STAR BUFFET, INC. 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 ofStar Buffet, Inc. , aDelaware 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 endedJanuary 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 theSecurities 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 SummaryStar Buffet, Inc. , aDelaware corporation (the "Company," "we" or "us"), is a multi-concept restaurant holding company. The Company was incorporated onJuly 28, 1997 . AtNovember 4, 2019 , the Company operated 23 full-service restaurants. During the first three quarters of fiscal year endingJanuary 27, 2020 ("Fiscal 2020"), the Company also had four restaurants that were not in operation. One restaurant was leased to a third-party operator and three were held for future use. 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 inArkansas ,Arizona ,Colorado ,Florida ,Idaho ,Mississippi ,Montana ,New Mexico ,Texas , andUtah . The Company has an executive office inScottsdale, Arizona and management information systems inSalt Lake City, Utah . Recent Developments None. 13
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The following table summarizes the Company's results of operations as a
percentage of total revenues for the 12 and 40 weeks ended
Twelve Weeks Ended Forty Weeks Ended
November 4, November 5, November 4, November 5,
2019 2018 2019 2018Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs, expenses and other Food costs 31.5 32.6 31.7 32.3 Labor costs 42.9 40.0 41.0 38.5 Occupancy and other expenses 21.1 21.6 20.5 20.5 General and administrative expenses 6.1 4.7 6.2 4.5 Depreciation and amortization 3.1 2.3 2.8 2.2 Total costs, expenses and other 104.7 101.2 102.2 98.0 Income (loss) from operations (4.7 ) (1.2 ) (2.2 ) 2.0 Interest expense 2.1 1.9 1.9 1.8 Other income 0.4 0.4 0.3 0.3 Income (loss) before income tax (6.4 ) (2.7 ) (3.8 ) 0.5 Income tax provision (benefit) (0.2 ) 0.2 0.0 0.1 Net income (loss) (6.2 )% (2.9 )% (3.8 )% 0.4 %
The table below outlines the number of operating and non-operating restaurants
by the Company as of
November 4, January 28,
2019 2019
Operating Restaurants :
4B's (1) (2) 11 14
JB's 5 5
Steakhouses (3) 4 4
Buffets (4) 2 2
Casa Bonita 1 1
23 26
Non-Operating Restaurants :
Leased to Third Parties 1 1
Warehouse 1 1
Held for Future Use 2 1
4 3
Total 27 29
(1) Includes one Antler's restaurant.
(2) The 4B's Café in
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.
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Twelve Weeks Ended
Overview - The Company has a consolidated net loss for the 12-week period endedNovember 4, 2019 of$(334,000) or$(0.10) per diluted share as compared with net loss of$(172,000) or$(0.05) per diluted share for the 12 weeks endNovember 5, 2018 , a decrease of approximately$162,000 from the comparable prior fiscal year period. The decrease in net income was primarily from the result of approximately$185,000 increase in net loss from operations due primarily to a$687,000 decrease in revenues and higher labor costs as a percentage of revenues. Revenues - Total revenues decreased by approximately$687,000 , or 11.5%, from$6.0 million in the 12 weeks endedNovember 5, 2018 to$5.3 million in the 12 weeks endedNovember 4, 2019 . The decrease in revenues was primarily the result of an approximately$401,000 or 7.5% decrease in comparable same store sales and an approximately$500,000 decrease in revenue for the closure of four restaurants in Fiscal 2020, one restaurant in Fiscal 2019 plus the temporary closure of one restaurant. The decrease in revenues was partially offset by the net increase of approximately$214,000 attributable to the opening of one restaurant in Fiscal 2020. Food Costs - Food costs as a percentage of total revenues decreased from 32.6% during the 12-week period endedNovember 5, 2018 to 31.5% during the 12-week period endedNovember 4, 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$282,000 in the 12-week period endedNovember 4, 2019 compared to the same period endedNovember 5, 2018 primarily due a$687,000 decrease in revenues. Labor - Labor costs as a percentage of total revenues increased from 40.0% during the 12-week period endedNovember 5, 2018 to 42.9% during the 12-week period endedNovember 4, 2019 . The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States ofArkansas ,Arizona ,Colorado ,Florida andMontana and$687,000 in lower revenue in the third quarter of Fiscal 2020 compared to the third quarter of Fiscal 2019. Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues decreased from 21.6% during the 12-week period endedNovember 5, 2018 to 21.1% during the 12-week period endedNovember 4, 2019 . The decrease as a percentage of total revenues was primarily attributable to a lower advertising and repair expense as a percentage of total revenues in the third quarter compared to the same period in the prior year. Occupancy and other expense decreased approximately$176,000 in the 12-week period endedNovember 4, 2019 primarily due to the decrease of$687,000 in revenues in the third 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 increased from 4.7% during the 12-week period endedNovember 5, 2018 to 6.1% during the 12-week period endedNovember 4, 2019 . The increase as a percentage of total revenues was primarily attributable to a credit in licensing fees as a percentage of total revenues in the third quarter of the prior year compared to the same period of the current year. General and administrative expense increased from$279,000 during the 12-week period endedNovember 5, 2018 to$320,000 during the 12-week period endedNovember 4, 2019 . Depreciation and Amortization - Depreciation and amortization expense increased from$135,000 during the 12-week period endedNovember 5, 2018 to$164,000 during the 12-week period endedNovember 4, 2019 . The increase was primarily attributable to additional restaurants opened. Interest Expense - Interest expense decreased from$116,000 during the 12-week period endedNovember 5, 2018 to$111,000 during the 12-week period endedNovember 4, 2019 . The decrease was attributable to lower debt balance primarily relating to loans for the purchase and remodel of the 4B's restaurant inMissoula, Montana in the 12-week period endedNovember 4, 2019 as compared to the 12-week period endedNovember 5, 2018 . Other Income - Other income is primarily rental income from the Company's leased properties. Rental income was$21,000 for two properties leased for the 12-week period endedNovember 5, 2018 . Rental income was$19,000 for one property leased for the 12-week period endedNovember 4, 2019 . Income Taxes - The income tax provision totaled$10,000 for the 12-week period endedNovember 5, 2018 and was a tax benefit of$10,000 for the 12-week period endedNovember 4, 2019 . The Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities onNovember 4, 2019 andJanuary 29, 2018 . The Company has a net operating loss for tax and financial reporting purposes. 15 --------------------------------------------------------------------------------
Forty weeks Ended
Overview - The Company has a consolidated net loss for the 40-week period endedNovember 4, 2019 of$(757,000) or$(0.24) per diluted share as compared with net income of$83,000 or$0.03 per diluted share for the 40-weeks endedNovember 5, 2018 , a decrease of approximately$840,000 from the comparable prior fiscal year period. The net decrease in operations was primarily from the result of approximately$876,000 decrease from income from operations due primarily to a$1.4 million 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$1.4 million , or 7.0%, from$20.8 million in the 40 weeks endedNovember 5, 2018 to$19.4 million in the 40-weeks endedNovember 4, 2019 . The decrease in revenues was primarily the result of an approximately$962,000 or 5.1% decrease in comparable same store sales and an approximately$1.1 million decrease in revenue for the closure of four restaurants in Fiscal 2020, one restaurant in Fiscal 2019 plus the temporary closure of one restaurant. The decrease in revenues was partially offset by the net increase of approximately$561,000 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 32.3% during the 40-week period endedNovember 5, 2018 to 31.7% during the 40-week period endedNovember 4, 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$566,000 in the 40-week period endedNovember 4, 2019 compared to the same period endedNovember 5, 2018 primarily due to a$1.4 million decrease in revenues. Labor - Labor costs as a percentage of total revenues increased from 38.5% during the 40-week period endedNovember 5, 2018 to 41.0% during the 40-week period endedNovember 4, 2019 . The increase as a percentage of total revenues was primarily attributable to higher minimum wages in the States ofArizona ,Colorado ,Florida andMontana and$1.4 million in lower revenue in the first three quarters of Fiscal 2020 compared to the first three quarters of Fiscal 2019. Occupancy and Other Expenses - Occupancy and other expenses as a percentage of total revenues remained the same at 20.5% during the 40-week period endedNovember 5, 2018 and during the 40-week period endedNovember 4, 2019 . Occupancy and other expense decreased approximately$286,000 in the 40-week period endedNovember 4, 2019 primarily due to the decrease of$1.4 million in revenues in the first three 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 40-week period endedNovember 5, 2018 to 6.2% during the 40-week period endedNovember 4, 2019 . General and administrative expense increased from$947,000 during the 40-week period endedNovember 5, 2018 to$1.2 million during the 40-week period endedNovember 5, 2018 . The increase was primarily attributable to a credit in licensing fees in the prior year and to higher legal expense in first three quarters of Fiscal 2020 compared same period in Fiscal 2019. The legal expenses primarily resulted from a settlement of a general liability case inDenver, Colorado and a trademark dispute inArkansas . Depreciation and Amortization - Depreciation and amortization expense increased from$451,000 during the 40-week period endedNovember 5, 2018 to$548,000 during the 40-week period endedNovember 4, 2019 . The increase was