Item 8. Financial Statements and Supplementary Data
J. Alexander’s Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 3, 2021, December 29, 2019 and December 30, 2018
(Dollars in thousands except shares and per share amounts)
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 is a publicly-traded company, with its stock listed on the New York Stock Exchange under the symbol “JAX.”
The Company, through J. Alexander’s Holdings, LLC and its subsidiaries, owns and operates full service, upscale restaurants including J. Alexander’s, Redlands Grill, Overland Park Grill, Merus Grill and Stoney River Steakhouse and Grill (“Stoney River”). At January 3, 2021 and December 29, 2019, the Company operated 46 and 47 restaurants, respectively, 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.
Effects of COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due to the global spread of a new strain of coronavirus (“COVID-19”) and the related risks to the international community. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, and on March 13, 2020 the United States declared the pandemic a National Public Health Emergency. In response, many states and jurisdictions in which the Company operates restaurants issued stay-at-home orders and other measures, including the closure of all in-restaurant dining, aimed at slowing the spread of the virus beginning in March 2020. These measures resulted in the closure of the Company’s dining rooms beginning in mid-March 2020 and a shift to an off‑premise operations platform only until late April 2020 when certain states began to allow for partial reopening of dining rooms. Dining room capacity restrictions remain in place at varying degrees while a limited number of locations are operating at full capacity in accordance with their state’s or local government’s guidelines through the date of this report. As a result of the government‑mandated restrictions and related public concerns, the Company’s net sales, results of operations and cash flows were negatively impacted during fiscal year 2020 due to significant reductions in guest counts. The Company has taken measures to increase its off-premise sales during the COVID-19 pandemic, including implementing its online ordering platform, introducing curbside service, menu innovation which includes family-style meals and butcher-shop sales of cook-at-home, hand-cut steaks and whole loins, and increasing digital marketing and email campaigns to drive guest awareness. Further, the Company began implementing contactless payment in 2020 as well as utilizing paperless menus to enhance the safety of our guests and employees in the restaurant. Additionally, the Company has invested in pub and booth partitions to increase capacity while maintaining guest safety.
In addition to the decline in restaurant sales, the Company also incurred approximately $3,444 of costs directly related to the COVID-19 pandemic in fiscal 2020, which consists primarily of benefits and payments to furloughed restaurant employees for emergency sick leave, vacation and other sick leave benefits and related payroll taxes as well as inventory waste. Additionally, the Company continued to incur expenses related to the ongoing operations of the restaurants as well as monthly rent and occupancy‑related costs during the period that its restaurants were temporarily closed or operating on an off-premise basis only or with limited capacity. The Company has implemented measures to reduce its costs and limit its cash outflows during the COVID-19 pandemic, including temporary reductions in staffing levels and related furloughs of restaurant-level hourly employees, elimination of certain positions at the Company’s corporate office, deferral or cancellation of significant capital expenditure projects, engaging in negotiations with vendors and landlords regarding deferral or abatement of rental and other contractual obligations and the deferral of tax payments where allowed. The Company executed deferral and abatement agreements for certain of its locations with landlords during each of the last three quarters of 2020.
The disruption in operations and reduction in restaurant sales also led the Company to consider the impact of the COVID-19 pandemic on the recoverability of its assets, including property and equipment, right-of-use assets for operating leases, goodwill and intangible assets, and others. Such impairment analyses resulted in the Company recording impairment charges totaling $16,426 for the year ended January 3, 2021, which are discussed further in Notes 2(h) and 2(i) below. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that additional impairments could be identified in future periods, and such amounts could be material.
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To preserve financial flexibility, the Company drew down the remaining $17,000 of available capacity (at the time of the draw) under its revolving credit facility in March 2020. During April 2020, the Company also entered into deferral letter agreements with its lender to postpone principal and interest payments on its outstanding indebtedness for a period of 90 days and, in June 2020, an additional deferral letter was entered into to defer principal payments for an additional 90-day period. Additionally, the Company entered into a modification agreement in April 2020 to defer the maturity of, and interest payments under, one of its term loans to September 2021 (which was subsequently modified again in October 2020 as discussed below). In May 2020, the Company obtained a waiver letter from its lender that waived existing financial covenants and instituted new financial covenants. In June 2020, the Company entered into an amendment with its lender to increase the borrowing capacity under its revolving line of credit by an additional $15,000. In October 2020, the Company entered into an agreement with its lender which extended the maturity dates of certain of its outstanding loans along with other modifications including instituting new financial covenants as well as repaid $10,000 of the $17,000 borrowed in March 2020. See Note 10 – Debt for further discussion.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income tax provisions that are addressed in Note 14 – Income Taxes below. Additionally, the CARES Act provides for deferred payment of the employer portion of social security taxes through the end of calendar 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. As of the fiscal year ended January 3, 2021, the Company has deferred the payment of $3,593 of social security taxes, $1,796 of which is accrued within “Other long-term liabilities” (see Note 11 – Other Long-Term Liabilities) while the current portion of $1,796 is included in “Accrued expenses and other current liabilities” (see Note 9 – Accrued Expenses and Other Current Liabilities) in the Consolidated Balance Sheet. Further, the CARES Act provides an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes of up to $5 per employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10 of qualified wages per employee through the end of 2020. During fiscal year 2020, the Company determined that it was an eligible employer for purposes of the ERC and further determined that during the first three quarters of fiscal 2020 it had paid qualified wages of approximately $2,010 for which it intends to file amended payroll tax returns to claim as refunds. In fiscal 2020, based on the available accounting guidance, the Company recorded a $1,082 receivable which represents the amount determined to be probable of realization related to the ERC as a reduction to “Restaurant labor and related costs” on the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income and in “Accounts and other receivables” on the Company’s Consolidated Balance Sheet (See Note 2(e)) for the year ended January 3, 2021.
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. Given the uncertainty surrounding the global economy and governmental restrictions on the Company’s operations, the Company cannot reasonably predict when its restaurants will be able to return to normal dining room operations. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity and future results of operations, and therefore any prediction as to the ultimate material adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain. The Company does expect that its results of operations, cash flows and liquidity will be negatively affected by the pandemic during fiscal 2021.
Note 2 – Summary of Significant Accounting Policies
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a)
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Principles of Consolidation and Basis of Presentation
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The Consolidated Financial Statements are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and 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. It holds as its sole asset an equity interest in J. Alexander’s Holdings, LLC, and relies on J. Alexander’s Holdings, LLC to provide it with funds necessary to meet any financial obligations.
The Company utilizes a 52- or 53-week accounting period which ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks. Fiscal year 2020 included 53 weeks of operations with the fiscal fourth quarter including 14 weeks. Fiscal years 2019 and 2018 each included 52 weeks of operations.
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c)
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Discontinued Operations and Restaurant Closures
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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 $203, $236 and $459 losses from discontinued operations in fiscal years 2020, 2019 and 2018, respectively, consist solely of exit and disposal costs for this location.
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d)
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Cash and Cash Equivalents
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Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Cash also consists of payments due from third‑party credit card issuers for purchases made by guests using the issuers’ credit cards. The issuers typically remit payment within three to four days of a credit card transaction.
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e)
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Accounts and Other Receivables
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Accounts receivable are primarily related to amounts due from various taxing jurisdictions, third-party online gift card sellers
and expected workers’ compensation rebates and vendor rebates which have been earned but not yet received. Additionally,
as discussed in Note 1 – “Organization and Business” above, the Company recorded a receivable in fiscal 2020 related to the
ERC provided by the CARES Act. The Company also recorded taxes receivable which are reflected in this balance and
discussed in Note 14 – Income Taxes. Due to the nature of the entities involved, the nature of the receivables and its past
history with such receivables, the Company believes that an additional allowance against these recorded amounts is not
warranted.
Inventories are stated at the lower of cost or net realizable value, with cost being determined using an average cost method.
At the beginning of fiscal 2020, the Company implemented a new inventory management system. In connection with this implementation, the Company changed its method of accounting for inventory from the lower of cost (first-in, first-out) or net realizable value method utilized by its legacy system to the lower of cost or net realizable value method, with cost being determined using an average cost method, effective December 30, 2019 (the first day of the current fiscal year). The Company believes this change in accounting principle is preferable, as it will result in greater precision in the costing of inventories. In addition, the average cost method better aligns with the functionality of the new inventory management system. The Company determined that the effects of adopting the average cost method were not material to its Consolidated Financial Statements. Prior to the conversion to the new inventory management system, the Company was not able to determine the impact of the change to the average cost method. Therefore, it did not retroactively apply the change to periods prior to fiscal year 2020.
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g)
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Property and Equipment, Net
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The Company states property and equipment at cost less accumulated depreciation and amortization. Depreciation and amortization expense is calculated using the straight‑line method. The useful lives of assets are typically 30-40 years for buildings and land improvements and two-10 years for furniture, fixtures, and equipment. Leasehold improvements are amortized over the lesser of the useful life or the remaining lease term, generally inclusive of renewal periods. Gains or losses are recognized upon the disposal of property and equipment, and the asset and related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs and betterments that do not enhance the value of or increase the life of the assets are expensed as incurred. The Company capitalizes all direct external costs associated with obtaining the land, building, and equipment for each new restaurant, as well as construction period interest. All direct external costs associated with obtaining the dining room and kitchen equipment, signage, and other assets and equipment are also capitalized.
Certain direct and indirect costs are capitalized as building and leasehold improvement costs in conjunction with capital improvement projects at existing restaurants and acquiring and developing new restaurant sites. Such costs are amortized over the life of the related assets.
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h)
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Goodwill and Other Intangible Assets
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Goodwill recorded as of December 29, 2019 represented the excess of cost over fair value of net assets acquired in a previous acquisition of the Company’s predecessor in 2012. Intangible assets include trade names, deferred loan costs, purchased trademarks and liquor licenses at certain restaurants. Goodwill, trade names, trademarks and liquor licenses are not subject to
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amortization, but are tested for impairment annually as of the fiscal year‑end date, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the goodwill or indefinite‑lived intangible asset exceeds its fair value.
