Notes to Condensed Consolidated Financial Statements
(Unaudited, dollars in thousands except per share data)
Note 1 – Organization and Business
J. Alexander’s Holdings, Inc. (the “Company”) was incorporated on August 15, 2014 in the state of Tennessee and is a holding company which is the sole managing member of and owns all of the outstanding Class A Units of J. Alexander’s Holdings, LLC, the parent company of all of the Company’s operating subsidiaries. The Company became a publicly-traded company, with its stock listed on the New York Stock Exchange under the symbol “JAX”, effective in September of 2015 as a result of the “Spin-off” distribution (the “Spin-off”) by the Company’s former parent, Fidelity National Financial, Inc. (“FNF”) of all shares of the Company’s common stock owned by FNF to holders of shares of FNF’s Fidelity National Financial Ventures, LLC (“FNFV”) Group common stock, as it was known at the time of the Spin-off. FNFV is now conducting business independently as Cannae Holdings, Inc.
The Company, through J. Alexander’s Holdings, LLC and its subsidiaries, owns and operates full service, upscale restaurants including J. Alexander’s, Redlands Grill, Lyndhurst Grill, Overland Park Grill and Stoney River Steakhouse and Grill (“Stoney River”). At both September 29, 2019 and December 30, 2018, the Company operated 46 restaurants in 16 states. The Company’s restaurants are concentrated primarily in the East, Southeast, and Midwest regions of the United States. The Company does not have any restaurants operating under franchise agreements.
Note 2 – Basis of Presentation
|
(a)
|
Interim Financial Statements
|
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and rules of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter and nine-month period ended September 29, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2019. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC on March 14, 2019, as amended on April 29, 2019 (the “2018 Annual Report”).
Total comprehensive income (loss) is comprised solely of net income (loss) for all periods presented. There have been no material changes in our significant accounting policies, other than the adoption of accounting pronouncements described in Note 7 below, as compared to the significant accounting policies described in our 2018 Annual Report.
(b) Principles of Consolidation
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company as well as the accounts of its majority-owned subsidiaries. All intercompany profits, transactions, and balances between the Company and its subsidiaries have been eliminated. It is the Company’s policy to reclassify prior year amounts to conform to the current year’s presentation for comparative purposes, if such a reclassification is warranted.
The Company is a holding company with no direct operations and that holds as its sole asset an equity interest in J. Alexander’s Holdings, LLC and, as a result, relies on J. Alexander’s Holdings, LLC to provide it with funds necessary to meet its financial obligations.
The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks. The quarters and nine-month periods ended September 29, 2019 and September 30, 2018 each included 13 and 39 weeks of operations, respectively. Fiscal years 2019 and 2018 each include 52 weeks of operations.
7
|
(d)
|
Discontinued Operations and Restaurant Closures
|
The Company remains party to a lease agreement for a location that was closed in 2013 and is accounted for as a discontinued operation. The $66 and $118 losses from discontinued operations included in the quarters ended September 29, 2019 and September 30, 2018, respectively, and losses of $183 and $339 for the nine-month periods ended September 29, 2019 and September 30, 2018, respectively, consist solely of exit and disposal costs for this location.
|
(e)
|
Transaction, Contested Proxy and Other Related Expenses
|
Transaction, contested proxy and other related expenses totaled $117 and $768 for the quarter and nine-month period ended September 29, 2019, respectively. These expenses included legal, proxy solicitor, and other professional and consulting fees along with printing and postage costs and other miscellaneous costs associated with both soliciting shareholder proxies for the Company’s 2019 annual meeting of shareholders and the ongoing evaluation of strategic alternatives.
