:

         

Accum.

                   

Accum.

         
   

Cost

   

Depr.

   

Net

   

Cost

   

Depr.

   

Net

 

Operating

  $ 12,006,000     $ 7,794,000     $ 4,212,000     $ 11,760,000     $ 7,360,000     $ 4,400,000  

Leased

    1,174,000       789,000       385,000       1,174,000       778,000       396,000  

Held for Future Use

    2,066,000       1,312,000       754,000       2,066,000       1,302,000       764,000  

Total

  $ 15,246,000     $ 9,895,000     $ 5,351,000     $ 15,000,000     $ 9,440,000     $ 5,560,000  

 

g) Other Assets

 

Other assets consist of deposits.

 

h) Intangible Assets

 

The Company’s intangible assets consist of trademarks as of August 12, 2019 and January 28, 2019. Trademark assets have an indefinite asset life.

 

i) Segment Reporting

 

All of the brands the Company operates are in the U.S. within the full-service restaurant industry and provide similar products to similar customers and, therefore, are considered to be one segment for reporting purposes. Sales to external customers are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales.

 

j) Revenue Recognition

 

We recognize revenue, net of discounts and incentives, when payment is tendered at the point of sale.  We report revenue net of sales-related taxes collected from customers and remitted to governmental taxing authorities. The Company defers all revenue on gift certificate sales until redeemed. The gift certificate liability is recorded in the Rent, licenses and other balance sheet account.

 

   

January 28, 2019

                   

August 12, 2019

 
   

Gift Certificate

Liability

   

Gift Certificates

Issued

   

Gift Certificates

Redeemed

   

Gift Certificate

Liability

 

Gift Certificates

  $ 14,100     $ 7,500     $ (17,200 )   $ 4,400  

 

k) 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. Currently, the Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities.

 

8

 

 

l) Recent Accounting Pronouncements

 

In November 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-18 – Collaborative Arrangements (Topic 808), which clarifies the interaction between Topic 808 and Topic 606, Revenue from Contracts with Customers. The provisions of ASU 2018-18 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company will be required to adopt this standard in the first quarter of fiscal year 2021. This standard is not expected to have a material impact on our consolidated financial statements and related disclosures.

 

Significant Accounting Policies Update

 

Adoption of ASC Topic 842: Leases

 

The Company adopted ASU 2016-02- Leases (Topic 842) and related amendments, as of January 29, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption with a cumulative adjustment to retained earnings. The Company elected the package of practical expedients which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any expired or existing leases as of the effective date. The Company also elected the practical expedient lease considerations to not allocate lease considerations between lease and non-lease components for real estate leases. As such, real estate lease considerations are treated as a single lease-component and accounted for accordingly.

 

The Company applied a portfolio approach to effectively account for the operating lease liabilities and operating lease assets; the Company does not have financing leases. The Company excludes leases with an initial term of 12 months or less from the application of Topic 842.

 

Adoption of the new standard resulted in the recording of operating lease assets and operating lease liabilities of $14.4 million and $15.3 million, respectively, on the Company’s consolidated balance sheet as of January 29, 2019. The difference between the approximate value of the operating lease assets and liabilities is attributable to deferred rent, deferred rent incentives, leasehold interests and prepaid rent. The cumulative change in the beginning accumulated deficit was $(501,000) due to the adoption of Topic 842. There was no material impact on the Company’s consolidated statement of operations or consolidated statements cash flows. The Company’s comparative periods continue to be presented and disclosed in accordance with legacy guidance in Topic 840.

 

Operating Leases

 

The Company determines if an arrangement is a lease at inception. Lease agreements will typically exist with lease and non-lease components, which are generally accounted for separately.

 

The Company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term. The lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

As the Company’s leases do not provide an implicit rate, the Company will use a secured incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The operating lease assets include any lease payments made prior to lease commencement and are reduced by any lease incentives.

