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 Company’s audited consolidated financial statements and Management’s Discussion and Analysis included in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 25, 2016
.
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 under-performing or unprofitable restaurants, if any, acquired or otherwise operated by the Company may have a material adverse effect on the Company’s results of operations in any individual period.
This quarterly report on Form 10-Q 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, among others, 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 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 Company’s Form 10-K for the fiscal year ended
January 25, 2016
, 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 these 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.
Chapter 11 Reorganization
On September 28, 2011, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”), in the proceeding titled In re: Star Buffet, Inc., Case No.2:11-bk-27518-GBN (the “Chapter 11 Case”). The Company’s wholly owned subsidiary, Summit Family Restaurants Inc. (“Summit”), also filed a voluntary petition for reorganization under Chapter 11 on September 29, 2011 in the Bankruptcy Court, in the proceeding titled In re: Summit Family Restaurants Inc., Case No. 2:11-bk-27713-GBN. The cases for Star Buffet, Inc. and Summit Family Restaurants Inc. (collectively the “Debtors”) were consolidated and jointly administered. None of the Company’s other subsidiaries were included in the bankruptcy filings. The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Under the Bankruptcy Code, certain claims against the Debtors that were in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization.
On December 17, 2012, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Company’s plan of reorganization (the “Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Plan as confirmed are attached as Exhibits 2.1 and 2.2, to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2012. The Plan became effective on January 17, 2013. The payment obligations under the Plan were estimated to be in excess of $10 million. The Plan provided for these obligations to be discharged from operating income derived from the restaurants operated by its affiliates, an exit loan of $300,000 from Suzanne H. Wheaton, the wife of CEO Robert E. Wheaton, and proceeds from sale of certain restaurant properties.
On October 14, 2016, the Company settled the final unsecured creditor claim for $900,000. On December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc.
Executive Summary
The Company owns and operates full-service restaurants located throughout the United States. At the time of its bankruptcy filing, it owned and operated 31 full-service restaurants, a number that reduced to 18 in late 2014. Since then, the Company has modestly expanded, increasing the number of restaurants it owns and operates to 24. The Company’s restaurants operate under various trade names including 4B’s, JB’s, Casa Bonita and BuddyFreddys. The Company has an executive and an accounting office in Scottsdale, Arizona, and an accounting office in Salt Lake City, Utah.
Recent Developments
The Company continues to evaluate the local geographic markets in which it operates and individual restaurant units for trends and changes in operating metrics. The Company may rebrand restaurants where management believes that the local market remains desirable but that the existing brand is not performing well in that unit. There may be further restaurant unit closures in the future as Management continues to evaluate operating results. The Company continues to explore the expansion of its non-buffet brands as those recently have generally performed better than buffet brands. Management believes the Company will generate sufficient cash flows from operations at these lower revenue levels to support its operations and pay its scheduled debt repayments.
Please refer to Note 6 – Subsequent Events in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for other recent developments.
Results of Operations
The following table summarizes the Company’s results of operations as a percentage of total revenues for the 12 and 40 weeks ended October 31, 2016 and November 2, 2015, respectively.
|
|
Twelve Weeks Ended
|
|
|
Forty Weeks Ended
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs, expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food costs
|
|
|
33.2
|
|
|
|
35.2
|
|
|
|
33.6
|
|
|
|
34.4
|
|
Labor costs
|
|
|
39.0
|
|
|
|
38.2
|
|
|
|
36.7
|
|
|
|
35.7
|
|
Occupancy and other expenses
|
|
|
21.9
|
|
|
|
22.1
|
|
|
|
20.5
|
|
|
|
19.7
|
|
General and administrative expenses
|
|
|
6.0
|
|
|
|
6.7
|
|
|
|
5.1
|
|
|
|
5.4
|
|
Depreciation and amortization
|
|
|
1.8
|
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
1.5
|
|
Total costs, expenses and other
|
|
|
101.9
|
|
|
|
103.8
|
|
|
|
97.6
|
|
|
|
96.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1.9
|
)
|
|
|
(3.8
|
)
|
|
|
2.4
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1.4
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
1.2
|
|
Gain on sale of assets
|
|
|
0.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.9
|
|
Other income
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
1.0
|
|
Income (loss) before income taxes and reorganization items
|
|
|
(2.8
|
)
|
|
|
(4.1
|
)
|
|
|
1.6
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization items, net
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3.0
|
)%
|
|
|
(4.2
|
)%
|
|
|
1.2
|
%
|
|
|
6.2
|
%
|
The table below outlines the number of restaurants operated by the Company by concept as well as the number of non-operating restaurants that are leased to third party operators, used as warehouse facilities, and are being held for repositioning and remodeling as of October 31, 2016 and January 25, 2016, respectively.
