STAR BUFFET INC - Quarter Report: 2017 August (Form 10-Q)

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 14, 2017

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

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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

    Yes [X]    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 (Check one):

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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 20, 2017 there were 3,213,075 shares of Common Stock, $ .001 par value, outstanding.

STAR BUFFET, INC. AND SUBSIDIARIES

INDEX

Page

ﹺPART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 14, 2017 it operated 26 full-service restaurants. During the second quarter of Fiscal 2018, the Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The Company’s restaurants operate under trade names including 4B’s Restaurants ®, JB’s Restaurants, Barnhill’s Salads Buffet Desserts®, Casa Bonita® and BuddyFreddys®. The Company has a license agreement to use the JB’s trademark. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming. The Company has an executive office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah.

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 30, 2017. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in that 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 14, 2017. The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each year contains 16 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 14, 2017 or August 8, 2016.

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:

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The carrying amounts of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximates 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 market, 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 Accounting Standards Codification 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 did not record impairment expense associated with restaurant facilities for the twenty-eight weeks ended August 14, 2017 and August 8, 2016.

f) Properties, Building 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:

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.

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of property, buildings and equipment as of August 14, 2017 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 30, 2017 consist of 24 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 Company recorded depreciation expense of $131,000 and $100,000 for the twelve weeks ended August 14, 2017 and August 8, 2016, respectively. 

g) Other Assets

Other assets consist of deposits and deferred financing fees. Deferred financing fees are amortized to interest expense over shortest of the life of the loan or five years.

h) Intangible Assets

The Company’s intangible assets consist of trademarks as of August 14, 2017 and January 30, 2017. 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) 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 liabilities 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. We evaluate, on a quarterly basis, the likelihood 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 the deferred tax asset value is subject to estimates and assumptions. Currently, the Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities.

k) Recent Accounting Pronouncements

During 2014, the FASB issued Accounting Standards Update 2014-09 and 2015-14, Revenue from Contract with Customers (Topic 606), which revises previous revenue recognition standards to improve guidance on revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides additional disclosure requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted. The Company has not yet selected a transition date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Note 3 – Related Party Transactions

Robert E. Wheaton currently beneficially owns approximately 45.3% of our total equity securities and possesses approximately 45.3% of the total voting power of the Company. Thus Robert E. 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. During fiscal 2008, the Company borrowed approximately $1,400,000 from Robert E. Wheaton, a principal shareholder, officer and director of the Company.  In June 2008, the Company borrowed an additional $592,000 from Robert E. 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 14, 2017 and January 30, 2017. The principal balance and any unpaid interest were due and payable in full on June 5, 2012. The loan was modified as a result of the Company’s bankruptcy filing. Pursuant to the Bankruptcy Plan the principal balance is not eligible to be repaid until all obligations owed to other creditors are 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 and $68,000 to Robert E. Wheaton for interest during the first two quarters of Fiscal 2018 and Fiscal 2017, respectively.

On November 9, 2016, the Company borrowed $450,000 from Robert E. and Suzanne H. Wheaton to remodel the 4B’s restaurant in Missoula, Montana. The three year fully amortized secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid approximately $66,000 in principal and $23,000 in interest to Robert E. and Suzanne H. Wheaton under this loan in the first two quarters of Fiscal 2018.

As part of the Bankruptcy Plan, Suzanne H. Wheaton, the wife of Robert E. Wheaton, loaned the Company $300,000 as an exit loan was secured by real estate in Artesia, New Mexico. The exit loan has been repaid. Starting in June 2013, Robert E. and Suzanne H. Wheaton purchased certain real estate properties from the Company and third parties. The Company entered into lease agreements with Robert E. and Suzanne H. Wheaton for each of the properties acquired from the Company or third parties. During Fiscal 2017, Robert E. and Suzanne H. Wheaton leased to the Company the Finnegan’s Restaurant in Kalispell, Montana. During the first quarter of Fiscal 2018, Robert E. and Suzanne H. Wheaton leased to the Company the Rancher’s Grill in Deming, New Mexico and the JB’s Restaurant in Coeur d’Alene, Idaho. During the second quarter of Fiscal 2018, Robert E. and Suzanne H. Wheaton leased to the Company the 4B’s Restaurant in Miles City, Montana. The Company paid to Robert E. and Suzanne H. Wheaton $419,000 and $357,000 in rent during the first two quarters of Fiscal 2018 and Fiscal 2017, respectively. The Company owes Robert E. and Suzanne H. Wheaton $225,000 primarily for interest as of August 14, 2017. The Company owed Robert E. and Suzanne H. Wheaton approximately $0 as of August 8, 2016.