 

9

 

 

Under Topic 842, for any new leases entered into, the Company will assess if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion (or exclusion) in the lease term when the Company measures the lease liability. The depreciable life of any assets and leasehold improvements are limited by the expected lease term.

 

Certain of the Company’s operating leases include variable rental payments based on a percentage of sales over contractual levels. Variable rental payments are recognized in the consolidated statement of operations in the period in which the obligation for those payments is incurred. If such variable operating leases arise that include incentives from landlords in the form of cash, the Company will record the full amount of the incentive when specific performance criteria are met as a deferred liability. The deferred liability is amortized into income as a reduction of rent expense over the term of the applicable lease, including options to extend if they are reasonably certain to be exercised. The Company recognized those liabilities to be amortized within a year as a current liability and those greater than a year as a long-term liability. For purposes of recognizing these incentives and rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the lease asset to begin amortization, which is generally when the Company takes possession of the asset. Please refer to Note 5 – Operating Leases in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for policies and disclosures related to leases.

 

 

Note 3 – Related Party Transactions

 

Robert E. Wheaton currently beneficially owns approximately 46.7% of our total equity securities and possesses approximately 46.7% of the total voting power. Thus Mr. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of nominees to our board of directors. 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 12, 2019 and January 28, 2019. The principal balance and any unpaid interest were 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 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 $1,992,000 and the interest of $197,000 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 Mr. Wheaton for interest during the first two quarters of Fiscal 2020 and the fiscal year ending January 28, 2019 (“Fiscal 2019”).

 

On November 9, 2016, the Company borrowed $450,000 from Mr. Wheaton to remodel the 4B’ 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 $82,000 and $81,000 in principal during the first quarters of Fiscal 2020 and Fiscal 2019, respectively, under this mortgage. In addition, the Company paid approximately $7,000 and $14,000 in interest during the first two quarters of Fiscal 2020 and Fiscal 2019, respectively. The Company owes Mr. Wheaton $71,000 and $156,000 for principal as of August 12, 2019 and January 28, 2019, respectively.

 

The Company did not lease any new restaurants from Mr. Wheaton during Fiscal 2020 or Fiscal 2019. The Company paid to Mr. Wheaton $468,000 and $451,000 in rent during the first two quarters of Fiscal 2020 and Fiscal 2019, respectively. The Company owes Mr. Wheaton $737,000 and $813,000 primarily for interest as of August 12, 2019 and January 28, 2019, respectively.

 

 

Note 4 - Long-Term Debt

 

The following table is a summary of the Company’s outstanding debt obligations.

 

   

August 12, 2019

   

August 12, 2019

   

January 28, 2019

   

January 28, 2019

 

Type of Debt (1)

 

Total Debt

   

Current Portion

   

Total Debt

   

Current Portion

 

Real Estate Mortgages

  $ 2,370,000     $ 332,000     $ 2,485,000     $ 560,000  

Other-Miscellaneous

    246,000       16,000       253,000       10,000  

Note Payable to Officer

    1,992,000       -       1,992,000       -  

Total Debt

  $ 4,608,000     $ 348,000     $ 4,730,000     $ 570,000  

 

 

(1)

The interest rates range from 6% to 11.5%. The maturity dates of the obligations range from November 2019 to October 2035.

 

10

 

 

 

Note 5 – Operating Leases

 

As of August 12, 2019, the Company leased restaurant properties and office space. As of that same date, the Company had no financing leases. The operating leases had no material residual value guarantees or material restrictive covenants. Certain of the Company’s operating leases include variable rental payments based on a percentage of retail sales over contractual levels.

 

Some operating leases include one or more options to renew, with renewal terms that can extend the lease term from two to sixteen years from the terms of the original agreement. The exercise of lease renewal options is at the Company’s sole discretion. As of August 12, 2019, the Company did include options to renew in the operating lease assets and liabilities if it is reasonably certain to exercise lease options.

