| Basis of Presentation | Note 2 – Basis of Presentation
(a)
Interim Financial Statements The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and rules of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter and six-month period ended June 28, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2021. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, and amended on April 17, 2020 (the “2019 Annual Report”). Total comprehensive (loss) income is comprised solely of net (loss) income for all periods presented. There have been no material changes in our significant accounting policies, other than those described in Note 2(k) – Inventory Method Change, Note 4 – Income Taxes and Note 7 – Recent Accounting Pronouncements, as compared to the significant accounting policies described in our 2019 Annual Report.
(b)
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 In addition to the decline in restaurant sales, the Company has also incurred approximately $3,275 of costs directly related to the COVID-19 pandemic in the six-month period ended June 28, 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 has 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, 7 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 out flows 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 ongoing negotiations with vendors and landlords regarding deferral or abatement of rental and other contractual obligations and the deferral of tax payments where allowed . 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 six-month period ended June 28, 2020 and are discussed further in Note 2(m) below. T he ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, To preserve financial flexibility, the Company drew the remaining $17,000 of available capacity (at the time of the draw) under its revolving credit facilities 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. 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. Further, in May 2020, the Company obtained a waiver letter from its lender that waived existing financial covenants and instituted new financial covenants, which the Company expects to be in compliance with, through the period ending July 4, 2021. See Note 2(l) below for further information. 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 our 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, in some form, for the remainder of fiscal year 2020.
(c)
Principles of Consolidation The unaudited Condensed Consolidated Financial Statements include the accounts of the Company as well as the accounts of its subsidiaries. All intercompany profits, transactions, and balances between the Company and its subsidiaries have been eliminated. It is the Company’s policy to reclassify prior year amounts to conform to the current year’s presentation for comparative purposes, if such a reclassification is warranted. The Company is a holding company with no direct operations and that holds as its sole asset an equity interest in J. Alexander’s Holdings, LLC and, as a result, relies on J. Alexander’s Holdings, LLC to provide it with funds necessary to meet its financial obligations.
( d )
Fiscal Year The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks. The quarters and six-month periods ended June 28, 2020 and June 30, 2019 each included 13 and 26 weeks of operations, respectively. Fiscal years 2020 and 2019 include 53 and 52 weeks of operations, respectively.
( e )
Discontinued Operations and Restaurant Closures During the second quarter of 2020, the Company made the decision to permanently close the Lyndhurst Grill location in Cleveland, Ohio, on May 1, 2020 after a review of its projected and historical financial performance. This location was also required to be temporarily closed in mid‑March due to COVID-19-related traffic limitations unique to that specific restaurant which further impacted operating results. Restaurant closing costs recorded during the second quarter of 2020 totaled $178 and included labor expenses incurred subsequent to closure, severance and other miscellaneous costs. Expenses 8 associated with the closure of the Lyndhurst Grill restaurant have not been included in discontinued operations as its closure does not represent a strategic shift that will have a major effect on our operations and financial results. As such, these restaurant closing costs have been included as a component of “ Long-lived asset impairment charges and restaurant closing costs ” in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company entered into an agreement to sell this property in the second quarter of 2020 . The sale is expected to close in the third quarter of 2020, subject to customary closing conditions. As such, the Company has reclassified $ 1,242 of restaurant property and equipment to “ Prepaid expenses and other current assets ” from “Property and equipment, at cost, less accumulated depreciation and amortization” in the Condensed Consolidated Balance Sheets as of June 28, 2020 . The assets held for sale consist of land and building at their carrying amount s subsequent to the related long-lived asset impairment charge recorded during the first quarter of 2020 discussed in Note 2(m) below. In addition, 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 $55 and $58 losses from discontinued operations included in the quarters ended June 28, 2020 and June 30, 2019, respectively, and losses for the six-month periods ended June 28, 2020 and June 30, 2019 of $107 and $117, respectively, consist solely of exit and disposal costs for this location.