primarily attributable to additional restaurants opened. Interest Expense - Interest expense decreased from$383,000 during the 40-week period endedNovember 5, 2018 to$360,000 during the 40-week period endedNovember 4, 2019 . The decrease was attributable to lower debt balance primarily relating to loans for the purchase and remodel of the 4B's restaurant inMissoula, Montana in the 40-week period endedNovember 4, 2019 as compared to the 40-week period endedNovember 5, 2018 . Other Income - Other income consists primarily of rental income from the Company's leased properties. Rental income was$70,000 for two properties leased for the 40-week period endedNovember 5, 2018 . Rental income was$58,000 for one property leased for the 40-week period endedNovember 4, 2019 . Rental income was adversely impacted by the loss of one tenant. Income Taxes - The income tax provision totaled$30,000 for the 40-week period endedNovember 5, 2018 and$5,000 for the 40-week period endedNovember 4, 2019 . The Company has a full valuation allowance against its deferred tax asset, net of expected reversals of existing deferred tax liabilities onNovember 4, 2019 andJanuary 29, 2018 . The Company has a net operating loss for tax and financial reporting purposes. 16
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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 ofNovember 4, 2019 , the Company had$95,000 in cash. Cash and cash equivalents decreased by$68,000 during the 40-weeks endedNovember 4, 2019 . The net working capital deficit was$5.5 million and$4.4 million atNovember 4, 2019 andJanuary 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$327,000 on capital expenditures during the 40-weeks endingNovember 4, 2019 , primarily on existing restaurants. Cash provided from operations was approximately$444,000 for the 40-weeks endingNovember 4, 2019 and$692,000 for the 40-weeks endingNovember 5, 2018 , respectively. The decrease in cash generated from operating activities for the 40-week period endingNovember 4, 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$185,000 for the 40-weeks endingNovember 4, 2019 compared to cash used by financing activities of approximately$349,000 for the 40-weeks endingNovember 5, 2018 . In the first three quarters of Fiscal 2020, cash used by financing activities was as follows: The Company made net debt payments of approximately$222,000 and had checks written in excess of bank balance of$37,000 , a change of$37,000 from the balance of$0 as ofJanuary 28, 2019 . In the first three quarters of Fiscal 2019, cash provided by financing activities was as follows: The Company made net debt payments of approximately$275,000 and had checks written in excess of bank balance of$164,000 , a change of$(74,000) from the balance of$238,000 as ofJanuary 29, 2018 . The following table is a summary of the Company's outstanding debt obligations. November 4, November 4, January 28, January 28, 2019 2019 2019 2019 Type of Debt (1) Total Debt Current Portion Total Debt Current Portion
Real Estate Mortgages$ 2,278,000 $ 292,000$ 2,485,000 $ 560,000 Other-Miscellaneous 242,000 16,000 253,000 10,000 Note Payable to Officer 1,992,000 - 1,992,000 - Total Debt$ 4,512,000 $ 308,000$ 4,730,000 $ 570,000
(1) The interest rates range from 6% to 8.5%. 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 November 4, 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 $150,000 to Robert E. Wheaton for interest during the
first three quarters of Fiscal 2020 and Fiscal 2019.
17
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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 secured loan had
monthly payments of $14,839 . The Company paid Mr. Wheaton approximately $154,000
and $113,000 in principal during the first three quarters of Fiscal 2020 and
Fiscal 2019, respectively, under this secured loan. In addition, the Company
paid approximately $10,000 and $21,000 in interest during the first three
quarters of Fiscal 2020 and Fiscal 2019, respectively. The loan was paid in full
in October 2019 .
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 endingNovember 4, 2019 andNovember 5, 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
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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.
Significant Accounting Policies Update
Adoption of ASC Topic 842: Leases
The Company adopted ASU 2016-02- Leases (Topic 842) and related amendments, as ofJanuary 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. 19 -------------------------------------------------------------------------------- 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$15.3 million , respectively, on the Company's consolidated balance sheet as ofJanuary 29, 2019 . The difference between the approximate value of the operating lease assets and liabilities is attributable to deferred rent, deferred rent incentives, leasehold interests and prepaid rent. The cumulative change in the beginning accumulated deficit was$(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
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