In light of the decline in the market price of the Company’s common stock, the impact of mandated dining room closures on financial results, the expected reduction in economic activity in the near term, and the general economic and market volatility, the Company determined that these factors constituted an interim triggering event as of the end of each of the Company’s quarters in fiscal 2020, and performed impairment analyses with regard to its indefinite-lived intangible assets, property and equipment (including its right-of-use assets for operating leases and goodwill. As a result, the Company recorded asset impairment charges totaling $16,426 in fiscal year 2020 related to its goodwill and property and equipment (See Note 2 (i) below).
The Company early adopted Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step quantitative goodwill impairment test. Impairment was measured at the amount by which the carrying value exceeded the fair value of the reporting unit, not to exceed the carrying value of the reporting unit goodwill. The quantitative goodwill impairment test was performed at the end of the first quarter utilizing a market approach which included observable market prices associated with the Company’s common stock price in determining a fair value for the Company and its reporting units. As a result of this test, the Company determined that the J. Alexander’s reporting unit’s carrying value exceeded its fair value to such an extent that the full impairment of goodwill in the first quarter of 2020 in the amount of $15,737 was appropriate. The effect of this conclusion is presented as a component of “Goodwill impairment charge” on the Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Company also performed a review of impairment for its other intangible assets at the end of each quarter in 2020, and it was determined that no impairment of these intangible assets existed in fiscal 2020. The same conclusion was reached as of December 29, 2019 and December 30, 2018 during the annual review for impairment in each of these years and, accordingly, no impairment losses were recorded.
Deferred loan costs are subject to amortization and are classified in the “Long-term debt, net of portion classified as current and deferred loan costs” line item on the Consolidated Balance Sheets. Deferred loan costs are amortized over the life of the related debt.
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i)
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Impairment of Long‑Lived Assets
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In accordance with Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment, long‑lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge may be recognized for the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group based upon the future highest and best use of the impaired asset or asset group. Fair value is determined by projected future discounted cash flows for each location or the estimated market value of the assets. The asset impairment charges are generally recorded in the Consolidated Statements of Operations and Comprehensive (Loss) Income in the financial statement line item “Asset impairment charges and restaurant closing costs,” but are also recorded in the line item “Loss from discontinued operations, net” when applicable. Assets to be disposed of are separately presented in the Consolidated Balance Sheets and reported at the lower of carrying amount or fair value less costs to sell and are no longer depreciated.
The Company recorded a long-lived asset impairment charge of $689 to state the assets at its Lyndhurst Grill location in Cleveland, Ohio, at their fair value as of the end of the first quarter, which is presented as “Long-lived asset impairment charges and restaurant closing costs” on the Consolidated Statements of Operations and Comprehensive (Loss) Income. During the second quarter of 2020, the Company made the decision to permanently close this location after a review of its projected and historical financial performance. This location was also required to be temporarily closed in mid‑March 2020 due to COVID‑19-related traffic limitations unique to that specific restaurant which further impacted operating results. The Company assessed its other restaurant locations for indicators of impairment at the end of each quarter in fiscal year 2020 and assessed recoverability of certain fixed assets as warranted. No additional impairment was identified during the year ended January 3, 2021.
No impairment charges were recorded for the years ended December 29, 2019 and December 30, 2018.
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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 right-of-use (“ROU”) assets and operating lease current and long-term liabilities on the Company’s 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 Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company presents both the change in ROU assets and lease liabilities as a single line item in the Company’s 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 take possession of or are 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 and lease liability. 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 is 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 combine 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.
For our existing operating leases that commenced prior to the adoption of ASC Topic 842, Leases, 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 ASC Topic 842, we 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.
In April 2020, the staff of the FASB issued a question-and-answer document that stated that entities may elect to account for lease concessions related to the effects of the COVID-19 pandemic as though the rights and obligations for those concessions existed as of the commencement of the contract rather than as a lease modification. Lessees may make the election for any lessor-provided lease concession related to the impact of the COVID-19 pandemic as long as the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. The Company has made such elections.
Restaurant sales are recognized at a point in time when food and service are provided to guests at one of the Company’s restaurants. Taxes assessed by a governmental authority that are imposed on the Company’s sales of its food and service and collected by the Company from the guest for remittance to such authorities, are excluded from net sales. Further, the Company excludes any discounts, such as management meals and employee meals, associated with each sale.
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Unearned revenue, as separately stated on the Company’s Consolidated Balance Sheets, represents the contract liability for gift cards, which have been sold but not redeemed. Upon redemption, when the guest presents a gift card as a form of payment for food and service provided at the restaurant, net sales are recorded and the contract liability is reduced by the amount of card value redeemed. The Company considers its performance obligations associated with gift cards sold to guests to be met when food and service have been provided to its guests, and a gift card is presented as a form of payment. The amount of gift card revenue that was previously deferred is recognized based on the selling price of the menu items at each restaurant.
Prior to the adoption of ASC Topic 606, Revenue from Contracts with Customers, the Company recorded gift card breakage when such cards were considered to be only remotely likely to be redeemed, and for which there was no legal obligation to remit balances under unclaimed property laws of the relevant jurisdictions. Management considered the probability of redemption of a gift card to be remote when it had been outstanding for 24 months. With the adoption of ASC Topic 606 as of January 1, 2018, the Company began analyzing gift card breakage based upon Company-specific historical redemption patterns, and gift card breakage is now recognized as revenue in proportion to guest redemptions. The Company’s gift cards continue to have no expiration date, and it does not deduct non-usage fees from outstanding gift card balances. In applying the guidance under this topic, management estimates the percentage of the value of gift cards sold that will go unused by the purchaser of such card, and for which there is no legal obligation to remit balances under unclaimed property laws of the relevant jurisdictions, which is a matter of judgement, and, as noted above, recognizes breakage revenue in proportion to actual gift card redemptions during the reporting period, at which time management believes the underlying performance obligations have been satisfied by the Company. Gift card breakage is recorded on a quarterly basis in conjunction with the Company’s preparation of its financial statements and related disclosures and is presented as a component of “Net sales” within the Consolidated Statements of Operations and Comprehensive (Loss) Income. Breakage of $422, $443 and $378 related to gift cards was recorded in fiscal years 2020, 2019 and 2018, respectively.
The Company’s net sales and net income have historically been subject to seasonal fluctuations. Net sales and operating income typically reach their highest levels during the fourth quarter of the fiscal year due to holiday business and the first quarter of the fiscal year due in part to the redemption of gift cards sold during the holiday season. The contract liability relative to gift cards and the recognition of revenue associated with such form of payment is impacted accordingly. The Company’s unearned revenue balance has historically decreased throughout the course of the fiscal year until the fourth quarter when an increase in the balance is typically experienced given the seasonality of gift card sales.
Vendor rebates are received from various nonalcoholic beverage suppliers and suppliers of food products and supplies. Rebates are recognized as a reduction to cost of sales in the period in which they are earned.
Costs of advertising are charged to expense at the time the costs are incurred. Advertising expense totaled $160, $156 and $154 during fiscal years 2020, 2019 and 2018, respectively.
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n)
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Transaction, Contested Proxy and Other Related Expenses
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In fiscal year 2018, the Company incurred transaction expenses totaling $5,648, a portion of which related to a terminated merger agreement with Ninety Nine Restaurant and Pub concept disclosed in previous annual reports. Additionally, the Company incurred transaction costs associated with the termination agreement (the “Termination Agreement”) between J. Alexander’s Holdings, LLC and Black Knight Advisory Services, LLC (“Black Knight”) effective November 30, 2018 which resulted in the termination of the management consulting agreement. Pursuant to the Termination Agreement, the termination payment of $4,560, along with other legal and professional fees, is included in transaction expenses for fiscal year 2018.
For fiscal year 2019, transaction, contested proxy and other related expenses totaled $1,178 and 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.
Transaction costs totaled $645 for fiscal year 2020 and included legal, other professional and consulting fees related to the ongoing evaluation of strategic alternatives. During the first quarter of 2020, the Company announced that given the uncertainties in the business community, the restaurant industry and the financial markets as a result of the COVID-19
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pandemic, the ongoing review of strategic alternatives by the Company’s Board of Directors (the “Board”) was not expected to be completed until the uncertainties are resolved.
Income taxes are accounted for using the asset and liability method, whereby deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and for operating loss and tax credit carryforwards. The deferred taxes generated within the J. Alexander’s Holdings, LLC partnership are accounted for using the “outside basis” approach, and the deferred taxes outside of the partnership are accounted for using the “inside basis” approach. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized.
The benefits of uncertain tax positions are recognized in the Consolidated Financial Statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, these probabilities are reassessed and any appropriate changes are recorded in the Consolidated Financial Statements. Uncertain tax positions are accounted for by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the Consolidated Financial Statements. This determination requires the use of judgment in assessing the timing and amounts of deductible and taxable items. Tax positions that meet the more likely than not recognition threshold are recognized and measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties accrued related to unrecognized tax benefits or income tax settlements are recognized as components of income tax expense.
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p)
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Concentration of Credit Risk
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Financial instruments that are potentially exposed to a concentration of credit risk are cash and cash equivalents and accounts receivable. Operating cash balances are maintained in noninterest‑bearing transaction accounts, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250. Further, a certain portion of the assets held in a rabbi trust established under a retirement benefit arrangement with certain of the Company’s current and former officers (the “Trust”) consists of cash and cash equivalents. The Company places cash with high‑credit‑quality financial institutions, and at times, such cash may be in excess of the federally insured limit. However, there have been no losses experienced related to these balances, and the credit risk is believed to be minimal. Also, the Company believes that its risk related to cash equivalents from third‑party credit card issuers for purchases made by guests using the issuers’ credit cards is not significant due to the number of banks involved and the fact that payment is typically received within three to four days of a credit card transaction. Therefore, the Company does not believe it has significant risk related to its cash and cash equivalents accounts. Another portion of the assets held in the Trust and the 409a Trust (each defined below) consist of U.S. Treasury bonds as well as a small number of corporate bonds with ratings no lower than BBB. The Company believes the credit risk associated with such bonds to be minimal given the historical stability of the U.S. government and the investment grade bond ratings relative to the corporate issuers. Concentrations of credit risk with respect to accounts receivable are related principally to receivables from governmental agencies related to refunds of franchise and income taxes and, in 2020, the ERC under the CARES Act. The Company does not believe it has significant risk related to accounts receivable due to the nature of the entities involved.