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Long-Term Debt

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

Note 5 – 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 Bankruptcy Court in 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 “Bankruptcy Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Bankruptcy 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 Bankruptcy Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Bankruptcy Plan were estimated to be in excess of $10 million.  The Bankruptcy 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 December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc.

Note 6 - Commitments and Contingencies

In connection with the Company’s employment contract with Robert E. Wheaton, the Company’s Chief Executive Officer and President, the Company has agreed to pay Robert E. Wheaton three years of his salary plus bonus if he resigns related to a change of control of the Company, termination by the Company without cause or resignation 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 and the remaining balance is $768,000 as of August 14, 2017.               

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.

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Subsequent Events

The Company has evaluated subsequent events through the date that these financial statements were filed with the Securities and Exchange Commission and the subsequent events are as follows:

On August 21, 2017 the Company’s Finnegan’s Restaurant in Kalispell, Montana closed due to a kitchen fire. The Company plans to use insurance funds to reopen the restaurant.

On August 28, 2017, the Company closed its restaurant in Magee, Mississippi for repositioning.

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 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 30, 2017. 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 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 Company’s Annual Report Form 10-K for the fiscal year ended January 30, 2017, 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 14, 2017 it operated 26 full-service restaurants. During the first two quarters of Fiscal 2018, the Company also had three closed restaurants, one closed for remodeling and repositioning, one leased to a third-party operator and one used as a warehouse. The Company’s restaurants operate under trade names including 4B’s Restaurants ®, JB’s Restaurants, Barnhill’s Salads Buffet Desserts®, Casa Bonita® and BuddyFreddys®. The Company has a license agreement to use the JB’s trademark. The Company's restaurants are located in Arkansas, Arizona, Colorado, Florida, Idaho, Mississippi, Montana, New Mexico, Texas, Utah and Wyoming. The Company has an executive office in Scottsdale, Arizona and an accounting office in Salt Lake City, Utah.

Recent Developments

Please refer to Note 7 – Subsequent Events in the Company’s Notes to Unaudited Condensed Consolidated Financial Statements for recent developments.

The following table summarizes the Company’s results of operations as a percentage of total revenues for the 12 and 28 weeks ended August 14, 2017 and August 8, 2016, respectively.

The table below outlines the number of operating and non-operating restaurants by the Company as of August 14, 2017 and January 30, 2017.

Twelve Weeks Ended August 14, 2017 compared to Twelve Weeks Ended August 8, 2016

Overview - The Company has a consolidated net income for the 12-week period ended August 14, 2017 of $465,000 or $0.14 per diluted share as compared with net income of $426,000 or $0.13 per diluted share for the comparable prior year period, an increase of approximately $39,000 from the prior year period. The increase in the net income is primarily from higher income from operations of approximately $41,000 due primarily to higher revenue and lower food costs, which were partially offset by higher labor costs. The Company also had higher interest expense and other income in the current year.

Revenues - Total revenues increased by approximately $444,000 or 6.4% from $7.0 million in the 12 weeks ended August 8, 2016 to $7.4 million in the 12 weeks ended August 14, 2017. The increase in revenues was primarily attributable to the opening of two stores in the fiscal year ending January 29, 2018 and two stores in the fiscal year ending January 30, 2017 resulting in a $697,000 increase in sales in the current fiscal year. The increase in sales was partially offset by approximately $60,000 or 0.9% decrease in comparable same store sales and approximately $193,000 decrease for closure of one store.

Food Costs - Food costs as a percentage of total revenues decreased from 33.0% during the 12-week period ended August 8, 2016 to 31.3% during the 12-week period ended August 14, 2017. The food cost decreased in the current fiscal year as compared to the same period in the prior year as a percentage of sales primarily from stable wholesale costs and higher guest check average in Fiscal 2018 compared to Fiscal 2017. Food costs increased by approximately $44,000 in the 12-week period ended August 14, 2017, primarily due a $444,000 increase in revenues.

Labor - Labor costs as a percentage of total revenues increased from 34.7% during the 12-week period ended August 8, 2016 to 36.0% during the 12-week period ended August 14, 2017. The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States of Arkansas and Colorado. Labor costs increased by approximately $253,000 in the 12-week period ended August 14, 2017, primarily due to the net increase of three stores and higher minimum wages.

Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues remained the same at 19.4% during the 12-week period ended August 8, 2016 and the 12-week period ended August 14, 2017. Occupancy and other expense increased approximately $91,000 in the 12-week period ended August 14, 2017 primarily due to the net increase of three stores in the current fiscal year.

General and Administrative Expenses - General and administrative expense as a percentage of total revenues decreased from 4.3% during the 12-week period ended August 8, 2016 to 3.8% during the 12-week period ended August 14, 2017. General and administrative expense decreased from $299,000 during the 12-week period ended August 8, 2016 to $283,000 during the 12-week period ended August 14, 2017. The decrease was primarily attributable to lower insurance costs in the current year compared to the prior year.                                