Concept
|
|
October 31,
2016
|
|
|
January 25,
2016
|
|
|
|
|
|
|
|
|
Operating Restaurants
|
|
|
|
|
|
|
|
|
4B’s (1)
|
|
|
10
|
|
|
|
8
|
|
JB’s
|
|
|
6
|
|
|
|
6
|
|
Pecos Diamond Steakhouse
|
|
|
2
|
|
|
|
2
|
|
Western Sizzlin
|
|
|
1
|
|
|
|
1
|
|
Barnhill’s Buffet
|
|
|
1
|
|
|
|
1
|
|
BuddyFreddys
|
|
|
1
|
|
|
|
1
|
|
Casa Bonita
|
|
|
1
|
|
|
|
1
|
|
Bar-H Steakhouse
|
|
|
1
|
|
|
|
1
|
|
|
|
|
23
|
|
|
|
21
|
|
Non-operating Restaurants
|
|
|
|
|
|
|
|
|
Leased to third parties
|
|
|
1
|
|
|
|
1
|
|
Warehouse
|
|
|
1
|
|
|
|
1
|
|
Held for Future Use
|
|
|
2
|
|
|
|
1
|
|
|
|
|
4
|
|
|
|
3
|
|
Total
|
|
|
27
|
|
|
|
24
|
|
|
(1)
|
Includes one Finnegan’s that will be converted to a 4B’s.
|
Twelve Weeks Ended
October 31, 2016 compared to Twelve Weeks Ended November 2, 2015
Overview -
The Company has a consolidated net loss for the 12-week period ended October 31, 2016 of $(173,000) or $(0.05) per diluted share as compared with the consolidated net loss of $(230,000) or $(0.07) per diluted share for the comparable prior year period, a change of approximately $57,000 from the prior year period. The increase in the income is primarily due to lower food costs as a percentage of sales in the current period compared to the prior year period.
Revenues -
Total revenues increased approximately $358,000 or 6.5% from $5.5 million in the 12 weeks ended November 2, 2015 to $5.9 million in the 12 weeks ended October 31, 2016. The increase in revenues was primarily attributable to the opening of four stores in the fiscal year ending January 30, 2017 (“Fiscal 2017”) resulting in a $547,000 increase in sales in the current fiscal year. The increase in sales was partially offset by approximately $158,000 decrease in comparable same store sales and approximately $29,000 decrease for closure of one store.
Food Costs -
Food costs as a percentage of total revenues decreased from 35.2% during the 12-week period ended November 2, 2015 to 33.2% during the 12-week period ended October 31, 2016. 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 due to lower wholesale food prices.
Labor -
Labor costs as a percentage of total revenues increased from 38.2% during the 12-week period ended November 2, 2015 to 39.0% during the 12-week period ended October 31, 2016. The increase as a percentage of total revenues was primarily attributable to higher minimum wages in States of Arkansas and Colorado in the current period as compared to the same period in the prior year.
Occupancy and Other Expenses -
Occupancy and other expenses as a percentage of total revenues decreased from 22.1% during the 12-week period ended November 2, 2015 to 21.9% during the 12-week period ended October 31, 2016. The decrease in occupancy and other expense as a percentage of total revenues was primarily attributable to slightly higher revenues in the current period compared to the same period in the prior year.
General and Administrative Expenses -
General and administrative expense as a percentage of total revenues decreased from 6.7% during the 12-week period ended November 2, 2015 to 6.0% during the 12-week period ended October 31, 2016. The decrease in general and administrative expense as a percentage of total revenues was primarily attributable to slightly higher revenues in the current period compared to the same period in the prior year.
Depreciation and Amortization -
Depreciation and amortization expense increased from $86,000 during the 12-week period ended November 2, 2015 to $102,000 during the 12-week period ended October 31, 2016. The increase was primarily attributable to increase in fixed assets in the current period compared to the same period in the prior year.
Interest Expense -
Interest expense increased from $57,000 during the 12-week period ended November 2, 2015 to $84,000 during the 12-week period ended October 31, 2016. The increase was attributable to higher debt balance in the 12-week period ended October 31, 2016 as compared to the prior year.
Other Income -
Other income is primarily rental income from the Company’s properties leased to third parties. Rental income was $29,000 for three properties leased for the 12-week period ended October 31, 2016. Rental income was $41,000 for four properties leased for the 12-week period ended November 2, 2015.
Income Taxes -
The income tax provision totaled $0 for the third quarter of fiscal of 2017 and $5,000 for fiscal 2016. The Company has deferred income tax assets of $0 on October 31, 2016 and January 25, 2016. The Company has a net operating losses for tax and financial reporting purposes. The Company has full valuation against its existing deferred tax assets as of October 31, 2016.