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 Consolidated Financial Statements and the reported amounts of net sales and expenses during the periods presented to prepare these Consolidated 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.
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As mentioned in Note 2 (k), revenues are presented net of sales taxes. The obligation for sales taxes is included in accrued expenses and other current liabilities until the taxes are remitted to the appropriate taxing authorities.
Pre‑opening expenses are accounted for by expensing such costs as they are incurred.
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t)
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Comprehensive (Loss) Income
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Total comprehensive (loss) income consists solely of net income or net loss for all periods presented. Therefore, a separate statement of comprehensive (loss) income is not included in the accompanying Consolidated Financial Statements.
The Company through its subsidiaries owns and operates full‑service, upscale restaurants under various concepts exclusively in the United States that have similar economic characteristics, products and services, class of customer and distribution methods. The Company believes it meets the criteria for aggregating its operating segments into a single reportable segment.
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v)
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Non-controlling Interests
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Non-controlling interests on the Consolidated Balance Sheets represents the portion of the Company’s net assets attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders. As of January 3, 2021 and December 29, 2019, the non-controlling interest presented on the Consolidated Balance Sheets is $1,558. On February 28, 2019, in conjunction with the Termination Agreement with 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 was reclassified to additional paid-in capital in fiscal year 2019, and as of January 3, 2021 and December 29, 2019, non-controlling interests consist solely of the non-cash compensation expense relative to the Class B Units held by management. The Hypothetical Liquidation of Book Value method was used as of January 3, 2021, December 29, 2019 and December 30, 2018 to determine allocations of non-controlling interests consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to that calculation, no allocation of net income was made to non-controlling interests for fiscal years 2020, 2019 or 2018, respectively.
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w)
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(Loss) Earnings per Share
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Basic (loss) earnings per share of common stock is computed by dividing net (loss) income by the weighted average number of shares outstanding for the reporting period. Diluted (loss) earnings per share of common stock is computed similarly to basic (loss) earnings 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. In periods of net loss, no potential common shares are included in the diluted shares outstanding as the effect is anti-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 included in the denominator of the diluted earnings 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 – (Loss) Earnings per Share for the basic and diluted (loss) earnings per share calculations and additional discussion.
x)Share Repurchase Program
On November 1, 2018, the Company’s Board 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 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.
65
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 fiscal year 2020, 2019, or 2018.
|
y)
|
Recently Issued Accounting Standards
|
In June 2016, the Financial Accounting Standards Board (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 a material impact on its Consolidated Financial Statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740; amending the interim-period accounting for enacted changes in tax law; and amending the requirements related to the accounting for “hybrid” tax regimes. This standard is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the potential impact of ASU No. 2019-12 on its Consolidated Financial Statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU No. 2020-04”). This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU No. 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. An entity may elect to apply the amendments for contract modifications by the impacted ASC topic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued through December 31, 2022. Once elected for an ASC topic, the amendments in ASU No. 2020-04 must be applied prospectively for all eligible contract modifications for that ASC topic. The Company has not adopted and continues to assess the potential impact of ASU No. 2020-04 on its Consolidated Financial Statements and related disclosures.
66
Note 3 – (Loss) Earnings per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
|
Year Ended
|
|
(Dollars and shares in thousands, except per share amounts)
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2021
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(22,268
|
)
|
|
$
|
9,053
|
|
|
$
|
4,458
|
|
Loss from discontinued operations, net
|
|
|
(203
|
)
|
|
|
(236
|
)
|
|
|
(459
|
)
|
Net (loss) income
|
|
$
|
(22,471
|
)
|
|
$
|
8,817
|
|
|
$
|
3,999
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator for basic (loss) earnings per share)
|
|
|
14,720
|
|
|
|
14,695
|
|
|
|
14,695
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
46
|
|
|
|
168
|
|
Adjusted weighted average shares and assumed conversions
(denominator for diluted (loss) earnings per share)
|
|
|
14,720
|
|
|
|
14,741
|
|
|
|
14,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(1.51
|
)
|
|
$
|
0.62
|
|
|
$
|
0.30
|
|
Loss from discontinued operations, net
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
Basic (loss) earnings per share
|
|
$
|
(1.53
|
)
|
|
$
|
0.60
|
|
|
$
|
0.27
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(1.51
|
)
|
|
$
|
0.61
|
|
|
$
|
0.30
|
|
Loss from discontinued operations, net
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(1.53
|
)
|
|
$
|
0.60
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Per share amounts may not sum due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share of common stock is computed by dividing net (loss) income by the weighted average number of shares outstanding for the reporting period. Diluted (loss) earnings 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. The Company incurred a net loss for the year ended January 3, 2021, and therefore, diluted shares outstanding equaled basic shares outstanding.
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 were considered to be dilutive for one quarter within fiscal year 2018, and the impact on the diluted earnings per share calculation was additional shares of 3,719 for the year ended December 30, 2018. Conversely, these Class B Units were considered to be anti-dilutive for the year ended December 29, 2019 and, therefore, are excluded from the diluted earnings per share calculation in that year.
The previously outstanding Black Knight profits interest Class B Units were considered to be dilutive for certain quarterly periods within fiscal years 2018, and the impact on the diluted earnings per share calculation was additional shares of 130,113 for the year ended December 30, 2018. See Note 19 – Related Party Transactions for discussion pertaining to the forfeiture and cancellation of these Class B Units during fiscal year 2019.
The number of additional shares of common stock related to stock option awards is calculated using the treasury method, if dilutive. There were 1,739,250 stock option awards outstanding as of January 3, 2021. As of both December 29, 2019 and December 30, 2018, 1,495,750 stock option awards were outstanding. A portion of the stock option awards outstanding as of January 3, 2021 include awards to purchase 246,000 shares of common stock at an exercise price of $5.00 issued on August 7, 2020. The dilutive impact of the awards outstanding as of December 29, 2019 and December 30, 2018 on the number of weighted average shares in the diluted earnings per share calculation was 42,948 and 33,811, respectively.
As of January 3, 2021 and December 29, 2019, there were 261,003 and 264,000 restricted share awards outstanding, respectively, which were subject to only a service condition. Restricted share awards subject to only a service condition are not regarded as
67
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. The restricted share awards outstanding as of January 3, 2021 include 63,000 awards which were granted by the Company to members of the Board on August 7, 2020 at $4.43, the Company’s stock price on the date of grant. During fiscal 2020, 65,997 restricted share awards vested, and such vested shares, net of shares withheld for taxes, are included in weighted average shares outstanding for basic loss per share calculation purposes for the year ended January 3, 2021. The 264,000 unvested restricted share awards outstanding as of December 29, 2019 were considered dilutive for the 2019 fiscal year and the impact on the number of weighted average shares in the diluted earnings per share calculation was 3,427.
As of January 3, 2021 and December 29, 2019, there were 52,500 performance share awards outstanding. 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 performance share 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 such awards had not been met at either January 3, 2021 and December 29, 2019, and, therefore, the portion of the awards that had satisfied the applicable service condition at each of these reporting dates were excluded from the weighted average shares outstanding for basic (loss) earnings per share calculations.
Note 4 – Fair Value Measurements
As of January 3, 2021 and December 29, 2019, 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 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 to the dates of these Consolidated Financial Statements (Level 2).
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.
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the first quarter of fiscal year 2020, primarily due to the impacts of the COVID-19 pandemic, the Company determined that a triggering event had occurred requiring an impairment evaluation of its long-lived assets, indefinite‑lived intangible assets and goodwill. As a result of these analyses, the Company recorded a $689 impairment charge related to the long-lived assets at one restaurant location that management determined would be permanently closed (i.e., Lyndhurst Grill in Cleveland, Ohio) and a $15,737 impairment charge related to the Company’s recorded goodwill. The impairment charges were measured based on the amounts by which the carrying values of the assets exceeded their relative fair values. No impairment was recorded for indefinite‑lived intangible assets as their fair values were determined to substantially exceed their carrying values. Fair values for goodwill and long-lived assets that were impaired during fiscal year 2020 were estimated utilizing a market approach, and fair value estimates for indefinite-lived intangibles were determined based on an income approach. Fair value estimates utilized market participant assumptions reflecting all available information as of the impairment date. The fair value of goodwill was $0 (Level 3), and the Lyndhurst Grill location was sold during the third quarter of 2020 and therefore has no remaining value on the Company’s Consolidated Balance Sheet as of January 3, 2021. There were no non-financial assets measured at fair value on a non‑recurring basis as of January 3, 2021 or December 29, 2019.
68
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
|
|
January 3, 2021
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
81
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
276
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
2,241
|
|
|
|
-
|
|
|
|
-
|
|
Mutual and money market funds **
|
|
|
1,222
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,820
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
71
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
2,195
|
|
|
|
-
|
|
|
|
-
|
|
Mutual and money market funds **
|
|
|
833
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,399
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* - As held in the Trust (as defined below).
|
|
|
|
|
|
|
|
|
|
|
|
|
** - As held in the 409a Trust (as defined below).
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in 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 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 considered to be trading securities and are classified as Level 1 of the fair value hierarchy given their readily available quoted prices in active markets.
At January 3, 2021 and December 29, 2019, the Company held investments in mutual and money market funds classified as trading securities that were also held in a rabbi trust as of January 3, 2021 (the “409a Trust”) to support its future obligations to participants of its nonqualified deferred compensation plan, which are carried at fair value based on quoted market prices in active markets for identical assets (Level 1).
At January 3, 2021 and December 28, 2019, the Company held life insurance policies in the Trust that are recorded at cash surrender value. 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.
Unrealized gains or losses on investments held in either the Trust or the 409a Trust are presented as a component of “Other, net” on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The assets of both the Trust and the 409a Trust disclosed above are presented as a component of “Other assets” on the Consolidated Balance Sheets.