During the nine-month period ended September 30, 2018, the Company incurred transaction, contested proxy and other related expenses of $933 which were associated primarily with the terminated acquisition of the Ninety Nine Restaurant and Pub concept. Such costs consisted primarily of legal and other professional and consulting fees as well as other miscellaneous costs. No such expenses were recorded during the quarter ended September 30, 2018.
|
(f)
|
Earnings (Loss) per Share
|
Basic earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of shares outstanding for the reporting period. Diluted earnings (loss) per share of common stock is computed similarly to basic earnings (loss) per share except the weighted average shares outstanding are increased to include potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents for this purpose. The number of additional shares of common stock related to these common stock equivalents is calculated using the if-converted method, if dilutive. The number of additional shares of common stock related to stock option awards and unvested restricted share awards subject to only a service condition is calculated using the treasury stock method, if dilutive. Unvested restricted share awards that are subject to a performance condition are regarded as contingently issuable common shares and are only included in the denominator of the diluted earnings (loss) per share calculation using the treasury stock method as of the beginning of the period in which the performance condition has been satisfied, if dilutive. Refer to Note 3 – Earnings (Loss) per Share for the basic and diluted earnings (loss) per share calculations and additional discussion.
|
(g)
|
Non-controlling Interests
|
Non-controlling interests presented on the Condensed Consolidated Balance Sheets represent the portion of net assets of the Company attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders. As of September 29, 2019 and December 30, 2018, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $1,558 and $7,844, respectively. On February 28, 2019, in conjunction with the termination agreement (“Termination Agreement”) entered into in November of 2018 between J. Alexander’s Holdings, LLC and Black Knight Advisory Services, LLC (“Black Knight”), the 1,500,024 Class B Units held by Black Knight were cancelled and forfeited for no consideration. Therefore, the share-based compensation expense associated with the Black Knight grant has been reclassified to additional paid-in capital in the first nine months of 2019, and as of September 29, 2019, non-controlling interests consist solely of the non-cash compensation expense relative to the Class B Units held by management. Non-controlling interests reported as of December 30, 2018 consisted of non-cash compensation expense associated with Class B Units held by both management and Black Knight. The Hypothetical Liquidation at Book Value method was used as of each of September 29, 2019 and September 30, 2018 to determine allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, no allocation of net income was made to non-controlling interests for either of the quarters and nine-month periods ended September 29, 2019 or September 30, 2018.
Management has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods presented to prepare these unaudited Condensed Consolidated
8
Financial Statements in conformity with GAAP. Significant items subject to such estimates and assumptions include those related to the accounting for gift card breakage, determination of uncertain tax positions and the valuation allowance relative to deferred tax assets, if any, estimates of useful lives of property and equipment and leasehold improvements, the carrying amount of intangible assets, fair market valuations, determination of lease terms, and accounting for impairment losses, contingencies, and litigation. Actual results could differ from these estimates.
(i) Share Repurchase Program
On November 1, 2018, the Company’s Board of Directors authorized a share repurchase program which replaced the previous share repurchase program that expired on October 29, 2018, and allows for the repurchase of shares up to an aggregate purchase price of $15,000 over the three-year period ending November 1, 2021. Any share repurchases under the current program are expected to be made solely from cash on hand and available operating cash flow. Repurchases will be made in accordance with applicable securities laws and may be made from time to time in the open market. The timing, prices and amount of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate the Company to acquire any particular amount of stock. There was no common stock repurchase activity under the program during the first nine months of 2019.