 

The components of lease expense were as follows:

 

Lease Cost

 

For the Twenty-eight

Weeks

Ended August 12,

2019

   

For the Twenty-eight

Weeks

Ended August 13,

2018

 

Operating lease costs

  $ 817,000     $ 798,000  

Variable lease costs

    45,000       48,000  

Total lease cost

  $ 862,000     $ 846,000  

 

 

The Company used an incremental borrowing rate in January 2019, for operating leases that commenced prior to that date. The incremental borrowing rate is estimated based upon (1) the financial condition and credit rating of the Company and its peers, (2) the term of the lease, (3) the nature of the underlying asset, and (4) the relative economic environment.

 

For the twenty-eight weeks ended August 12, 2019, operating lease liabilities arising from obtaining new operating leases was $0.

 

For the twenty-eight weeks ended August 12, 2019, the total cash paid for amounts included in the measurement of operating leases liabilities was $842,000.

 

Lease Term and Discount Rate

 

August 12, 2019

 

Weighted-average remaining lease term (in years)

       

Operating leases

    17.4  

Weighted-average discount rate

       

Operating leases

    6.0 %

 

The aggregate annual lease obligations at August 12, 2019 are as follows:

 

Fiscal Year

 

Operating Leases

 

Remainder of 2020

  $ 634,000  

2021

    1,448,000  

2022

    1,435,000  

2023

    1,400,000  

2024

    1,386,000  

Thereafter

    18,410,000  

Total undiscounted lease obligations

    24,713,000  

Less imputed interest

    (9,760,000

)

Net lease obligations

  $ 14,953,000  

 

Upon adoption of ASC 2016-02, Leases (Topic 842), the Company's aggregate annual lease obligations include leases with reasonably assured renewals. The aggregate minimum annual lease rentals as of January 28, 2019 for the remaining contractual term of non-cancelable leases under ASC 840 were as follows:

 

Fiscal Year

 

Operating Leases

 

2020

  $ 1,343,000  

2021

    1,291,000  

2022

    1,261,000  

2023

    1,238,000  

2024

    1,239,000  

Thereafter

    16,777,000  

Total undiscounted lease obligations

  $ 23,149,000  

 

11

 

 

 

Note 6 — Management Update Operations

 

Management has added several new locations over the past few years. The Company has a net loss of $541,000 in the year end January 28, 2019 and a net loss of $423,000 in the first two quarters of fiscal 2020. Management intends to and has focused on reducing costs and increasing earnings in Fiscal 2020. Management believes it can lower food and occupancy and other expenses in Fiscal 2020. The food cost was significantly lower in the second quarter of Fiscal 2020 compared to the same quarter of the prior year and occupancy and other expenses would have been lower except for rent reimbursement in the prior year due to a kitchen fire. Management expected a modest increase in labor costs due to the tight labor market and increases in the minimum wages in many of the state in which it operates. However, the labor increase was a significant 3.0% in first quarter of fiscal 2020. The labor costs increased by 1.6% in the second quarter of Fiscal 2020 compared to the same period of the prior year. We expect the increases in labor costs for the remaining two quarters in fiscal 2020 to be more in line with the second quarter increase since there are no significant scheduled minimum wages increases until January of 2020.We increased restaurant pricing in the second quarter of fiscal 2020. Management intends to sell certain excess assets during the current fiscal year. Management has refinanced some long-term debt in the current fiscal year.

 

 

Note 7 - Commitments and Contingencies

 

In connection with the employment contract with Mr. Wheaton, the Company has agreed to pay Mr. Wheaton three years of his salary plus bonus if he resigns related to a change of control, is terminated without cause or if he resigns for good reason.

 

On August 4, 2010, Spirit Master Funding, LLC (‘Spirit”), a landlord of a Company subsidiary, filed case number CV-2010-022169 in the Superior Court of the State of Arizona for the failure of the subsidiary to pay $3.7 million in rent and accelerated rent for four restaurants leased to the subsidiary. During the bankruptcy, Spirit filed a proof of claim as an unsecured creditor for approximately $1.5 million. On October 14, 2016, the Company settled the claim for $900,000 payable over five years at five percent interest. The outstanding balance was $498,000 and $525,000 as of August 12, 2019 and January 28, 2019, respectively. In May 2019 the Company settled a general liability case in Colorado.