69
Note 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Prepaid insurance
|
|
$
|
1,534
|
|
|
$
|
1,422
|
|
Prepaid rent
|
|
|
227
|
|
|
|
1,081
|
|
Payroll taxes
|
|
|
-
|
|
|
|
1,183
|
|
Other
|
|
|
344
|
|
|
|
473
|
|
Prepaid expenses and other current assets
|
|
$
|
2,105
|
|
|
$
|
4,159
|
|
Note 6 – Other Assets
Other assets consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Cash, cash equivalents and securities held in the Trust
|
|
$
|
2,598
|
|
|
$
|
2,566
|
|
Cash surrender value of life insurance
|
|
|
2,329
|
|
|
|
2,253
|
|
Investments in trading securities
|
|
|
1,222
|
|
|
|
833
|
|
Other
|
|
|
46
|
|
|
|
46
|
|
Other assets
|
|
$
|
6,195
|
|
|
$
|
5,698
|
|
Note 7 – Property and Equipment
Property and equipment, at cost, less accumulated depreciation and amortization, consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Land
|
|
$
|
19,167
|
|
|
$
|
20,204
|
|
Buildings
|
|
|
31,564
|
|
|
|
32,785
|
|
Leasehold improvements
|
|
|
78,984
|
|
|
|
78,047
|
|
Restaurant and other equipment
|
|
|
42,026
|
|
|
|
41,504
|
|
Construction in progress
|
|
|
5,774
|
|
|
|
1,730
|
|
|
|
|
177,515
|
|
|
|
174,270
|
|
Less accumulated depreciation and amortization
|
|
|
(75,327
|
)
|
|
|
(64,967
|
)
|
Property and equipment, net
|
|
$
|
102,188
|
|
|
$
|
109,303
|
|
For fiscal years 2020, 2019 and 2018, depreciation expense from continuing operations related to restaurant and corporate office property and equipment was $12,290, $12,123 and $11,157, respectively. The loss on disposition of assets from continuing operations included in the “Other operating expenses” line item of the Statements of Operations and Comprehensive (Loss) Income, primarily related to the refreshing of assets through store remodels, was $68, $135 and $202 for fiscal years 2020, 2019 and 2018, respectively.
Note 8 – Goodwill and Indefinite‑Lived Intangible Assets
Goodwill and indefinite-lived intangible assets consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Tradename
|
|
$
|
25,069
|
|
|
$
|
25,069
|
|
Goodwill
|
|
|
-
|
|
|
|
15,737
|
|
Liquor licenses
|
|
|
579
|
|
|
|
579
|
|
Intangible assets
|
|
$
|
25,648
|
|
|
$
|
41,385
|
|
70
Note 9 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Taxes, other than income taxes
|
|
$
|
3,338
|
|
|
$
|
4,447
|
|
Salaries, wages, vacation, and incentive compensation
|
|
|
2,433
|
|
|
|
3,009
|
|
Current portion of deferred employer FICA tax
|
|
|
1,796
|
|
|
|
-
|
|
Transaction, contested proxy and other related expenses
|
|
|
67
|
|
|
|
412
|
|
Accrued audit and accounting fees
|
|
|
481
|
|
|
|
240
|
|
Other
|
|
|
1,307
|
|
|
|
1,281
|
|
Accrued expenses and other current liabilities
|
|
$
|
9,422
|
|
|
$
|
9,389
|
|
Note 10 – Debt
Current Loan Agreement
The Company is party to the Fourth Amended and Restated Loan Agreement (the “Fourth Loan Agreement”) with Pinnacle Bank, dated October 28, 2020. The Fourth Loan Agreement amended and restated the Company’s Third Amended and Restated Loan Agreement (the “Third Loan Agreement”) entered into on June 5, 2020, and the Third Loan Agreement amended and restated in its entirety the Company’s Second Amended and Restated Loan Agreement (the “Second Loan Agreement”), dated May 20, 2015. The borrower under the Fourth Loan Agreement is J. Alexander’s, LLC, and it is guaranteed by J. Alexander’s Holdings, LLC and all of its significant subsidiaries. The indebtedness outstanding under this Fourth Loan Agreement is secured by liens on certain personal property of the Company and its subsidiaries, subsidiary guarantees, and a mortgage lien on certain real property. The Fourth Loan Agreement, among other things, permits payments of tax dividends to members, restricts liens and encumbrances, restricts dividends, and contains certain other provisions customarily included in such agreements. The Fourth Loan Agreement consists of the following:
|
•
|
A $16,000 revolving line of credit (“Revolving Line of Credit”) that matures on January 1, 2023;
|
|
•
|
A $4,028 term loan (“Mortgage Loan”) that matures on January 1, 2023;
|
|
•
|
A $20,000 development line of credit (“Development Line of Credit”) that matures on January 1, 2023; and
|
|
•
|
A $556 term loan (“Term Loan”) which matured on December 10, 2020.
|
The balances of each of these notes as of January 3, 2021 and December 29, 2019 is set forth below:
|
|
January 3,
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2021
|
|
|
2019
|
|
|
2019
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Current
|
|
|
Long-term
|
|
Mortgage Loan
|
|
$
|
1,667
|
|
|
$
|
2,083
|
|
|
$
|
1,667
|
|
|
$
|
2,917
|
|
Term Loan
|
|
|
-
|
|
|
|
-
|
|
|
|
1,389
|
|
|
|
-
|
|
Development Line of Credit
|
|
|
-
|
|
|
|
10,000
|
|
|
|
4,000
|
|
|
|
-
|
|
Revolving Line of Credit
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
Less: Net deferred loan costs
|
|
|
-
|
|
|
|
(337
|
)
|
|
|
-
|
|
|
|
(72
|
)
|
Total debt
|
|
$
|
1,667
|
|
|
$
|
12,746
|
|
|
$
|
7,056
|
|
|
$
|
2,845
|
|
Interest Rates
Prior to the amendments discussed above, at December 29, 2019, all of the notes under the Second Loan Agreement bore interest at 30-day LIBOR plus a sliding interest rate scale determined by the maximum adjusted debt to EBITDAR ratio. For the year ended December 29, 2019, the interest rate was set at 3.57% for the Second Loan Agreement, which is 30-day LIBOR plus 1.85%. Additionally, the non-use fee payable quarterly on the Development Line of Credit and Revolving Line of Credit was based on a sliding rate determined by a maximum adjusted debt to EBITDAR ratio which equaled 0.20% as of December 29, 2019.
The Third Loan Agreement amended the interest rate with respect to only the Revolving Line of Credit, and under the Third Loan Agreement any borrowings under that note bore interest at a rate of 30-day LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, while the Company’s other notes continued to bear interest based on the same sliding scale methodology as under the Second Loan Agreement. The Fourth Loan Agreement made the same rates apply to each of the Company’s notes and removed the maximum
71
adjusted debt to EBITDAR ratio financial covenant which previously determined interest rates. Under the Fourth Loan Agreement, each of the Company’s notes bear interest at a rate of 30-day LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, and was set at 4.0% as of January 3, 2021.
COVID-19 Response and Loan Modifications and Amendments
During the first quarter of 2020, the Company announced it drew down the remaining $17,000 of available capacity (at the time of the draw) under the Development Line of Credit and the Revolving Line of Credit (the “Credit Draw”). The Credit Draw was undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of the disruption and uncertainty resulting from the COVID-19 pandemic. Following the Credit Draw, debt outstanding under the Development Line of Credit and the Revolving Line of Credit totaled $21,000. In October 2020, the Company repaid $10,000 of the $20,000 outstanding Development Line of Credit balance.
On April 15, 2020, the Company entered into a modification of the Second Loan Agreement impacting the Term Loan, which deferred the two remaining principal payments totaling $556 until the Term Loan’s new maturity date which was modified to be September 3, 2021. As noted below, the Fourth Loan Agreement further modified the maturity date of the Term Loan to December 10, 2020. With respect to interest payments in the interim, the Term Loan was modified to defer such payments until July 3, 2020 at which point monthly interest payments resumed and continued through its maturity date of December 10, 2020. Similar to the Term Loan, the Company also negotiated for the deferral of principal and interest payments related to the Mortgage Loan and executed deferral letters in both April 2020 and June 2020 related to such deferrals. The principal payments otherwise due in April through September 2020 totaling $834 will now be payable when the loan matures on January 1, 2023 and interest payments resumed on July 3, 2020. The Company also reached an agreement with its lender in April 2020 to defer interest payments on its Development Line of Credit and Revolving Line of Credit for the months of April, May and June 2020, and interest payments resumed on July 3, 2020.
On June 5, 2020, the Company entered into the Third Loan Agreement with Pinnacle Bank which amended its Revolving Line of Credit to expand its capacity from $1,000 to a total of $16,000 by adding an accordion feature for the additional $15,000, with the additional capacity available for general corporate purposes, including working capital and letters of credit. This amendment also required the Company to pledge five previously unencumbered fee-owned properties as collateral to the lender. The additional capacity is available for borrowing by the Company in amounts up to and including $5,000 per fiscal month beginning in the eighth fiscal month of 2020, with any amounts not borrowed during any particular period to be available for borrowing in subsequent periods. Any advances on the expanded Revolving Line of Credit are contingent on the Company achieving certain levels of revenue on a trailing three-fiscal-month basis. The Third Loan Agreement also modified the interest rate with respect to the Revolving Line of Credit as discussed above.
Additionally, the Third Loan Agreement included certain terms agreed upon in a May 2020 waiver, which waived financial covenant compliance for then existing financial covenants under the Second Loan Agreement beginning May 7, 2020 through the period ending July 4, 2021, and implemented two new financial covenants. These financial covenants are now incorporated in the Fourth Loan Agreement, which also extended the Company’s obligation to maintain these financial covenants through the new maturity date at the end of fiscal 2022. The details of the new financial covenants are detailed below.
The Company entered into the Fourth Loan Agreement with Pinnacle Bank on October 28, 2020, which extended the maturity dates of the Revolving Line of Credit, the Development Line of Credit, and the Mortgage Loan to January 1, 2023 and modified the maturity date of the Term Loan to December 10, 2020. The Fourth Loan Agreement also modified interest rates for the Mortgage Loan, the Term Loan and the Development Line of Credit to align such rates with the interest rate for the Revolving Line of Credit as discussed above. Lastly, as discussed below, the Fourth Loan Agreement modified loan covenants as detailed below.