(j) Debt Modifications
In 2019, J. Alexander’s, LLC, a subsidiary of the Company, entered into two separate modification agreements with respect to the loan agreement (the “Loan Agreement”) with its lender. The first modification agreement (the “First Modification Agreement”) became effective on January 2, 2019, while the second modification agreement (the “Second Modification Agreement”) became effective on September 3, 2019. The Loan Agreement previously provided that both the development line of credit and the term loan would bear interest at 30-day LIBOR plus 220 basis points and amounts borrowed under the revolving line of credit and the mortgage loan would bear interest at 30-day LIBOR plus 250 basis points. The revolving line of credit previously had a minimum interest rate of 3.25%, and the mortgage loan had minimum and maximum interest rates of 3.25% and 6.25%, respectively. Under the terms of the First Modification Agreement, effective January 2, 2019, all of the notes under the Loan Agreement bear interest at LIBOR plus a sliding interest rate scale determined by the maximum adjusted debt to EBITDAR ratio. For the quarter ended September 29, 2019, the interest rate was set at LIBOR plus 1.85%. Additionally, the non-use fee payable quarterly on the development line of credit and revolving line of credit decreased as a result of the First Modification Agreement from 0.25% to a sliding rate based on the maximum adjusted debt to EBITDAR ratio. The interest rate and non-use fee rate scale is set forth as follows:
Maximum adjusted debt to EBITDAR ratio
|
|
Margin
|
|
|
Non-Use Fee Rate
|
|
Less than 1.25X
|
|
1.60%
|
|
|
0.15%
|
|
Less than 2.25X
|
|
1.85%
|
|
|
0.20%
|
|
Less than 3.25X
|
|
2.10%
|
|
|
0.25%
|
|
Greater than 3.25X
|
|
2.35%
|
|
|
0.30%
|
|
The First Modification Agreement also clarified that the lease liabilities recorded on the Company’s Condensed Consolidated Balance Sheets related to the adoption of the new lease accounting standard (see Notes 7 and 10 below) would not be considered debt for purposes of calculating the financial debt covenants previously established under the Loan Agreement.
The Second Modification Agreement extended the maturity dates with respect to the development line of credit, the revolving line of credit and the mortgage loan to September 3, 2021. Prior to the Second Modification Agreement, the revolving line of credit, the development line of credit and the mortgage loan were set to mature on September 3, 2019, May 3, 2020 and September 3, 2020, respectively. No further changes to the Loan Agreement were made as a result of the modification agreements discussed above.
9
Note 3 – Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
|
Quarter Ended
|
|
|
|
Nine Months Ended
|
|
(Dollars and shares in thousands, except per share amounts)
|
|
September 29,
|
|
|
September 30,
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of tax
|
|
$
|
837
|
|
|
$
|
(515
|
)
|
|
|
$
|
6,970
|
|
|
$
|
3,404
|
|
Loss from discontinued operations, net
|
|
|
(66
|
)
|
|
|
(118
|
)
|
|
|
|
(183
|
)
|
|
|
(339
|
)
|
Net income (loss)
|
|
$
|
771
|
|
|
$
|
(633
|
)
|
|
|
$
|
6,787
|
|
|
$
|
3,065
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator for basic earnings (loss) per share)
|
|
|
14,695
|
|
|
|
14,695
|
|
|
|
|
14,695
|
|
|
|
14,695
|
|
Effect of dilutive securities
|
|
|
113
|
|
|
|
-
|
|
|
|
|
51
|
|
|
|
224
|
|
Adjusted weighted average shares and assumed conversions
(denominator for diluted earnings (loss) per share)
|
|
|
14,808
|
|
|
|
14,695
|
|
|
|
|
14,746
|
|
|
|
14,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of tax
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
|
$
|
0.47
|
|
|
$
|
0.23
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Basic earnings (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
|
$
|
0.46
|
|
|
$
|
0.21
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations, net of tax
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
|
$
|
0.47
|
|
|
$
|
0.23
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
|
$
|
0.46
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Per share amounts may not sum due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of shares outstanding for the reporting period. Diluted earnings (loss) per share of common stock gives effect during the reporting period to all dilutive potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. We incurred a net loss for the quarter ended September 30, 2018, and therefore diluted shares outstanding equaled basic shares outstanding for the third quarter of 2018.
The J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents, and the number of additional shares of common stock related to these Class B Units is calculated using the if-converted method. The 833,346 Class B Units associated with management’s profits interest awards are considered to be antidilutive as of and for the quarter and nine-month period ended September 29, 2019 and, therefore, have been excluded from the diluted earnings (loss) per share calculations. However, management’s profits interest awards were considered dilutive for the nine-month period ended September 30, 2018 resulting in an additional 4,959 shares included in the diluted calculation above for the aforementioned period. Similarly, the now cancelled and forfeited Black Knight profits interest Class B Units outstanding as of September 30, 2018 were considered dilutive, and the impact on the diluted earnings (loss) per share calculation for the nine-month period then ended was 173,484.