 

In addition to the matter set forth above, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position.

 

 

Note 8 - Subsequent Events

 

None.

 

12

 

 

 

STAR BUFFET, INC. AND SUBSIDIARIES

 

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 28, 2019 (the “2019 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 Quarterly Report 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 policies and other risks detailed in Item 1A of the 2019 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., a Delaware corporation (the “Company,” “we” or “us”), is a multi-concept restaurant holding company. The Company was incorporated on July 28, 1997. At August 12, 2019, the Company operated 26 full-service restaurants. During the first two quarters of fiscal year ending January 27, 2020 (“Fiscal 2020”), the Company also had three restaurants that were not in operation. One restaurant was leased to a third-party operator, one was closed for remodeling and repositioning and one was used as a warehouse. The Company’s restaurants operate under trade names are owned by the Company and include 4B’s Restaurants®, BuddyFreddys®, Barnhill’s Salads Buffet Desserts®, and Casa Bonita®. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, and Utah. The Company has an executive office in Scottsdale, Arizona and management information systems in Salt Lake City, Utah.

 

Recent Developments

 

Please refer to Note 8 – Subsequent Events in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for recent developments.

 

13

 

 

The following table summarizes the Company’s results of operations as a percentage of total revenues for the 12 and 28 weeks ended August 13, 2018 and August 13, 2018, respectively.

 

   

Twelve Weeks Ended

   

Twenty-eight Weeks Ended

 
   

August 12,

   

August 13,

   

August 12,

   

August 13,

 
   

2019

   

2018

   

2019

   

2018

 

Total revenues

    100.0 %     100.0 %     100.0 %     100.0 %
                                 

Costs, expenses and other

                               

Food costs

    30.4       31.2       31.8       32.1  

Labor costs

    38.7       37.1       40.3       37.9  

Occupancy and other expenses

    19.0       18.7       20.3       20.0  

General and administrative expenses

    4.4       4.4       6.3       4.5  

Depreciation and amortization

    2.4       1.8       2.7       2.1  

Total costs, expenses and other

    95.0       93.2       101.4       96.6  
                                 

Income from operations

    5.0       6.8       (1.4 )     3.4  
                                 

Interest expense

    1.6       1.6       1.8       1.8  

Other income

    0.2       0.3       0.3       0.3  

Income before income tax

    3.6       5.5       (2.9 )     1.9  
                                 
                                 

Income tax provision

    0.1       0.1       0.1       0.1  

Net income

    3.5 %     5.4 %     (3.0 )%     1.8 %

 

 

The table below outlines the number of operating and non-operating restaurants by the Company as of August 12, 2019 and January 28, 2019.

 

   

August 12, 2019

   

January 28, 2019

 

Operating Restaurants:

               

4B’s (1) (2)

    13       14  

JB’s

    6       5  

Steakhouses (3)

    4       4  

Buffets (4)

    2       2  

Casa Bonita

    1       1  
      26       26  

Non-Operating Restaurants:

               

Leased to Third Parties

    1       1  

Warehouse

    1       1  

Held for Future Use

    1       1  
      3       3  

Total

    29       29  

 

 

(1) 

Includes one Frosty Freez restaurant and one Antler’s restaurant.

 

(2) 

The 4B’s Café in Deer Lodge Montana operates seasonally from approximately May to September.

 

(3) 

Includes two Pecos Diamond restaurants, one Bar H restaurant and one Rancher’s Grill restaurant.

 

(4) 

Includes one Barnhill’s Salads Buffet Desserts restaurant and one BuddyFreddys restaurant.