Financial Covenants
The Fourth Loan Agreement incorporates the financial covenants previously in effect under the Third Loan Agreement and adds a fixed charge coverage ratio covenant (originally in the Second Loan Agreement with our lender). Further, a previously applicable financial covenant referred to as the maximum adjusted debt to EBITDAR ratio in the Company’s previous filings was eliminated in the Fourth Loan Agreement as mentioned above. The financial covenants under the Fourth Loan Agreement require (i) minimum revenue of (a) at least $99,800 for the Company’s fiscal year ended January 3, 2021, (b) at least $118,400 on a four quarter trailing basis by April 4, 2021, and (c) at least $166,800 on a four quarter trailing basis by July 4, 2021 through the maturity date, and (ii) a maximum adjusted debt to tangible net worth ratio of 0.80 or less, measured quarterly beginning September 27, 2020, and (iii) a fixed coverage charge of not less than 1.00 to 1.00 for the period commencing July 5, 2021 through January 2, 2022, and not less than 1.05 to 1.00 beginning on January 3, 2022 through January 1, 2023, or the maturity date. The fixed charge coverage ratio is defined in the Fourth Loan Agreement as the ratio of (a) the sum of net (loss) income for the applicable period (excluding the effect on such period of any extraordinary or nonrecurring gains or losses, including any asset impairment charges, restaurant closing expenses, changes in
72
valuation allowance for deferred tax assets, and non-cash deferred income tax benefits and expenses and up to $1,000 (in the aggregate for the remaining term of the loans) in uninsured losses) plus depreciation and amortization plus interest expense plus rent payments plus non-cash share-based compensation expense plus other non-cash expenses or charges plus expenses associated with a public offering, spin-off, strategic evaluation, or acquisition/merger process regardless of whether such events occur or are delayed minus the greater of either actual store maintenance capital expenditures (excluding major remodeling or image enhancements) or the total number of stores in operation for at least 18 months multiplied by $40 to (b) the sum of interest expense during such period plus rent payments made during such period plus payments of long-term debt and finance lease obligations made during such period, all determined in accordance with U.S. GAAP. Additionally, the Fourth Loan Agreement specifically states that for purposes of the financial covenant calculations, operating leases are not considered indebtedness.
If an event of default shall occur and be continuing under the Fourth Loan Agreement, the commitment under the Fourth Loan Agreement may be terminated and any principal amount outstanding, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable. As discussed above, J. Alexander’s, LLC received a waiver of the then existing financial covenants during certain reporting periods in 2020, and it was in compliance with all applicable financial covenants during each of the non-waived reporting periods during fiscal 2020.
Paycheck Protection Program
On April 10, 2020 and April 15, 2020, respectively, J. Alexander’s, LLC and Stoney River Management Company, LLC each an indirect subsidiary of the Company, were each granted loans from Pinnacle Bank in the aggregate amounts of $10,000 and $5,100 pursuant to the Paycheck Protection Program under the CARES Act. The Company believed its subsidiary operating companies were eligible for the loans in accordance with the special eligibility provisions for larger companies under provisions included in the CARES Act and the applicable implementing guidance issued by the U.S. Small Business Administration under the Paycheck Protection Program that was available at the time loan applications were submitted. The loans had been obtained to support the goal in the legislation of providing financial assistance to restaurant-level employees, including approximately 3,400 furloughed hourly employees that were not assisting with the Company’s carry-out programs at the time, and to restore the Company’s workforce as quickly as possible once dine-in operations could be safely resumed in accordance with applicable state and local government guidelines. However, as a result of additional guidance issued by the United States Treasury Department and the U.S. Small Business Administration on April 23, 2020, the Company repaid both the $10,000 and $5,100 loans in full on April 29, 2020.
Other
Deferred loan costs are $1,040 and $508, net of accumulated amortization expense of $703 and $436 at January 3, 2021 and December 29, 2019, respectively. Deferred loan costs are being amortized to interest expense over the life of the related debt. For the next five fiscal years, scheduled amortization of deferred loan costs is as follows: 2021 – $169; 2022 - $168; and 2023 and thereafter – $0.
At January 3, 2021, the amounts outstanding under the Development Line of Credit and Revolving Line of Credit were $10,000 and $1,000, respectively, and a total of $25,000 was available to us for borrowing under these lines of credit on this date. At January 3, 2021, the Fourth Loan Agreement was secured by the real estate, equipment and other personal property of 17 restaurant locations with an aggregate net book value of $38,379.
The aggregate maturities of long‑term debt for the five fiscal years succeeding January 3, 2021 are as follows: 2021 – $1,667; 2022 – $13,083; 2023 and thereafter – $0.
Note 11 - Other Long‑Term Liabilities
Other long‑term liabilities consisted of the following:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Noncurrent portion of deferred employer FICA tax
|
|
$
|
1,796
|
|
|
$
|
-
|
|
Uncertain tax positions
|
|
|
14
|
|
|
|
9
|
|
Other
|
|
|
92
|
|
|
|
129
|
|
Other long-term liabilities
|
|
$
|
1,902
|
|
|
$
|
138
|
|
Note 12 – Revenue
On January 1, 2018, the Company adopted ASC Topic 606 using the cumulative effect method applied to those contracts which were not completed as of January 1, 2018. The Company recorded a net increase to opening retained earnings of $34 as of January 1, 2018
73
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 net sales disaggregated by source for the periods presented:
|
Year Ended
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
2021
|
|
|
2019
|
|
|
2018
|
|
Restaurant
|
$
|
182,951
|
|
|
$
|
246,826
|
|
|
$
|
241,886
|
|
Gift card breakage
|
|
422
|
|
|
|
443
|
|
|
|
378
|
|
Net sales
|
$
|
183,373
|
|
|
$
|
247,269
|
|
|
$
|
242,264
|
|
The Company recognized revenue associated with gift cards redeemed by guests during fiscal years 2020, 2019 and 2018 of $3,242, $4,115 and $4,011, respectively. Further, of the amounts that were redeemed during fiscal years 2020, 2019 and 2018, $2,069, $2,464 and $2,396 were recorded within unearned revenue at the beginning of each respective fiscal year. Unearned revenue increased by $3,314 and $4,723 as a result of gift cards sold during the fiscal years 2020 and 2019, respectively.
Note 13 - Leases
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, 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, as shown in the Consolidated Statement of Shareholders’ Equity. 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 Consolidated Balance Sheets. The adoption of Topic 842 did not have a material effect on the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income and Consolidated Statements of Cash Flows.
As of January 3, 2021, the Company is party to 30 separate operating leases for real estate on which it currently operates its restaurants and has its corporate office space and remains a party to one operating lease for a closed location. Additionally, during fiscal year 2020, the Company took possession of the new restaurant location in San Antonio, Texas, and the Redlands Grill location is slated to open in March 2021. Further, the Company entered into a lease for a new restaurant location in Madison, Alabama, which it anticipates will open during the fourth quarter of 2021 but for which it has not yet taken possession. The commencement date of the Madison, Alabama, location has been delayed from the previously anticipated date due to the Company’s decision to limit capital expenditures in response to the COVID-19 pandemic. Each of the leases for the two new locations include a lease term, including option periods, of 30 years. The Company is also party to one equipment operating lease.
The Company modified certain of its leases during fiscal year 2020 for matters unrelated to the COVID-19 pandemic and updated the ROU assets, lease liabilities and related incremental borrowing rates as required.
During fiscal year 2020, the Company was granted COVID-19 related rent concessions for 16 of its restaurant locations and for its corporate office. Under these landlord agreements, certain rent payments will be deferred for various periods, generally providing for 50% rent deferral ranging between three to six months. Certain other locations received rent abatements ranging from 50% to the full amount of the original lease amount for a period of three to seven months. The Company has elected to account for lease concessions resulting directly from COVID-19 as though the enforceable rights and obligations to the concessions existed in the respective agreements at lease inception and will not account for the concessions as lease modifications, unless the concession results in a substantial increase in the Company’s obligations, taking into consideration the guidance issued by the FASB in its Staff question-and-answer document regarding rent concessions related to the effects of the COVID-19 pandemic. Of the 17 rent concessions, 15 agreements qualified for this accounting election, and the remaining two agreements were treated as lease modifications due to a significant extension to the lease term resulting in a substantial increase in total lease payments associated with each lease. The Company’s ROU assets and lease liabilities have been remeasured for lease concessions received to take into consideration the impact of the two lease modifications including adjustment for their respective incremental borrowing rates as well as the timing of the aforementioned abatements and deferrals, the impact of which is presented in the information below.
74
Components of lease cost are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
9,311
|
|
|
$
|
8,930
|
|
Variable lease cost
|
|
|
2,558
|
|
|
|
2,438
|
|
Short-term lease cost
|
|
|
162
|
|
|
|
167
|
|
Total lease cost
|
|
$
|
12,031
|
|
|
$
|
11,535
|
|
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Operating cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
7,885
|
|
|
$
|
8,330
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
4,468
|
|
|
|
3,752
|
|
Weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows as of the period indicated:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Weighted-average remaining lease term
|
|
15.9 years
|
|
|
15.7 years
|
|
Weighted-average discount rate
|
|
|
5.84
|
%
|
|
|
6.01
|
%
|
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:
|
|
January 3,
|
|
|
|
2021
|
|
2021
|
|
$
|
10,097
|
|
2022
|
|
|
9,731
|
|
2023
|
|
|
9,745
|
|
2024
|
|
|
9,402
|
|
2025
|
|
|
8,718
|
|
2026 and thereafter
|
|
|
87,675
|
|
Total minimum lease payments
|
|
|
135,368
|
|
Less: Imputed interest (1)
|
|
|
50,972
|
|
Present value of lease liabilities
|
|
$
|
84,396
|
|
(1) 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).