Reorganization Items, Net
– The Company and Summit both filed for bankruptcy in September 2011. During the 12-weeks ended October 31, 2016 and November 2, 2015, the Company incurred $10,000 and $2,000, respectively, for professional fees and bankruptcy costs related to the bankruptcy.
Forty Weeks Ended
October 31, 2016 compared to Forty Weeks Ended November 2, 2015
Overview -
The Company has a consolidated net income for the 40-week period ended October 31, 2016 of $242,000 or $0.08 per diluted share as compared with net income of $1,192,000 or $0.37 per diluted share for the comparable prior year period, a change of approximately $950,000 from the prior year period. The decrease in the net income is primarily due to gain on sale of assets in the prior year of $762,000 compared $0 in the current year. In addition, as a percentage of sales the Labor costs and Occupancy and other expenses were higher in the current fiscal year, which in turn was partially offset by lower food costs.
Revenues -
Total revenues increased approximately $720,000 or 3.7% from $19.6 million in the 40 weeks ended November 2, 2015 to $20.4 million in the 40 weeks ended October 31, 2016. The increase in revenues was primarily attributable to the opening of four stores in Fiscal 2017 and three in the fiscal year ended January 25, 2016 (“Fiscal 2016”) resulting in a $1.6 million increase in sales in the current fiscal year. The increase in sales was partially offset by approximately $700,000 decrease in comparable same store sales and approximately $200,000 decrease for closure of one store.
Food costs -
Food costs as a percentage of total revenues decreased from 34.4% during the 40-week period ended November 2, 2015 to 33.6% during the 40-week period ended October 31, 2016. 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 due to lower wholesale food prices.
Labor -
Labor costs as a percentage of total revenues increased from 35.7% during the 40-week period ended November 2, 2015 to 36.7% during the 40-week period ended October 31, 2016. The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States of Arkansas and Colorado in the current period as compared to the same period in the prior year.
Occupancy and Other Expenses -
Occupancy and other expenses as a percentage of total revenues increased from 19.7% during the 40-week period ended November 2, 2015 to 20.5% during the 40-week period ended October 31, 2016. Occupancy and other expense increased approximately $306,000 in the 40-week period ended October 31, 2016. The increase for the 40-week period ending October 31, 2016 as a percentage of total revenues was primarily attributable to an increase in rent expense in the current compared to the same period last year.
General and Administrative Expenses -
General and administrative expense as a percentage of total revenues decreased from 5.4% during the 40-week period ended November 2, 2015 to 5.1% during the 12-week period ended October 31, 2016. The decrease in general and administrative expense as a percentage of total revenues was primarily attributable to slightly higher revenues in the current period compared to the same period in the prior year.
Depreciation and Amortization -
Depreciation and amortization expense increased from $296,000 during the 40-week period ended November 2, 2015 to $334,000 during the 40-week period ended October 31, 2016. The increase in depreciation and amortization was primarily attributable to increase in fixed assets in the current period compared to the same period in the prior year.
Interest Expense -
Interest expense increased from $234,000 during the 40-week period ended November 2, 2015 to $268,000 during the 40-week period ended October 31, 2016. The decrease was attributable to higher debt balances in the 40-week period ended October 31, 2016 compared to the 40-week period ended November 2, 2015.
Other income -
Other income consists primarily of rental income from the Company’s leased properties. Rental income was $103,000 for three properties leased for the 40-week period ended October 31, 2016. Rental income was $152,000 for five properties leased for the 40-week period ended November 2, 2015.
Income Taxes -
The income tax provision totaled $25,000 and $45,000 first three quarters of the fiscal 2017 and Fiscal 2016, respectively. The Company has deferred income tax assets of $0 on October 31, 2016 and January 25, 2016. 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 October 31, 2016.
Reorganization Items, Net –
The Company and Summit both filed for bankruptcy in September 2011. During the 40-weeks ended October 31, 2016 and November 2, 2015, the Company incurred professional fees and bankruptcy cost (benefits) related to the bankruptcy totaling $55,000 and $120,000, respectively.
I
mpact of Inflation
The impact of inflation on the cost of food, labor, equipment and construction and remodeling of stores could affect the Company’s margins. Many of the Company’s employees are paid hourly rates related to the federal and state minimum wage laws
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. Changes in these costs may have an impact on the Company’s margins. The Company believes that modest increases in these costs can be offset through pricing and other cost control efforts. However, there is no assurance that the Company would be able to pass more significant costs on to its customers, or if it were able to do so, could do so 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 shareholder.