 

14

 

 

Sixteen Weeks Ended August 12, 2019 compared to Twelve Weeks Ended August 13, 2018

 

Overview - The Company has a consolidated net income for the 12-week period ended August 12, 2019 of $237,000 or $0.07 per diluted share as compared with net income of $389,000 or $0.12 per diluted share for the 12 weeks end August 13, 2018, a decrease of approximately $152,000 from the comparable prior fiscal year period. The decrease in net income was primarily from the result of approximately $153,000 decrease in net income from operations due primarily to a $526,000 decrease in revenues and higher labor costs as a percentage of revenues.

 

Revenues - Total revenues decreased by approximately $526,000, or 7.3%, from $7.3 million in the 12 weeks ended August 13, 2018 to $6.7 million in the 12 weeks ended August 12, 2019. The decrease in revenues was primarily the result of an approximately $305,000 or 4.5% decrease in comparable same store sales and an approximately $276,000 decrease in revenue for the closure of two restaurants plus the temporary closure of one restaurant. The decrease in revenues was partially offset by the net increase of approximately $55,000 attributable to the opening of one restaurant each in Fiscal 2019 and Fiscal 2020.

 

Food Costs - Food costs as a percentage of total revenues decreased from 31.2% during the 12-week period ended August 13, 2018 to 30.4% during the 12-week period ended August 12, 2019. The food cost decreased in the current fiscal quarter 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 2020 as compared to Fiscal 2019. Food costs decreased by approximately $215,000 in the 12-week period ended August 12, 2019 compared to the same period ended August 13, 2018 primarily due a $526,000 decrease in revenues.

 

Labor - Labor costs as a percentage of total revenues increased from 37.1% during the 12-week period ended August 13, 2018 to 38.7% during the 12-week period ended August 12, 2019. The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States of Arkansas, Arizona, Colorado, Florida and Montana and $526,000 in lower revenue in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019.

 

Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues increased from 18.7% during the 12-week period ended August 13, 2018 to 19.0% during the 12-week period ended August 12, 2019. The increase as a percentage of total revenues was primarily attributable to a lower rent expense as a percentage of total revenues in the second quarter of the prior year primarily resulting from a rent reimbursement regarding the fire in Kalispell in Fiscal 2019. Occupancy and other expense decreased approximately $77,000 in the 12-week period ended August 12, 2019 primarily due to the decrease of $526,000 in revenues in the second quarter of Fiscal 2020 compared the same period in Fiscal 2019.

 

General and Administrative Expenses - General and administrative expense as a percentage of total revenues remained the same at 4.4% during the 12-week period ended August 13, 2018 and during the 12-week period ended August 12, 2019. General and administrative expense decreased from $320,000 during the 12-week period ended August 13, 2018 to $295,000 during the 12-week period ended August 12, 2019.                                          

 

Depreciation and Amortization - Depreciation and amortization expense increased from $133,000 during the 12-week period ended August 13, 2018 to $164,000 during the 12-week period ended August 12, 2019. The increase was primarily attributable to additional restaurants acquired.

 

Interest Expense - Interest expense decreased from $115,000 during the 12-week period ended August 13, 2018 to $105,000 during the 12-week period ended August 12, 2019. 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 12, 2019 as compared to the 12-week period ended August 13, 2018.

 

Other Income - Other income is primarily rental income from the Company’s leased properties. Rental income was $22,000 for two properties leased for the 12-week period ended August 13, 2018. Rental income was $13,000 for one property leased for the 12-week period ended August 12, 2019.

 

Income Taxes - The income tax provision totaled $10,000 for the 12-week period ended August 13, 2018 and $10,000 for the 12-week period ended August 12, 2019. The Company has net deferred income tax assets of $0 on August 12, 2019 and January 28, 2019. 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 12, 2019.

 

15

 

 

Twenty-eight Weeks Ended August 12, 2019 compared to Twenty-eight Weeks Ended August 13, 2018

 

Overview - The Company has a consolidated net loss for the 28-week period ended August 12, 2019 of $(423,000) or $(0.13) per diluted share as compared with net income of $255,000 or $0.08 per diluted share for the 28-weeks ended August 13, 2018, a decrease of approximately $678,000 from the comparable prior fiscal year period. The net decrease in operations was primarily from the result of approximately $691,000 decrease from income from operations due primarily to a $762,000 decrease in revenues and higher labor and higher legal expenses in general and administrative costs as a percentage of revenues.