|
|
75
Note 14 – Income Taxes
Significant components of the Company’s income tax benefit for the periods indicated below are as follows:
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2021
|
|
|
2019
|
|
|
2018
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(6,936
|
)
|
|
$
|
697
|
|
|
$
|
(152
|
)
|
State and local
|
|
|
192
|
|
|
|
678
|
|
|
|
565
|
|
Total current income taxes
|
|
|
(6,744
|
)
|
|
|
1,375
|
|
|
|
413
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,257
|
)
|
|
|
(1,838
|
)
|
|
|
(2,041
|
)
|
State and local
|
|
|
(448
|
)
|
|
|
(105
|
)
|
|
|
32
|
|
Total deferred income taxes
|
|
|
(1,705
|
)
|
|
|
(1,943
|
)
|
|
|
(2,009
|
)
|
Income tax benefit
|
|
$
|
(8,449
|
)
|
|
$
|
(568
|
)
|
|
$
|
(1,596
|
)
|
The Company’s effective tax rate differs from the federal statutory rate as set forth in the following table for the periods indicated:
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2021
|
|
|
2019
|
|
|
2018
|
|
Federal income tax
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Federal tax reform
|
|
|
-
|
|
|
|
-
|
|
|
|
3.3
|
|
Goodwill impairment impact
|
|
|
(10.7
|
)
|
|
|
-
|
|
|
|
-
|
|
State income tax
|
|
|
1.4
|
|
|
|
6.0
|
|
|
|
14.3
|
|
Wage credits
|
|
|
6.1
|
|
|
|
(32.3
|
)
|
|
|
(107.5
|
)
|
Uncertain tax positions
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.3
|
)
|
Return to provision
|
|
|
0.1
|
|
|
|
(0.6
|
)
|
|
|
(3.1
|
)
|
Rate differential between current and deferred taxes
|
|
|
10.1
|
|
|
|
-
|
|
|
|
(1.3
|
)
|
Incentive Stock Options
|
|
|
(0.2
|
)
|
|
|
1.3
|
|
|
|
4.4
|
|
Other
|
|
|
(0.5
|
)
|
|
|
(2.3
|
)
|
|
|
2.8
|
|
Effective tax rate
|
|
|
27.3
|
%
|
|
|
(6.9
|
)%
|
|
|
(66.4
|
)%
|
76
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of January 3, 2021, and December 29, 2019, are as follows:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
742
|
|
|
$
|
207
|
|
Accrued bonuses
|
|
|
3
|
|
|
|
47
|
|
Share-based compensation awards
|
|
|
739
|
|
|
|
546
|
|
State bonus depreciation
|
|
|
282
|
|
|
|
115
|
|
General business credit carryforward
|
|
|
7,108
|
|
|
|
3,304
|
|
Other
|
|
|
120
|
|
|
|
77
|
|
Total deferred tax assets
|
|
|
8,994
|
|
|
|
4,296
|
|
Less: deferred tax assets valuation allowance
|
|
|
(317
|
)
|
|
|
(168
|
)
|
Total net deferred tax assets
|
|
|
8,677
|
|
|
|
4,128
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Partnership differences
|
|
|
(4,050
|
)
|
|
|
(1,210
|
)
|
Total deferred tax liabilities
|
|
|
(4,050
|
)
|
|
|
(1,210
|
)
|
Net deferred tax asset
|
|
$
|
4,627
|
|
|
$
|
2,918
|
|
ASC Topic 740, Income Taxes, establishes procedures to measure deferred tax assets and liabilities and assess whether a valuation allowance relative to existing deferred tax assets is necessary. Management assesses the likelihood of realization of the Company’s deferred tax assets and the need for a valuation allowance with respect to those assets based on the weight of available positive and negative evidence. As of January 3, 2021, management determined that a valuation allowance of $317 was necessary relative to certain state net operating loss and capital loss carryforwards which are not expected to be realized. Management also determined at January 3, 2021 that it is more likely than not that the results of future operations and reversal of deferred tax liabilities will generate sufficient taxable income to realize the remaining deferred tax assets not covered by this valuation allowance.
As of January 3, 2021, the Company has state gross operating loss carryforwards gross of the valuation allowance and uncertain tax positions discussed above of approximately $15,185 expiring in years 2021 through 2040 as well as an additional $3,029 that will never expire. The Company also has federal general business credit carryforwards of $7,108 expiring in 2031 through 2040.
The CARES Act includes several significant income and other business tax provisions that, among other things, eliminates the taxable income limit for certain net operating losses (“NOLs”) and allows businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, loosens the business interest limitation under Internal Revenue Code Section 163(j) and fixes the qualified improvement property (“QIP”) regulations in the 2017 Tax Cuts and Jobs Act. As a result of the CARES Act, the Company estimates that it will be able to obtain a $6,856 tax refund from the carryback of $23,761 fiscal 2020 gross federal NOLs, which otherwise would have an indefinite carryforward period.
Additionally, the Company has recorded a liability (including interest) in connection with uncertain tax positions related to state tax issues totaling $72 and $66 as of January 3, 2021 and December 29, 2019, respectively. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company has accrued interest related to unrecognized tax benefits of approximately $6 and $1 as of January 3, 2021 and December 29, 2019, respectively.
A reconciliation of the beginning and ending unrecognized tax benefit associated with these positions (excluding federal benefit and the aforementioned accrued interest) is as follows:
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2021
|
|
|
2019
|
|
Balance at the beginning of the year
|
|
$
|
83
|
|
|
$
|
88
|
|
Changes based on tax positions taken during the current year
|
|
|
-
|
|
|
|
-
|
|
Changes based on tax positions taken during prior years
|
|
|
-
|
|
|
|
-
|
|
Reductions related to settlements with taxing authorities and
|
|
|
|
|
|
|
|
|
lapses of statutes of limitations
|
|
|
-
|
|
|
|
(5
|
)
|
Balance at the end of the year
|
|
$
|
83
|
|
|
$
|
83
|
|
77
As of January 3, 2021, the total amount of gross unrecognized tax benefit that, if recognized, would impact the effective tax rate was $23. The Company expects that gross unrecognized benefits will decrease by $18 due to statute expirations within the next twelve months.
The Company and its subsidiaries file a partnership federal income tax return, consolidated corporate federal income tax return, and a separate corporate federal income tax return as well as various state and local income tax returns. The earliest year open to examination in the Company’s major jurisdictions is 2017 for federal and 2016 for state income tax returns.
Note 15 – Share-based Compensation
For the years ended January 3, 2021, December 29, 2019 and December 30, 2018, the Company recorded total share-based compensation expense of $1,878, $1,498 and $3,765, respectively, the components of which are discussed in further detail below.
J. Alexander’s Holdings, Inc. Amended and Restated 2015 Equity Incentive Plan
Under the J. Alexander’s Holdings, Inc. Amended and Restated 2015 Equity Incentive Plan (the “Plan”), directors, officers and key employees of the Company may be granted equity incentive awards, such as stock options, restricted stock and stock appreciation rights in an effort to retain qualified management and personnel. The Company’s Board approved the amended and restated plan in May 2019, and it was subsequently approved by shareholders of the Company in June 2019 at the annual meeting of shareholders. The amended and restated plan authorizes a maximum of 2,850,000 shares of the Company’s common stock to be issued to holders of these equity awards. At January 3, 2021, December 29, 2019 and December 30, 2018, total shares available to be granted pursuant to the Plan (or the predecessor plan) were 351,750; 721,250; and 4,250, respectively.
Stock Option Awards
Under the Plan and the predecessor plan, the Compensation Committee and the Board of the Company have awarded stock option grants totaling 1,776,750 options, with 246,000 awarded in fiscal 2020, to certain members of management, and the contractual term for each grant is seven years. The requisite service period for each grant is four years with each vesting in four equal installments on the first four anniversaries of their respective grant dates. A total of 37,500 options have been forfeited since the inception of the plan, 2,500 of which occurred in fiscal year 2020. No stock options were granted in fiscal 2019.
The Company uses the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards and used the following assumptions for the indicated periods during which grants were made as noted above:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3, 2021
|
|
|
December 30, 2018
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility factor
|
|
|
50.00
|
%
|
|
|
37.00
|
%
|
Risk-free interest rate
|
|
|
0.22
|
%
|
|
|
2.69
|
%
|
Expected life of options (in years)
|
|
|
4.75
|
|
|
|
4.75
|
|
Weighted-average grant date fair value
|
|
$
|
1.69
|
|
|
$
|
3.42
|
|
The expected life of stock options granted during the period presented was calculated in accordance with the simplified method described in SEC Staff Accounting Bulletin (“SAB”) Topic 14.D.2 in accordance with SAB 110. This approach was utilized due to the lack of exercise history and the anticipated behavior of the overall group of grantees. The risk-free rate for periods within the contractual life of the options is based on the five-year U.S. Treasury bond rate in effect at the time of grant. The Company utilized a weighted rate for expected volatility based on a representative peer group within the industry. The dividend yield was set at zero as the underlying security does not pay a dividend. Additionally, management has made an accounting policy election to account for forfeitures when they occur.
78
A summary of stock options under the Company’s equity incentive plan is as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 29, 2019
|
|
|
1,495,750
|
|
|
$
|
9.57
|
|
Issued
|
|
|
246,000
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
|
8.90
|
|
Outstanding at January 3, 2021
|
|
|
1,739,250
|
|
|
$
|
8.92
|
|
At January 3, 2021, December 29, 2019 and December 30, 2018, stock options exercisable were 1,238,250; 976,063; and 602,125, respectively.
As these awards contain only service conditions for vesting purposes and have a graded vesting schedule, the Company has elected to recognize the expense over the requisite service period for the entire award. Stock option expense totaling $803, $1,105 and $1,121 was recognized for fiscal years 2020, 2019 and 2018, respectively, which is included in the “General and administrative expenses” line item on the Consolidated Statements of Operations and Comprehensive (Loss) Income. At January 3, 2021, the Company had $867 of unrecognized compensation cost related to these stock options which is expected to be recognized over a period of approximately 3.59 years.
The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options. This amount changes based on the fair market value of the Company’s common stock and totaled $563, $379 and $0 at January 3, 2021, December 29, 2019 and December 30, 2018, respectively, for options outstanding. The intrinsic value of options exercisable at January 3, 2021, December 29, 2019 and December 30, 2018 totaled $0, $277 and $0, respectively. No options were exercised in fiscal years 2020, 2019 or 2018.
The following table summarizes the Company’s non-vested stock option activity for the year ended January 3, 2021:
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested stock options at December 29, 2019
|
|
|
519,687
|
|
|
$
|
3.26
|
|
Granted
|
|
|
246,000
|
|
|
|
1.69
|
|
Vested
|
|
|
(264,063
|
)
|
|
|
3.11
|
|
Forfeited
|
|
|
(625
|
)
|
|
|
2.81
|
|
Non-vested stock options at January 3, 2021
|
|
|
500,999
|
|
|
$
|
2.57
|
|
The total fair value of stock options vested during fiscal years 2020, 2019 and 2018 was $820, $1,187 and $751, respectively.