As of October 31, 2016, the Company had $335,000 in cash. Cash and cash equivalents increased by $91,000 during the 40-weeks ended October 31, 2016. The net working capital deficit was $2.9 million and $2.2 million at October 31, 2016 and January 25, 2016, respectively. The Company spent approximately $1.7 million on capital expenditures during the 40-weeks ending October 31, 2016. The primary capital expenditure was approximately $1.2 million for the purchase and remodel of the 4B’s in Missoula, Montana. The Company generates cash flow daily from sales in its restaurants and manages its cash balances to meet its current operating obligations.
Cash provided by operations was approximately $1.0 million for the 40-weeks ending October 31, 2016 and cash used by operations was approximately $2.1 million for the 40-weeks ending November 2, 2015. The increase in cash generated from operating activities for the 40-week period ending October 31, 2016 was primarily due to fewer payments made on other liabilities in the current period compared to the prior period.
Cash provided by financing activities was approximately $713,000 for the 40-weeks ending October 31, 2016 compared to approximately $813,000 used by financing activities for the 40-weeks ending November 2, 2015. During the periods, the Company made net debt payments of approximately $126,000 and $1.9 million, had checks written in excess of bank balance changes of approximately $241,000 and $(250,000), had proceeds from issuance of long-term debt of approximately $600,000 and $1.3 million and incurred loan costs of $2,000 and $15,000, respectively.
The following table is a summary of the Company’s outstanding debt obligations.
|
|
October 31,
|
|
|
October 31,
|
|
|
January 25,
|
|
|
January 25,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Type of Debt
|
|
Total Debt
|
|
|
Current Portion
|
|
|
Total Debt
|
|
|
Current Portion
|
|
Real Estate Mortgages
|
|
$
|
2,658,000
|
|
|
$
|
151,000
|
|
|
$
|
2,169,000
|
|
|
$
|
119,000
|
|
Other-Miscellaneous
|
|
|
32,000
|
|
|
|
20,000
|
|
|
|
47,000
|
|
|
|
20,000
|
|
Note Payable to Officer
|
|
|
1,992,000
|
|
|
|
-
|
|
|
|
1,992,000
|
|
|
|
-
|
|
Total Debt
|
|
$
|
4,682,000
|
|
|
$
|
171,000
|
|
|
$
|
4,208,000
|
|
|
$
|
139,000
|
|
During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. 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 October 31, 2016 and January 25, 2016. The Company expensed $97,000 and $94,000 for interest related to its loans from Mr. Wheaton during the first 40 weeks of fiscal 2017 and fiscal 2016, respectively. 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 approved Plan is 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 January 16, 2013 at the bankruptcy plan rate. Interest will accrue on the principal amount of $1,991,936 and the interest of $196,957 from January 17, 2013 until paid at the rate of 3.25%.
The interest rate of 3.25% will increase 1% each year on January 17 until paid per Plan.
The Company used the funds borrowed from Mr. Wheaton for working capital requirements.
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 2016 included in the Company’s Annual Report filed on Form 10-K for Fiscal 2016. 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. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.
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 as of October 31, 2016 or November 2, 2015.
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.
Property, Buildings and Equipment
Property, 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
|
|
Buildings
|
|
|
|
40
|
|
|
Building and leasehold improvements
|
|
|
15
|
–
|
20
|
|
Furniture, fixtures and equipment
|
|
|
5
|
–
|
8
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Building and 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.
Property and 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.
Property 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, because there can be no assurance that the Company will generate any specific level of earnings in the future years to realize the benefit of the deferred tax assets existing as of October 31, 2016 and January 25, 2016 the Company has a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized.
Adopted and Recently Issued Accounting Standards
During 2014, the FASB issued Accounting Standards Update 2014-09 and 2015-14,
Revenue from Contract with Customers
(Topic 606), respectively, 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. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
In November 2015, the FASB issued
Accounting Standards Update 2015-17,
Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes. This update, which is part of the FASB's larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, which eliminates the requirement that an entity separate deferred tax liabilities and assets into current and non-current amounts. This update does not affect the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount on the balance sheet. This amendment applies to all entities with a classified statement of financial position. For public business entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company notes this guidance will apply to its reporting requirements and will implement the new guidance accordingly.
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. Early adoption is permitted. The Company has not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.
In March 2016, the FASB issued Accounting Standards Update 2016-09,
Stock Compensation – Improvements to Employee Share-Based Payment Accounting
. This new accounting standard simplifies accounting for share-based payment transactions, including income tax consequences and the classification of the tax impact on the statement of cash flows. The new standard is effective as of January 1, 2017, and early adoption is permitted. We are assessing the potential impact to our financial statements and disclosures
.
Off-Balance Sheet Arrangements
As of October 31, 2016, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.