 

Revenues - Total revenues decreased by approximately $762,000, or 5.1%, from $14.8 million in the 28 weeks ended August 13, 2018 to $14.1 million in the 28 weeks ended August 12, 2019. The decrease in revenues was primarily the result of an approximately $681,000 or 4.9% decrease in comparable same store sales and an approximately $504,000 decrease in revenue for the closure of two restaurants plus the temporary closure of one restaurant. The decrease in revenues was partially offset by the net increase of approximately $423,000 attributable to the opening of one restaurant in Fiscal 2020, two restaurants in Fiscal 2019 and the reopening of one restaurant closed due to a kitchen fire.

 

Food Costs - Food costs as a percentage of total revenues decreased from 32.1% during the 28-week period ended August 13, 2018 to 31.8% during the 28-week period ended August 12, 2019. The food cost decreased in the current fiscal quarter 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 2020 as compared to Fiscal 2019. Food costs decreased by approximately $284,000 in the 28-week period ended August 12, 2019 compared to the same period ended August 13, 2018 primarily due a $762,000 decrease in revenues.

 

Labor - Labor costs as a percentage of total revenues increased from 37.9% during the 28-week period ended August 13, 2018 to 40.3% during the 28-week period ended August 12, 2019. The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States of Arizona, Colorado, Florida and Montana and $762,000 in lower revenue in the first two quarters of Fiscal 2020 compared to the first two quarters of Fiscal 2019.

 

Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues increased from 20.0% during the 28-week period ended August 13, 2018 to 20.3% during the 28-week period ended August 12, 2019. The increase as a percentage of total revenues was primarily attributable to a lower rent expense as a percentage of total revenues in the second quarter of the prior year primarily resulting from a rent reimbursement regarding the fire in Kalispell in Fiscal 2019. Occupancy and other expense decreased approximately $110,000 in the 28-week period ended August 12, 2019 primarily due to the decrease of $762,000 in revenues in the first two quarters of Fiscal 2020 compared the same period in Fiscal 2019.

 

General and Administrative Expenses - General and administrative expense as a percentage of total revenues increased from 4.5% during the 28-week period ended August 13, 2018 to 6.3% during the 28-week period ended August 12, 2019. General and administrative expense increased from $668,000 during the 28-week period ended August 13, 2018 to $880,000 during the 28-week period ended August 13, 2018. The increase was primarily attributable to higher legal expense in first two quarters of Fiscal 2020 compared same period in Fiscal 2019. The legal expenses primarily resulted from a settlement of a general liability case in Denver, Colorado and a trademark dispute in Arkansas.

 

Depreciation and Amortization - Depreciation and amortization expense increased from $316,000 during the 28-week period ended August 13, 2018 to $384,000 during the 28-week period ended August 12, 2019. The increase was primarily attributable to additional restaurants acquired.

 

Interest Expense - Interest expense decreased from $267,000 during the 28-week period ended August 13, 2018 to $249,000 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 12, 2019 as compared to the 28-week period ended August 13, 2018.

 

Other Income - Other income consists primarily of rental income from the Company’s leased properties. Rental income was $49,000 for two properties leased for the 28-week period ended August 13, 2018. Rental income was $39,000 for one property leased for the 28-week period ended August 12, 2019. Rental income was adversely impacted by the loss of one tenant.

 

Income Taxes - The income tax provision totaled $20,000 for the 28-week period ended August 13, 2018 and $15,000 for the 28-week period ended August 12, 2019. 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 12, 2019.