The following table summarizes information about the Company’s stock options outstanding at January 3, 2021:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number Outstanding at
January 3, 2021
|
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable at January 3, 2021
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price
|
|
$5.00
|
|
|
246,000
|
|
|
6.59 years
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$8.90
|
|
|
532,500
|
|
|
2.84 years
|
|
|
8.90
|
|
|
|
532,500
|
|
|
2.84 years
|
|
|
|
8.90
|
|
$9.55
|
|
|
510,000
|
|
|
4.13 years
|
|
|
9.55
|
|
|
|
255,000
|
|
|
4.13 years
|
|
|
|
9.55
|
|
$10.24
|
|
|
13,750
|
|
|
2.32 years
|
|
|
10.24
|
|
|
|
13,750
|
|
|
2.32 years
|
|
|
|
10.24
|
|
$10.39
|
|
|
437,000
|
|
|
1.77 years
|
|
|
10.39
|
|
|
|
437,000
|
|
|
1.77 years
|
|
|
|
10.39
|
|
$5.00 - $10.39
|
|
|
1,739,250
|
|
|
3.48 years
|
|
$
|
8.92
|
|
|
|
1,238,250
|
|
|
2.72 years
|
|
|
$
|
9.57
|
|
79
Restricted and Performance Shares
In fiscal 2020 and 2019, the Company granted 63,000 and 264,000 restricted share awards, respectively, under the Plan to members of its Board in 2020, and, in 2019, to members of the Board and certain employees of the Company. Also, in fiscal 2019, 52,500 performance share awards were granted to certain employees of the Company under the Plan. Restricted share awards are subject to only a service condition while performance share awards are regarded as contingently issuable common shares which are dependent upon achievement of certain performance targets by the Company. With respect to the restricted share awards, the restricted period for the 2019 grant is four years with the restriction expiring in four equal installments on the first four anniversaries of their respective grant dates. For the 2020 restricted share award grant, the vesting period is one year from the date of the grant. For the performance share awards, the performance period shall be any four consecutive fiscal quarters during the sixteen-quarter period beginning with the fiscal quarter in which the awards were granted. The performance target must be met for the performance period in order for the restriction to lapse.
The following table summarizes the Company’s non-vested restricted and performance share activity for the year ended January 3, 2021:
|
|
Restricted Shares
|
|
|
Performance Shares
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Non-vested restricted shares at December 29, 2019
|
|
|
264,000
|
|
|
$
|
10.75
|
|
|
|
52,500
|
|
|
$
|
10.75
|
|
Granted
|
|
|
63,000
|
|
|
|
4.43
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(65,997
|
)
|
|
|
10.75
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested restricted shares at January 3, 2021
|
|
|
261,003
|
|
|
$
|
9.22
|
|
|
|
52,500
|
|
|
$
|
10.75
|
|
Expense associated with the restricted shares is recognized using the straight-line method over the requisite service period, accounting for forfeitures as they occur. Expense associated with the performance share awards is recognized using the tranche method wherein the Company treats each vesting tranche as a separate award with compensation cost for each award recognized over its vesting period. The Company anticipates that the performance condition will be met during the performance period. The grant date fair value for the fiscal year 2020 and 2019 awards was $4.43 and $10.75, respectively, based on the Company’s quoted stock price on the date of grant. The Company recorded non-cash share-based compensation expense for restricted shares totaling $834 and $277 during fiscal years 2020 and 2019, respectively. Such expense for performance shares totaled $241 and $115 for fiscal years 2020 and 2019, respectively. Based on estimates at January 3, 2021, the Company had $2,005 and $208 of unrecognized compensation expense related to the restricted and performance awards, respectively, that will be recognized over a period of approximately 2.7 years. The fair value of shares earned as of the vesting date during fiscal year 2020 was $292. Subsequent to the fiscal 2020 year-end, the Company granted 20,000 restricted share awards. The restricted period is four years with the restriction expiring in four equal installments on the first four anniversaries of the grant date.
Management Profits Interest Plan
On January 1, 2015, J. Alexander’s Holdings, LLC adopted its 2015 Management Incentive Plan and granted equity incentive awards to certain members of its management in the form of Class B Units. The Class B Units are profits interests in J. Alexander’s Holdings, LLC. Class B Units in the amount of 1,770,000 were reserved for issuance under the plan and a total of 885,000 Class B Units were granted on January 1, 2015. Each Class B Unit represents a non-voting equity interest in J. Alexander’s Holdings, LLC that entitles the holder to a percentage of the profits and appreciation in the equity value of J. Alexander’s Holdings, LLC arising after the date of grant and after such time as an applicable hurdle amount is met. The hurdle amount for the Class B Units issued to our management in January 2015 was set at $180,000, which at such time was a reasonable premium to the estimated liquidation value of the equity of J. Alexander’s Holdings, LLC. The Class B Units issued to management vested with respect to 50% of the grant units on the second anniversary of the date of grant and with respect to the remaining 50% on the third anniversary of the date of grant and required a six-month holding period post vesting.
Vested Class B Units may be exchanged for, at the Company’s option, either (i) cash in an amount equal to the amount that would be distributed to the holder of those Class B Units by J. Alexander’s Holdings, LLC upon a liquidation of J. Alexander’s Holdings, LLC assuming the aggregate amount to be distributed to all members of J. Alexander’s Holdings, LLC were equal to the Company’s market capitalization on the date of exchange (net of any assets and liabilities of the Company that are not assets or liabilities of
80
J. Alexander’s Holdings, LLC) or (ii) shares of the Company’s common stock with a fair market value equal to the cash payment under (i) above.
The Class B Units issued to the Company’s management have been classified as equity awards and share-based compensation expense is based on the grant date fair value of the awards. At January 3, 2021, the applicable hurdle rate for these Class B Units was not met.
The Company used the Black-Scholes-Merton pricing model to estimate the fair value of management profits interest awards and used the following assumptions:
|
|
Grant Date
|
|
|
|
Fair Value
|
|
Member equity price per unit
|
|
$
|
10.00
|
|
Class B hurdle price
|
|
$
|
11.30
|
|
Dividend yield
|
|
|
0
|
%
|
Volatility factor
|
|
|
35
|
%
|
Risk-free interest rate
|
|
|
1.24
|
%
|
Time to liquidity (in years)
|
|
|
3.5
|
|
Lack of marketability discount
|
|
|
23
|
%
|
Grant date fair value
|
|
$
|
1.76
|
|
The member equity price per unit was based on an enterprise valuation of J. Alexander’s Holdings, LLC divided by the number of Class A Units outstanding at the date of grant. The Class B hurdle price is based on the hurdle rate divided by the number of Class A Units outstanding at the time of grant. The expected life of management profits interest awards granted during the period presented was determined based on the vesting term of the award which also includes a six-month holding period subsequent to meeting the requisite vesting period. The risk-free rate for periods within the contractual life of the profit interest award is based on an extrapolated four-year U.S. Treasury bond rate in effect at the time of grant given the expected time to liquidity. The Company utilized a weighted rate for expected volatility based on a representative peer group of comparable public companies. The dividend yield was set at zero as the underlying security does not pay a dividend. The protective put method was used to estimate the discount for lack of marketability inherent to the awards due to the lack of liquidity associated with the post-vesting requirement and other restrictions on the Class B Units.
As a result of the reorganization transactions on September 28, 2015 and as evidenced in the executed Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, entered into in connection with the reorganization transactions, the members’ equity of J. Alexander’s Holdings, LLC was recapitalized such that the total outstanding Class B Units granted to management as discussed above was reduced on a pro rata basis from 885,000 to 833,346 which is also the number of Class B Units outstanding as of January 3, 2021, and resulted in an adjusted grant date fair value relative to these units of $1.87.
As these awards contain only service conditions for vesting purposes and have a graded vesting schedule, the Company elected to recognize the expense over the requisite service period for the entire award and, as of January 3, 2021, the Company had $0 of unrecognized compensation cost related to these awards as the units fully vested on January 1, 2018. The total grant date fair value of units vested during fiscal years 2020, 2019 and 2018 was $0, $0 and $779, respectively. There was no redemption value of the outstanding management profits interest awards as of January 3, 2021 as the fair value was less than the hurdle rate.
Black Knight Advisory Services Profits Interest Plan
On October 6, 2015, J. Alexander’s Holdings, LLC granted 1,500,024 Class B Units representing profits interests to Black Knight with a hurdle rate stated in the agreement of $151,052. The awards vested at a rate of one-third of the Class B Units on each of the first, second and third anniversaries of the grant date and required a six-month holding period post vesting. The Class B Units contained exchange rights which allowed for them to be converted once vested into shares of the Company’s common stock based upon the value of the Class B Units at the date of the conversion election. The value was determined in reference to the market capitalization of the Company, with certain adjustments made for assets or liabilities contained at the Company’s level which are not also assets and liabilities of J. Alexander’s Holdings, LLC. These awards could not be settled with a cash payment. The Class B Units issued to Black Knight were classified as equity awards.
These awards constituted nonemployee awards. Therefore, the Company remeasured the fair value of the awards at each reporting date through October 6, 2018 using the valuation model applied in previous periods. The portion of services rendered to each reporting date was applied to the current measure of fair value to determine the expense for the relevant period. Because these awards had a graded vesting schedule, the Company elected to recognize the compensation cost on a straight-line basis over the three-year requisite service period for the entire award. Black Knight profits interest expense totaling $0, $0 and $2,644 was recognized for fiscal years 2020, 2019 and 2018, respectively, which is included in the “General and administrative expense” line item on the Consolidated Statements of Operations and Comprehensive (Loss) Income.
81
On November 30, 2018, the Company entered into the Termination Agreement which terminated the consulting agreement with Black Knight (the “Management Consulting Agreement”). Under the terms of the Management Consulting Agreement, Black Knight had 90 days from November 30, 2018 to exercise its right to convert the value of the fully-vested Class B Units above the applicable hurdle rate to the Company’s common stock. As Black Knight did not exercise its conversion rights within the 90-day period, the Class B Units were cancelled and forfeited for no consideration in fiscal year 2019.