The number of additional shares of common stock related to stock option awards is calculated using the treasury stock method, if dilutive. There were 1,495,750 stock option awards outstanding as of September 29, 2019 and September 30, 2018. The dilutive impact of these awards on the number of weighted average shares in the diluted earnings (loss) per share calculation was 102,490 and 47,446 for the quarter and nine-month period ended September 29, 2019, respectively. The awards outstanding as of September 30, 2018 were also considered dilutive, and the impact on the number of weighted average shares in the diluted earnings (loss) per share calculation was 45,082 for the nine-month period then ended.
On August 9, 2019, the Company granted 264,000 restricted share awards and 52,500 performance share awards to members of its board of directors as well as certain employees of the Company under its Amended and Restated 2015 Equity Incentive Plan. The shares were registered under the Company’s Registration Statement on Form S-8, filed with the SEC on August 9, 2019. Restricted
10
share awards subject to only a service condition are not regarded as outstanding for basic earnings per share calculation purposes until they are vested, and any potential dilutive impact of unvested restricted share awards is calculated using the treasury stock method. Performance share awards are regarded as contingently issuable common shares and are included in the weighted average shares outstanding for basic earnings per share calculation purposes as of the beginning of the period in which the performance condition has been satisfied and the awards have vested. For diluted earnings per share calculation purposes under the treasury stock method, such awards are included in the number of weighted average shares outstanding as of the beginning of the period in which the performance condition has been satisfied, if dilutive. The performance condition associated with the performance share awards had not been met as of September 29, 2019, and, therefore, any dilutive impact on the earnings per share calculation of these awards was not considered. However, the unvested restricted share awards subject to only a service condition were considered dilutive for the quarter and nine-month period ended September 29, 2019, and the impact on the number of weighted average shares in the diluted earnings per share calculation was 10,763 and 3,588, respectively.
Note 4 – Income Taxes
The net effective tax rate (including the impact of discrete items) for the nine-month periods ended September 29, 2019 and September 30, 2018 was (3.6)% and (2.4)%, respectively. The factors that cause the net effective tax rate to vary from the federal statutory rate of 21% for the nine-month periods ended September 29, 2019 and September 30, 2018 include the impact of the Federal Insurance Contribution Act tip and other credits, partially offset by state income taxes and certain non-deductible expenses. In addition to these items for the nine-month period ended September 29, 2019, we recognized a rate benefit of (4.9)% due to the impact of discrete tax items, including but not limited to, the return to provision reconciliation and the beginning of the year deferred tax rate adjustment.
Note 5 – Commitments and Contingencies
As a result of the disposition of the Company’s predecessor’s Wendy’s operations in 1996, subsidiaries of the Company may remain secondarily liable for certain real property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these five leases at September 29, 2019 was approximately $771. In connection with the sale of the Company’s predecessor’s Mrs. Winner’s Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, subsidiaries of the Company also may remain secondarily liable for a certain real property lease. The total estimated amount of lease payments remaining on this lease at September 29, 2019 was approximately $370. Additionally, in connection with the previous disposition of certain other Wendy’s restaurant operations, primarily the southern California restaurants in 1982, subsidiaries of the Company may remain secondarily liable for a certain real property lease with a remaining term of one year. The total estimated amount of lease payments remaining on this lease as of September 29, 2019 was approximately $21. There have been no payments by subsidiaries of the Company of such contingent liabilities in the history of the Company. Management believes any significant loss is remote.
The Company and its subsidiaries are subject to real property, personal property, business, franchise, income, withholding, unemployment, sales and use taxes in various jurisdictions within the United States, and are regularly under audit by tax authorities. This is believed to be common for the restaurant industry. Management believes the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
|
(c)
|
Litigation Contingencies
|
The Company and its subsidiaries are defendants from time to time in various claims or legal proceedings arising in the ordinary course of business, including claims relating to workers’ compensation matters, labor-related claims, discrimination and similar matters, claims resulting from guest accidents while visiting a restaurant, claims relating to lease and contractual obligations, federal and state tax matters, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns, and injury or wrongful death under “dram shop” laws that allow a person to sue the Company and its subsidiaries based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of the Company’s restaurants.