Depreciation and Amortization - Depreciation and amortization expense increased from $100,000 during the 12-week period ended August 8, 2016 to $131,000 during the 12-week period ended August 14, 2017. The increase was primarily attributable to the net addition of three stores.

Interest Expense - Interest expense increased from $83,000 during the 12-week period ended August 8, 2016 to $120,000 during the 12-week period ended August 14, 2017. The increase was attributable to higher debt balance primarily relating to loans for the purchase and remodel of the 4B’s in Missoula, Montana in the 12-week period ended August 14, 2017 as compared to the 12-week period ended August 8, 2016.

Other Income - Other income is primarily rental income from the Company’s leased properties. Rental income was $34,000 for three properties leased for the 12-week period ended August 14, 2017. Rental income was $19,000 for three properties leased for the 12-week period ended August 8, 2016.                                                       

Income Taxes - The income tax provision totaled $20,000 for the second quarter of Fiscal 2018 and $20,000 for the second quarter of Fiscal 2017. The Company has deferred income tax assets of $0 on August 14, 2017 and January 30, 2017. 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 14, 2017.

Reorganization Items, Net - Star Buffet, Inc. and Summit both filed for bankruptcy in September 2011. On December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. During the 12-weeks ended August 14, 2017 and August 8, 2016, the Company incurred professional fees and bankruptcy costs (benefits) related to the bankruptcy totaling $0 and $20,000, respectively.

Twenty-eight Weeks Ended August 14, 2017 compared to Twenty-eight Weeks Ended August 8, 2016

Overview - The Company has a consolidated net income for the 28-week period ended August 14, 2017 of $581,000, or $0.18 per diluted share, as compared with net income of $415,000 or $0.13 per diluted share for the comparable prior year period, an increase of approximately $166,000 from the prior year period. The increase in the net income is primarily attributable to higher income from operations of approximately $211,000 due primarily to higher revenue and lower food costs, which were partially offset by higher labor costs. The Company also had higher interest expense in the current year.

Revenues - Total revenues increased by approximately $1.2 million, or 8.2%, from $14.5 million in the 28 weeks ended August 8, 2016 to $15.7 million in the 28 weeks ended August 14, 2017. The increase in revenues was primarily attributable to the opening of two stores in the fiscal year ending January 29, 2018 and three stores in the fiscal year ending January 30, 2017, resulting in a $1.6 million increase in sales in the current fiscal year. The increase in sales was partially offset by approximately $200,000 or 1.2% 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 33.7% during the 28-week period ended August 8, 2016 to 31.8% during the 28-week period ended August 14, 2017. The food cost decreased in the current fiscal year as compared to the same period in the prior year as a percentage of sales primarily from stable wholesale costs and higher guest check average in Fiscal 2018 as compared to Fiscal 2017. Food costs increased by approximately $99,000 in the 12-week period ended August 14, 2017 primarily due a $1.2 million increase in revenues.

Labor - Labor costs as a percentage of total revenues increased from 35.8% during the 28-week period ended August 8, 2016 to 36.6% during the 28-week period ended August 14, 2017. The increase as a percentage of total revenues was primarily attributable to higher minimum wages States of Arkansas and Colorado. Labor costs increased by approximately $549,000 in the 28-week period ended August 14, 2017, primarily due to the net increase of four stores and higher minimum wages.

Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues decreased from 20.0% during the 28-week period ended August 8, 2016 to 19.8% during the 28-week period ended August 14, 2017. Occupancy and other expenses increased approximately $207,000 in the 28-week period ended August 14, 2017 primarily due to the net increase of four stores. The decrease for the 28-week period ending August 14, 2017 as a percentage of total revenues was primarily attributable to a decrease in advertising expense.

General and Administrative Expenses - General and administrative expense as a percentage of total revenues decreased from 4.8% during the 28-week period ended August 8, 2016 to 4.7% during the 28-week period ended August 14, 2017. General and administrative expense increased from $696,000 during the 28-week period ended August 8, 2016 to $741,000 during the 28-week period ended August 14, 2017. The decrease as a percentage of total revenues was primarily due to a decrease in insurance expense in the current period.

Depreciation and Amortization - Depreciation and amortization expense increased from $232,000 during the 28-week period ended August 8, 2016 to $306,000 during the 28-week period ended August 14, 2017. The increase was primarily attributable to net increase of four stores in the current period.