Note 16 – Other Employee Benefits
A subsidiary of the Company maintains a Savings Incentive and Salary Deferral Plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for the benefit of its employees and their beneficiaries. Under the 401(k) Plan, qualifying employees can defer a portion of their income on a pretax basis through contributions to the 401(k) Plan, subject to an annual statutory limit. All employees with at least six months of service and who are at least 21 years of age are eligible to participate. For each dollar of participant contributions, up to 3% of each participant’s salary and bonus, the Company makes a minimum 25% matching contribution to the 401(k) Plan with a discretionary match allowable in addition and subject to the approval of the compensation committee of the Board on an annual basis. Such discretionary match was set at an additional 25% of the first 3% of each participant’s salary and bonus contributions for fiscal year 2020. Matching contributions vest according to a vesting schedule defined in the plan document.
A subsidiary of the Company also has a nonqualified deferred compensation plan under which executive officers and certain senior managers may defer receipt of their compensation, including up to 50% of applicable salaries and bonuses, and may be credited with matching contributions subject to the annual approval by the compensation committee of the Board. Such discretionary match was set at 25% of the first 3% of each participant’s salary and bonus contributions for fiscal year 2020. Amounts that are deferred under this plan, and any matching contributions, are increased by earnings and decreased by losses based on the performance of one or more investment measurement funds elected by the participants from a group of funds, which the plan administrator has determined to make available for this purpose. Participant account balances totaled $1,405 and $1,050 at January 3, 2021 and December 29, 2019, respectively. Although this plan is not required to be funded, the Company makes investments in trading securities which are equivalent funds to those selected by participants, and the balance of those investments at January 3, 2021 and December 29, 2019 was $1,222 and $833, respectively.
Expense for matching contributions associated with the 401(k) Plan and the nonqualified deferred compensation plan totaled $253, $119 and $122 for fiscal years 2020, 2019 and 2018, respectively.
A subsidiary of the Company has Salary Continuation Agreements, which provide retirement and death benefits to certain executive officers and certain other members of management. The recorded liability associated with these agreements totaled $6,568 and $6,053 at January 3, 2021 and December 29, 2019, respectively. The expense (income) recognized under these agreements was $627, $702 and $(206) for fiscal years 2020, 2019 and 2018, respectively.
J. Alexander’s, LLC is obligated to establish and fund the Trust (as defined in Note 2 above) under the Amended and Restated Salary Continuation Agreements with each of the agreement holders, which includes three of the Company’s executive officers and one former executive officer. These assets are classified as noncurrent within the Company’s Consolidated Financial Statements. J. Alexander’s, LLC made additional contributions of $75 and $95 to the Trust in fiscal years 2019 and 2018, respectively, and will continue to make additional contributions to the Trust in the future in order to maintain the level of funding required by the agreements. The Trust is subject to creditor claims in the event of insolvency, but the assets held in the Trust are not available for general corporate purposes. The Trust investments consisted of cash and cash equivalents, U.S. government agency obligations and corporate bonds. The securities are designated as trading securities and carried at fair value. Refer to Note 4 – Fair Value Measurements for additional discussion regarding fair value considerations. As of January 3, 2021, the Trust balance was $4,927 consisting of $2,329 in aggregate cash surrender value of whole life insurance policies and $2,598 in Trust investments. The Company records changes in the fair value of assets held in the Trust in the “Other, net” line item on the Consolidated Statements of Operations and Comprehensive (Loss) Income.
Note 17 – Stockholders’ Equity
The Company is an independent public company, and its common stock is listed under the symbol “JAX” on The NYSE. The Company also owns, directly or indirectly, all of the outstanding Class A Units and is the sole managing member of J. Alexander’s Holdings, LLC. The Company is authorized to issue 40,000,000 shares of capital stock, consisting of 30,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. As of January 3, 2021 and
82
December 29, 2019, a total of 15,070,077 and 15,011,676 shares, respectively, of the Company’s common stock were outstanding. No shares of preferred stock were outstanding during either of the periods presented.
The pertinent rights and privileges of the Company’s outstanding common stock or restricted and performance share awards are as follows:
Voting rights. The holders of common stock as well as restricted and performance share awards are entitled to one vote per share on all matters to be voted upon by the shareholders.
Dividend rights. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of shares of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board out of funds legally available therefor. Holders of restricted and performance share awards are entitled to dividend rights once such shares have vested. Prior to vesting, dividends may be accumulated for eventual payment once relevant restrictions have expired or performance targets are met by the Company, as applicable.
Rights upon liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of affairs, the holders of common stock are entitled to share ratably in all assets remaining after payment of debts and other liabilities, subject to prior distribution rights of preferred stock then outstanding, if any. Such rights are conferred upon holders of restricted or performance share awards upon vesting.
Other rights. The holders of common stock as well as restricted and performance share awards have no preemptive or conversion rights or other subscription rights. Further, there are no redemption or sinking fund provisions applicable to the common stock or the aforementioned awards. The rights, preferences and privileges of holders of common stock and vested restricted and performance share awards will be subject to those of the holders of any shares of preferred stock the Company may issue in the future.
Note 18 - 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 four leases at January 3, 2021 was approximately $987. 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 January 3, 2021 was approximately $259. There have been no payments by subsidiaries of the Company of such contingent liabilities in the history of the Company or its predecessor. Management believes any significant loss is remote.
The Company is subject to real property, personal property, business, franchise and income, payroll and sales and use taxes in various jurisdictions within the United States and is 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 for 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 based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of its restaurants.
Management does not believe that any of the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity, results of operations or 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 results of operations, or on occasion, receive settlements that favorably affect its results of operations.
83
Note 19 – Related-Party Transactions
On September 28, 2015, J. Alexander’s Holdings, LLC entered into the 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, the Company terminated the Management Consulting Agreement by entering into the Termination Agreement. The details pertaining to the termination of this agreement are discussed below.
Under the Management Consulting Agreement, J. Alexander’s Holdings, LLC issued Black Knight 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. J. Alexander’s Holdings, LLC also reimbursed 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 (loss) 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 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.
During fiscal years 2018, management fees and reimbursable out-of-pocket costs of $703 were incurred relative to the Black Knight Management Consulting Agreement. Such costs are presented as a component of “General and administrative expenses” on the Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Class B Units granted to Black Knight 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. Under the terms of the Termination Agreement, Black Knight had 90 days from November 30, 2018 to exchange its Class B Units 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 20 – Non-controlling Interest
84
As discussed in Note 15, on January 1, 2015, J. Alexander’s Holdings, LLC adopted the 2015 Management Incentive Plan and granted equity incentive awards to certain members of management in the form of Class B Units. The Class B Units are profits interests in J. Alexander’s Holdings, LLC. Additionally, on October 6, 2015, J. Alexander’s Holdings, LLC granted Class B Units representing profits interests to Black Knight. However, on February 28, 2019, in conjunction with the Termination Agreement with Black Knight, the 1,500,024 Class B Units held by Black Knight were cancelled and forfeited for no consideration. The Class B Units allow for the distribution of earnings in J. Alexander’s Holdings, LLC in the event that the hurdle amounts and vesting requirements are met and, as such, represent non-controlling interests in J. Alexander’s Holdings, LLC during the periods that they remain outstanding. The Hypothetical Liquidation of Book Value method was used as of January 3, 2021, December 29, 2019 and December 30, 2018 to determine allocations of non-controlling interests consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to that calculation, no allocation of net (loss) income was made to non-controlling interests for fiscal years 2020, 2019 or 2018, respectively. A non-controlling interest balance has been presented on the Consolidated Balance Sheets and Statements of Stockholders’ Equity in the amount of $1,558 as of each January 3, 2021 and December 29, 2019, respectively, which represents profits interest compensation expense recorded by the Company. The share-based compensation expense associated with the Class B units granted to Black Knight were reclassified to additional paid-in capital in fiscal year 2019 as a result of their forfeiture and cancellation. As such, non-controlling interests consist solely of the non-cash compensation expense relative to the Class B Units held by management as of January 3, 2021 and December 29, 2019. Such compensation costs have been reflected in the “General and administrative expenses” line item of the Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal year 2018. No such compensation expense was recognized in 2020 or 2019 as the Class B Units held by management vested in fiscal year 2018.
Note 21 – Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended January 3, 2021 and December 29, 2019 (in thousands, except per share amounts):
|
|
2020 Quarter ended
|
|
|
|
March 29,
|
|
|
June 28,
|
|
|
September 27,
|
|
|
January 3,
|
|
Net sales
|
|
$
|
56,972
|
|
|
$
|
27,602
|
|
|
$
|
46,230
|
|
|
$
|
52,569
|
|
Operating (loss) income
|
|
|
(18,855
|
)
|
|
|
(11,298
|
)
|
|
|
(1,384
|
)
|
|
|
1,484
|
|
(Loss) income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
(18,979
|
)
|
|
|
(11,352
|
)
|
|
|
(1,643
|
)
|
|
|
1,257
|
|
Net (loss) income
|
|
|
(17,644
|
)
|
|
|
(6,988
|
)
|
|
|
(1,760
|
)
|
|
|
3,921
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
$
|
(1.20
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.27
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Basic (loss) earnings per share
|
|
$
|
(1.20
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.27
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
$
|
(1.20
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.27
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(1.20
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarter ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 29,
|
|
|
December 29,
|
|
Net sales
|
|
$
|
64,734
|
|
|
$
|
62,229
|
|
|
$
|
56,867
|
|
|
$
|
63,439
|
|
Operating income
|
|
|
4,266
|
|
|
|
2,343
|
|
|
|
422
|
|
|
|
1,883
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before income taxes
|
|
|
4,146
|
|
|
|
2,244
|
|
|
|
342
|
|
|
|
1,753
|
|
Net income
|
|
|
3,848
|
|
|
|
2,168
|
|
|
|
771
|
|
|
|
2,030
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
$
|
0.27
|
|
|
$
|
0.15
|
|
|
$
|
0.06
|
|
|
$
|
0.14
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Basic earnings per share
|
|
$
|
0.26
|
|
|
$
|
0.15
|
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
$
|
0.27
|
|
|
$
|
0.15
|
|
|
$
|
0.06
|
|
|
$
|
0.14
|
|
Loss from discontinued operations, net
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Diluted earnings per share
|
|
$
|
0.26
|
|
|
$
|
0.15
|
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
Per share amounts may not sum due to rounding.
85