Management does not believe that any of the legal proceedings pending against the Company and its subsidiaries as of the date of this report will have a material adverse effect on the Company’s liquidity, consolidated results of operations or
11
financial condition. The Company may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal year, which may adversely affect its consolidated results of operations, or on occasion, receive settlements that favorably affect its consolidated results of operations.
Note 6 – Fair Value Measurements
The Company utilizes the following fair value hierarchy, which prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:
Level 1
|
Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3
|
Defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.
|
The following tables present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
|
|
September 29, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
183
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
2,091
|
|
|
|
-
|
|
|
|
-
|
|
Cash surrender value - life insurance *
|
|
|
-
|
|
|
|
2,196
|
|
|
|
-
|
|
Total
|
|
$
|
2,574
|
|
|
$
|
2,196
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
86
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
296
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
2,083
|
|
|
|
-
|
|
|
|
-
|
|
Cash surrender value - life insurance *
|
|
|
-
|
|
|
|
2,193
|
|
|
|
-
|
|
Total
|
|
$
|
2,465
|
|
|
$
|
2,193
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* - As held in the Trust (as defined below).
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in a rabbi trust established under a retirement benefit arrangement with certain of our current and former officers (the “Trust”). Cash held in the Trust is invested through an overnight repurchase agreement the investments of which may include U.S. Treasury securities, such as corporate bonds or Treasury bills, and other agencies of the U.S. government. Such investments are valued using quoted market prices in active markets.
U.S. government obligations held in the Trust include U.S. Treasury Bonds. These bonds as well as the corporate bonds listed above are classified as Level 1 of the fair value hierarchy given their readily available quoted prices in active markets.
Cash surrender value - life insurance is classified as Level 2 in the fair value hierarchy. The value of each policy was determined by MassMutual Financial Group, an A-rated insurance company, which provides the value of these policies to the Company on a regular basis.
There were no transfers between the levels listed above during either of the reporting periods.
12
Unrealized gains or losses on investments held in the Trust are presented as a component of “Other, net” on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The assets of the Trust disclosed above are presented as a component of “Other assets” on the Condensed Consolidated Balance Sheets.
As of each of September 29, 2019 and December 30, 2018, the fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their carrying value due to their short-term nature. The carrying amounts of the long-term debt approximate fair value as interest rates and negotiated terms and conditions are consistent with current market rates because of the close proximity of recent refinancing transactions and the quotes obtained for potential financings to the dates of these unaudited Condensed Consolidated Financial Statements (Level 2).
There were no assets and liabilities measured at fair value on a nonrecurring basis during the quarters and nine-month periods ended September 29, 2019 and September 30, 2018.
Note 7 – Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a lease liability and ROU asset on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The new standard was effective for the Company on the first day of fiscal year 2019, December 31, 2018, and it elected the optional transition method to apply the standard as of the effective date. Consequently, financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before December 31, 2018. See Note 10 – Leases for additional discussion surrounding the adoption of Topic 842 as well as related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 was issued to update the methodology used to measure current expected credit losses (“CECL”). The update applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. ASU No. 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption. The effective date relative to smaller reporting companies is for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2016-13 to have an impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”). This update simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step quantitative goodwill impairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit, not to exceed the carrying value of the reporting unit goodwill. The option remains for an entity to perform a qualitative assessment of a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 requires prospective adoption and is effective commencing in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) (“ASU No. 2018-07”), in an effort to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. Under ASU No. 2018-07, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company adopted this guidance at the beginning of fiscal year 2019, and it did not have a significant impact on the Company’s unaudited Condensed Consolidated Financial Statements and related disclosures.
13
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”). This update eliminates, modifies and adds a number of disclosure requirements related to fair value measurements in connection with the FASB’s disclosure framework project, the objective of which is to improve the effectiveness of disclosures in the notes to financial statements. ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. While the Company continues to assess the potential impact of ASU No. 2018-13, it does not expect the adoption of this standard to have a significant impact on the notes to its unaudited Condensed Consolidated Financial Statements.