 

16

 

 

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. The Company believes that modest increases in these costs can be offset through price changes and other cost control efforts. However, there is no assurance that the Company would be 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 12, 2019, the Company had $121,000 in cash.  Cash and cash equivalents decreased by $42,000 during the 28-weeks ended August 12, 2019. The net working capital deficit was $5.2 million and $4.4 million at August 12, 2019 and January 28, 2019, respectively. We will need to raise additional capital to grow our business and anticipate raising such capital through the issuance of common stock, preferred stock or debt. We have recently been borrowing required capital to grow our business from our principal shareholders. We have no commitment from them to provide additional capital or assurance that they will voluntarily continue to provide capital as needed. We may be unable to raise additional capital as needed, and we will likely be required to pay a high price for 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 $175,000 on capital expenditures during the 28-weeks ending August 12, 2019, primarily on existing restaurants.

 

Cash provided from operations was approximately $187,000 for the 28-weeks ending August 12, 2019 and $533,000 for the 28-weeks ending August 13, 2018, respectively. The decrease in cash generated from operating activities for the 28-week period ending August 12, 2019 was primarily due to the increase in the net loss in the current fiscal year as compared to the prior fiscal year.

 

Cash used by financing activities was approximately $54,000 for the 28-weeks ending August 12, 2019 compared to cash used by financing activities of approximately $326,000 for the 28-weeks ending August 13, 2018. In the first two quarters of Fiscal 2020, cash used by financing activities was as follows: The Company made net debt payments of approximately $125,000 and had checks written in excess of bank balance of $71,000, a change of $71,000. In the first quarter of Fiscal 2019, cash provided 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.

 

The following table is a summary of the Company’s outstanding debt obligations.

 

   

August 12, 2019

   

August 12, 2019

   

January 28, 2019

   

January 28, 2019

 

Type of Debt (1)

 

Total Debt

   

Current Portion

   

Total Debt

   

Current Portion

 

Real Estate Mortgages

  $ 2,370,000     $ 332,000     $ 2,485,000     $ 560,000  

Other-Miscellaneous

    246,000       16,000       253,000       10,000  

Note Payable to Officer

    1,992,000       -       1,992,000       -  

Total Debt

  $ 4,608,000     $ 348,000     $ 4,730,000     $ 570,000  

 

 

(1)  

The interest rates range from 6% to 11.5%. The maturity dates of the obligations range from November 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 12, 2019 and January 28, 2019. The principal balance and any unpaid interest were 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 $1,992,000 and the interest of $197,000 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 quarters of Fiscal 2020 and Fiscal 2019.

 

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On November 9, 2016, the Company borrowed $450,000 from Mr. Robert E. Wheaton to remodel the 4B’ 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 $82,000 and $81,000 in principal during the first quarters of Fiscal 2020 and Fiscal 2019, respectively, under this mortgage. In addition, the Company paid approximately $7,000 and $14,000 in interest during the first quarters of Fiscal 2020 and Fiscal 2019, 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 2019 included in the 2019 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 12, 2019 and August 13, 2018.

 

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. 

 

18

 

 

Building and Equipment

 

Building 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

 

Building

      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 would 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. 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

 

In November 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-18 – Collaborative Arrangements (Topic 808), which clarifies the interaction between Topic 808 and Topic 606, Revenue from Contracts with Customers. The provisions of ASU 2018-18 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company will be required to adopt this standard in the first quarter of fiscal year 2021. This standard is not expected to have a material impact on our consolidated financial statements and related disclosures.

 

19

 

 

Significant Accounting Policies Update

 

Adoption of ASC Topic 842: Leases

 

The Company adopted ASU 2016-02- Leases (Topic 842) and related amendments, as of January 29, 2019, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption with a cumulative adjustment to retained earnings. The Company elected the package of practical expedients which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any expired or existing leases as of the effective date. The Company also elected the practical expedient lease considerations to not allocate lease considerations between lease and non-lease components for real estate leases. As such, real estate lease considerations are treated as a single lease-component and accounted for accordingly.