Interest Expense - Interest expense increased from $184,000 during the 28-week period ended August 8, 2016 to $277,000 during the 28-week period ended August 14, 2017. The increase was attributable to higher debt balance primarily relating to loans for the purchase and remodel of the 4B’s in Missoula, Montana in the 28-week period ended August 14, 2017 as compared to the 28-week period ended August 8, 2016.

Other income - Other income consists primarily of rental income from the Company’s leased properties. Rental income was $82,000 for three properties leased for the 28-week period ended August 14, 2017. Rental income was $74,000 for three                  property leased for the 28-week period ended August 8, 2016.

Income Taxes - The income tax provision totaled $30,000 and $25,000 for the first 28-week periods of fiscal 2018 and 2017, respectively. The Company has deferred income tax assets of $0 on August 14, 2017 and January 30, 2017. 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 14, 2017.

Reorganization Items, Net - Star Buffet, Inc. and Summit both filed for bankruptcy in September 2011. On December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc. During the 28-weeks ended August 14, 2017 and August 8, 2016, the Company incurred professional fees and bankruptcy costs (benefits) related to the bankruptcy totaling $0 and $45,000, respectively.

Impact 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 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. 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 August 14, 2017, the Company had $293,000 in cash.  Cash and cash equivalents decreased by $46,000 during the 12-weeks ended August 14, 2017. The net working capital deficit was $3.5 million and $3.3 million at August 14, 2017 and January 30, 2017, respectively. 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 $576,000 on capital expenditures during the 28-weeks ending August 14, 2017 primarily on acquisitions.

Cash provided from operations was approximately $542,000 for the 28-weeks ending August 14, 2017 and $827,000 for the 28-weeks ending August 8, 2016, respectively. The increase in cash generated from operating activities for the 28-week period ending August 14, 2017 was primarily due to the change in the accounts payable – trade liability paid in the current fiscal year as compared to the prior fiscal year.

Cash used by financing activities was approximately $12,000 for the 28-weeks ending August 14, 2017 compared to cash provided by financing activities of approximately $653,000 for the 28-weeks ending August 8, 2016. During the periods, the Company made net debt payments of approximately $190,000 and $97,000, had checks written in excess of bank balance changes of approximately $(100,000) and $152,000, had proceeds from issuance of long-term debt of approximately $285,000 and $600,000 and incurred loan costs of $7,000 and $2,000, respectively.

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

During fiscal 2008, the Company borrowed approximately $1,400,000 from Robert E. Wheaton, a principal shareholder, officer and director of the Company.  In June 2008, the Company borrowed an additional $592,000 from Robert E. 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 14, 2017 and January 30, 2017. The principal balance and any unpaid interest were due and payable in full on June 5, 2012. The loan was modified as a result of the Company’s bankruptcy filing. Pursuant to the Bankruptcy Plan the principal balance is not eligible to be repaid until all obligations owed to other creditors are 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 and $68,000 to Robert E. Wheaton for interest during the first two quarters of Fiscal 2018 and Fiscal 2017, respectively.

On November 9, 2016, the Company borrowed $450,000 from Robert E. and Suzanne H. Wheaton to remodel the 4B’s restaurant in Missoula, Montana. The three year fully amortized secured loan has monthly payments of $14,839 and interest rate of 11.5%. The Company paid approximately $66,000 in principal and $23,000 in interest to Robert E. and Suzanne H. Wheaton under this loan in the first two quarters of Fiscal 2018.

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 2017 included in the Company’s Annual Report filed on Form 10-K for Fiscal 2017. 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 for the fiscal quarters ending August 14, 2017 and August 8, 2016.

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:

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 liabilities 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. We evaluate, on a quarterly basis, the likelihood 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 the deferred tax asset value is subject to estimates and assumptions. Currently, the Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities.

Adopted and Recently Issued Accounting Standards

During 2014, the FASB issued Accounting Standards Update 2014-09 and 2015-14, Revenue from Contract with Customers (Topic 606), which revises previous revenue recognition standards to improve guidance on revenue recognition requirements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also provides additional disclosure requirements. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted. The Company has not yet selected a transition date. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

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 August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

Off-Balance Sheet Arrangements 

As of August 14, 2017, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

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 Bankruptcy Court in 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 “Bankruptcy Plan”), which provided for the payment in full of all approved claims. A copy of the Confirmation Order and the Bankruptcy 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 Bankruptcy Plan became effective on January 17, 2013 and the Company emerged from bankruptcy. The payment obligations under the Bankruptcy Plan were estimated to be in excess of $10 million.  The Bankruptcy 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 December 7, 2016, the Bankruptcy Court entered into a Final Decree and Order Closing the Bankruptcy Case of Star Buffet, Inc.

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 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 14, 2017 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.  

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 14, 2017, 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 30, 2017 filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

* 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

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.

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