Note 8 – Related Party Transactions
On September 28, 2015, as part of the Spin-off from FNF, J. Alexander’s Holdings, LLC entered into a management consulting agreement (“Management Consulting Agreement”) with Black Knight, pursuant to which Black Knight provided corporate and strategic advisory services to J. Alexander’s Holdings, LLC. On November 30, 2018 (“Termination Date”), the Company terminated the Management Consulting Agreement by entering into the Termination Agreement.
Under the Management Consulting Agreement, J. Alexander’s Holdings, LLC issued Black Knight 1,500,024 non-voting Class B Units and was required to pay Black Knight an annual fee equal to 3% of the Company’s Adjusted EBITDA for each fiscal year during the term of the Management Consulting Agreement and to reimburse Black Knight for its direct out-of-pocket costs incurred for management services provided to J. Alexander’s Holdings, LLC. Under the Management Consulting Agreement, “Adjusted EBITDA” meant the Company’s net income before interest expense, income tax (expense) benefit, depreciation and amortization, and adding asset impairment charges and restaurant closing costs, loss on disposals of fixed assets, transaction and integration costs, non-cash compensation, loss from discontinued operations, gain on debt extinguishment, pre-opening costs and certain unusual items. As a result of the Termination Agreement, in the first quarter of 2019, the Company paid approximately $705 to Black Knight which represented the pro-rata portion of its consulting fees earned during 2018 through the Termination Date. Additionally, the early termination of the Management Consulting Agreement by J. Alexander’s Holdings, LLC required the cash payment of $4,560 to Black Knight as a termination fee which the Company paid on January 31, 2019 using cash on hand. Consulting fees associated with fiscal year 2017 of approximately $749 were paid during the first quarter of 2018. During the quarter and nine-month period ended September 30, 2018, expense for consulting fees of $139 and $587 was recorded relative to the Management Consulting Agreement. Such costs are presented as a component of “General and administrative expenses” on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Class B Units granted to Black Knight under the Management Consulting Agreement vested in equal installments on the first, second and third anniversaries of the October 6, 2015 grant date, and were measured at fair value at each reporting date through the date of vesting. This non-cash compensation expense totaled $1,240 and $3,094 during the quarter and nine-month period ended September 30, 2018, and is presented as a component of “General and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Under the terms of the Termination Agreement, Black Knight had 90 days from the Termination Date to exercise its right to convert the value of such units above the applicable hurdle rate to the Company’s common stock. Since Black Knight did not exercise its conversion rights within the 90-day period, the Class B Units were cancelled and forfeited for no consideration on February 28, 2019.
Note 9 – Revenue
On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the cumulative effect method applied to those contracts which were not completed as of the adoption date. The Company recorded a net increase to opening retained earnings of $34 as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact wholly related to the Company’s accounting for gift card breakage.
The following table presents the Company’s revenues disaggregated by revenue source for the periods presented:
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 29,
|
|
|
September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Restaurant
|
$
|
56,835
|
|
|
$
|
56,703
|
|
|
$
|
183,485
|
|
|
$
|
178,748
|
|
Gift card breakage
|
|
32
|
|
|
|
27
|
|
|
|
345
|
|
|
|
311
|
|
Net sales
|
$
|
56,867
|
|
|
$
|
56,730
|
|
|
$
|
183,830
|
|
|
$
|
179,059
|
|
14
The Company recognized revenue associated with gift cards redeemed by guests of $779 and $743 during the quarters ended September 29, 2019 and September 30, 2018, respectively, and $3,208 and $3,021 during the nine-month periods ended September 29, 2019 and September 30, 2018, respectively. Further, of the amounts that were redeemed during the nine-month periods ended September 29, 2019 and September 30, 2018, $2,197 and $2,047, respectively, were recorded within unearned revenue at the beginning of each the respective fiscal years. Unearned revenue increased by $607 and $600 during the quarters ended September 29, 2019 and September 30, 2018, respectively, and by $1,954 and $1,875 during the nine-month periods ended September 29, 2019 and September 30, 2018, respectively, as a result of gift cards sold.