 

The Company applied a portfolio approach to effectively account for the operating lease liabilities and operating lease assets; the Company does not have financing leases. The Company excludes leases with an initial term of 12 months or less from the application of Topic 842.

 

Adoption of the new standard resulted in the recording of operating lease assets and operating lease liabilities of $14.4 million and $15.3 million, respectively, on the Company’s consolidated balance sheet as of January 29, 2019. The difference between the approximate value of the operating lease assets and liabilities is attributable to deferred rent, deferred rent incentives, leasehold interests and prepaid rent. The cumulative change in the beginning accumulated deficit was $(501,000) due to the adoption of Topic 842. There was no material impact on the Company’s consolidated statement of operations or consolidated statements cash flows. The Company’s comparative periods continue to be presented and disclosed in accordance with legacy guidance in Topic 840.

 

Operating Leases

 

The Company determines if an arrangement is a lease at inception. Lease agreements will typically exist with lease and non-lease components, which are generally accounted for separately.

 

The Company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term. The lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

As the Company’s leases do not provide an implicit rate, the Company will use a secured incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The operating lease assets include any lease payments made prior to lease commencement and are reduced by any lease incentives.

 

Under Topic 842, for any new leases entered into, the Company will assess if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion (or exclusion) in the lease term when the Company measures the lease liability. The depreciable life of any assets and leasehold improvements are limited by the expected lease term.

 

Certain of the Company’s operating leases include variable rental payments based on a percentage of sales over contractual levels. Variable rental payments are recognized in the consolidated statement of operations in the period in which the obligation for those payments is incurred. If such variable operating leases arise that include incentives from landlords in the form of cash, the Company will record the full amount of the incentive when specific performance criteria are met as a deferred liability. The deferred liability is amortized into income as a reduction of rent expense over the term of the applicable lease, including options to extend if they are reasonably certain to be exercised. The Company recognized those liabilities to be amortized within a year as a current liability and those greater than a year as a long-term liability. For purposes of recognizing these incentives and rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the lease asset to begin amortization, which is generally when the Company takes possession of the asset. Please refer to Note 5 – Operating Leases in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for policies and disclosures related to leases.

 

Off-Balance Sheet Arrangements 

 

As of August 12, 2019, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

20

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

This is not required for small issuers.

 

Item 4. Controls and Procedures

 

Management’s Report on Disclosure Controls and Procedures

 

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, as appropriate.

 

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and the Principal Accounting Officer, of the effectiveness and the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer, the Chief Financial Officer and the Principal Accounting Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the fiscal quarter ended August 12, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.  Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.  

 

21

 

 

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the fiscal quarter ended August 12, 2019, there were no new, or material developments in any existing legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on the results of our operations or financial position.

 

Item 1A. Risk Factors

 

This item is not applicable to small issuers; however, please refer to the risk factors disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2019 filed with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Of Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-Q (unless noted as previously filed) and incorporated herein by reference.

 

22

 

 

Exhibit Index

 

Exhibit

 

Description

Number

 

of Exhibit

     

3.1

 

Certificate of Incorporation*

3.2

 

Bylaws, as amended on September 22, 1997*

4.1

 

Form of Common Stock Certificate**

21.1

 

List of Subsidiaries

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

101   The following financial information from the quarterly report on Form 10-Q of Star Buffet, Inc. for the quarter ended August 12, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. †
     
 

* Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 1 (Registration No. 333- 32249).

 

** Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 2 (Registration No. 333- 32249).

 

† Filed concurrently herewith.

 

23

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

Star Buffet, Inc. 

 

 

 

 

 

 

 

 

 

 

 

Date:  September 23, 2019   

 

By:

/s/ Robert E. Wheaton

 

 

 

 

Robert E. Wheaton, Chief Executive Officer, 

 

 

 

 

President, Chief Financial Officer and Chairman 

 

         
         
    By: /s/ Ronald E. Dowdy  
September 23, 2019     Ronald E. Dowdy  
      Group Controller,  
      Treasurer, Secretary and  
      Principal Accounting Officer  

 

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