Note 10 – Leases
Adoption of ASC Topic 842, Leases
As discussed in Note 7 – Recent Accounting Pronouncements, the Company adopted ASC Topic 842, Leases, as of the first day of fiscal year 2019, December 31, 2018, electing the optional transition method to apply the standard as of the effective date. Accordingly, financial information for periods prior to the first day of fiscal year 2019 has not been adjusted to reflect the effects of Topic 842, and the Company recorded a cumulative-effect adjustment to opening retained earnings for the impairment of an abandoned ROU asset at the effective date for a restaurant that was previously impaired and the remaining lease payments were accounted for under ASC Topic 420, Exit or Disposal Obligations. Additionally, the adoption of Topic 842 had a material impact on the Company’s assets and liabilities as a result of the recognition of operating lease ROU assets and lease liabilities on its Condensed Consolidated Balance Sheets. The adoption of Topic 842 did not have a material effect on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and Condensed Consolidated Statements of Cash Flows.
Topic 842 provided a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits the Company to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient that permits the Company to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are now considered leases under Topic 842. The Company also elected the practical expedient to account for lease and non-lease components as a single component for certain classes of underlying assets, specifically real property. Additionally, the Company elected a short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). The Company did not elect the use-of-hindsight practical expedient which would have permitted a reassessment of lease terms for existing leases.
As of the date of adoption, the Company was party to 30 separate operating leases for real estate on which it operates its restaurants and has its corporate office space. During the nine-month period ended September 29, 2019, the Company entered into two additional leases for new restaurant locations, and the associated commencement date for one of these leases was also during the first nine months of 2019. The Company also entered into one equipment lease during the first nine months of 2019.
15
The effects of the changes made to the Company’s Condensed Consolidated Balance Sheet as of December 31, 2018 for the adoption of Topic 842 were as follows:
|
|
December 30,
|
|
|
Adjustments Due to the Adoption
|
|
|
December 31,
|
|
|
|
2018
|
|
|
of Topic 842
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
5,557
|
|
|
$
|
(149
|
)
|
|
$
|
5,408
|
|
Right-of-use lease assets
|
|
|
-
|
|
|
|
70,666
|
|
|
|
70,666
|
|
Deferred income taxes
|
|
|
539
|
|
|
|
434
|
|
|
|
973
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities
|
|
|
-
|
|
|
|
3,707
|
|
|
|
3,707
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term lease liabilities
|
|
|
-
|
|
|
|
75,489
|
|
|
|
75,489
|
|
Other long-term liabilities
|
|
|
6,995
|
|
|
|
(6,988
|
)
|
|
|
7
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
17,528
|
|
|
|
(1,257
|
)
|
|
|
16,271
|
|
Significant Accounting Policy
The Company through its subsidiaries has land only, building only, and land and building leases for a number of its restaurants and its corporate office that are recorded as operating leases. The Company determines if an arrangement meets the definition of a lease at inception, at which time it also performs an analysis to determine whether the lease qualifies as operating or financing. Operating leases are included in operating lease ROU assets and operating lease current and long-term liabilities on the Company’s Condensed Consolidated Balance Sheets. Lease expense for operating leases is generally recognized on a straight-line basis over the lease term, and is included in other operating expenses (for restaurant properties) or general and administrative expense (for corporate office space) on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company presents both the change in ROU assets and lease liabilities as a single line item in the Company’s Condensed Consolidated Statement of Cash Flows as the change in “Lease right-of-use assets and liabilities.” The Company does not currently have any arrangements that are classified as financing leases.
Most of the Company’s leases have rent escalation clauses and some have rent holiday and contingent rent provisions. Terms for these leases are generally for 15 to 20 years and, in many cases, the leases provide for one or more five‑year renewal options. As stated, the rent expense under these leases is recognized on a straight‑line basis over an expected lease term, including cancelable option periods when it is reasonably assured that such option periods will be exercised because failure to do so would result in a significant economic penalty, and these periods are recognized as a part of the ROU asset and related lease liability. The Company begins recognizing rent expense on the date that it or its subsidiaries become legally obligated under the lease and takes possession of or is given control of the leased property. Rent expense incurred during the construction period for a leased restaurant location is included in pre‑opening expense. Contingent rent expense is generally based upon sales levels and is typically accrued when it is deemed probable that it will be payable. These costs are disclosed as variable lease costs. Any tenant improvement allowances received from landlords under operating leases are recorded as a reduction to the related ROU asset. The same lease term that is used to calculate the lease liabilities is also used for assessing leases for finance or operating lease accounting. Many of the Company’s leases require payments for property taxes, insurance, maintenance and certain other costs. The variable portion of these payments are not included as a component of the Company’s ROU assets and lease liabilities. Rather, variable payments, other than those dependent on an index or rate, are expensed as incurred and are disclosed as variable lease costs.
Certain of the Company’s leases include both lease (i.e. fixed payments including rent) and non-lease components (e.g., common-area maintenance, marketing, and other miscellaneous fixed costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for real estate leases. The Company is also a party to leases which have a non-cancelable lease term of less than one year with no option to purchase the underlying asset and, therefore, it has elected to exclude these short-term leases from its ROU assets and lease liabilities.
16
For our existing operating leases that commenced prior to the adoption of Topic 842, we made an accounting policy election to use the incremental borrowing rate for our leases considering the remaining lease term and remaining minimum rental payments during transition in establishing our lease liabilities. For new leases entered into after the adoption of Topic 842, we will use an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The right-of-use asset also includes any lease payments made on or before the commencement date of the lease, less any lease incentives received. As the rate implicit in the lease is not readily determinable in the Company’s leases, it uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rates used are estimated based on what the Company would be required to pay for a collateralized loan over a similar term. Additionally, based on the applicable lease terms and the current economic environment, the Company applies a portfolio approach for determining the incremental borrowing rate for its real estate leases.
Components of lease cost are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29,
|
|
|
September 29,
|
|
|
|
2019
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
2,265
|
|
|
$
|
6,724
|
|
Variable lease cost
|
|
|
724
|
|
|
|
1,859
|
|
Short-term lease cost
|
|
|
39
|
|
|
|
122
|
|
Total lease cost
|
|
$
|
3,028
|
|
|
$
|
8,705
|
|
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29,
|
|
|
September 29,
|
|
|
|
2019
|
|
|
2019
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
2,046
|
|
|
$
|
6,224
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
-
|
|
|
|
3,768
|
|
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows as of the period indicated:
|
|
September 29,
|
|
|
|
2019
|
|
Weighted-average remaining lease term
|
|
15.8 years
|
|
Weighted-average discount rate
|
|
|
6.01
|
%
|
17
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:
|
|
September 29,
|
|
|
|
2019
|
|
2019 (1)
|
|
$
|
2,121
|
|
2020
|
|
|
8,936
|
|
2021
|
|
|
9,142
|
|
2022
|
|
|
9,302
|
|
2023
|
|
|
9,327
|
|
2024 and thereafter
|
|
|
93,640
|
|
Total minimum lease payments
|
|
|
132,468
|
|
Less: Imputed interest (2)
|
|
|
51,351
|
|
Present value of lease liabilities
|
|
$
|
81,117
|
|
(1) Excluding the nine months ended September 29, 2019
|
|
|
|
|
(2) Amount necessary to reduce net minimum lease payments to present value calculated using our incremental borrowing rates, which are consistent with the lease terms at adoption date (for those leases in existence as of the adoption date of Topic 842) or lease inception (for those leases entered into after the adoption date).
|
|
As previously disclosed in the 2018 Annual Report and under the previous lease accounting standard, minimum lease payments under non-cancelable operating leases (including renewal options and those restaurants reported as discontinued operations) were expected to be as follows:
|
|
December 30,
|
|
|
|
2018
|
|
2019
|
|
$
|
7,800
|
|
2020
|
|
|
8,084
|
|
2021
|
|
|
7,832
|
|
2022
|
|
|
7,974
|
|
2023
|
|
|
8,006
|
|
2024 and thereafter
|
|
|
78,302
|
|
Total minimum lease payments
|
|
$
|
117,998
|
|
18