( f )
Transaction, Contested Proxy and other Related Expenses Transaction, contested proxy and other related expenses totaled $(66) and $623 for the quarter and six-month period ended June 28, 2020, respectively. In the first quarter of 2020, the Company incurred legal fees, other professional fees and consulting fees related to the ongoing evaluation of strategic alternatives. The Company received a discount for legal services rendered during that period resulting in income for the second quarter of the year. 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 COVID-19, the ongoing review of strategic alternatives by the Company’s Board of Directors (the “Board”) will not be completed until these uncertainties are resolved. Transaction, contested proxy and other related expenses for the second quarter and six-month period ended June 30, 2019 totaled $651. Expenses in 2019 include costs associated with both soliciting shareholder proxies for the Company’s 2019 annual meeting of shareholders as well as costs related to the evaluation of strategic alternatives.
( g )
(Loss) Earnings per Share 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 (loss) 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.
( h )
Non-controlling Interests Non-controlling interests presented on the Condensed Consolidated Balance Sheets represent the portion of net assets of the Company attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders. As of each June 28, 2020 and December 29, 2019, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $1,558. On February 28, 2019, in conjunction with the termination agreement (“Termination Agreement”) entered into in November 2018 between J. Alexander’s Holdings, LLC and Black Knight Advisory Services, LLC (“Black Knight”), the 1,500,024 Class B Units held by Black Knight were cancelled and forfeited for no consideration. Therefore, the Black Knight non‑controlling interest associated with their Class B Unit share-based compensation expense was reclassified to additional paid-in capital in the first quarter of 2019, and as of June 28, 2020 and December 29, 2019, non-controlling interests consist solely of the previously recognized non-cash compensation expense relative to the Class B Units held by management. The Hypothetical Liquidation at Book Value method was used as of each of June 28, 2020 and June 30, 2019 to determine 9 allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, no allocation of net (loss) income was made to non-controlling interests for either of the quarters or six-month periods ended June 28, 2020 or June 30, 2019 .
( i )
Use of Estimates Management has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods presented to prepare these unaudited Condensed Consolidated 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 goodwill and intangible assets, fair market valuations, determination of lease terms, and accounting for impairment losses, contingencies, and litigation. Actual results could differ from these estimates.
( j )
Share Repurchase Program
On November 1, 2018, the 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
(k)
Inventory Method Change The Company recently completed the implementation of 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 Condensed 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. (l) Debt The Company is party to the Third Amended and Restated Loan Agreement, dated June 5, 2020, by and between J. Alexander’s, LLC and Pinnacle Bank, as amended (the “Loan Agreement”). As of June 28, 2020, the Loan Agreement consists of the following loans: (i) a $5,000 term loan that matures on September 3, 2021 (the “Mortgage Loan”), (ii) a $20,000 development line of credit that matures on September 3, 2021 (the “Development Line of Credit”), (iii) a $10,000 term loan that matures on September 3, 2021 (the “Term Loan”), and (iv) a $16,000 revolving line of credit that matures on September 3, 2021 (the “Revolving Line of Credit”). At June 28, 2020, the amounts outstanding under the Development Line of Credit and the Revolving Line of Credit were $20,000 and $1,000, respectively. At June 28, 2020, $4,167 was outstanding under the Mortgage Loan and an additional $555 was outstanding under the Term Loan. The Loan Agreement includes the agreed terms of the April and May modifications discussed below. 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”). Following the Credit Draw, debt outstanding under the Development Line of Credit and the Revolving Line of Credit totaled $21,000. Pursuant to the terms of the Second Amended and Restated Loan Agreement (the “Second Loan Agreement”), the borrowings under the Second Loan Agreement bore interest at 30-day LIBOR plus a sliding interest rate scale determined by a maximum adjusted debt to EBITDAR ratio (following the Credit Draw, set at 30-day LIBOR plus 2.10% as of June 28, 10 2020 ). Interest rate terms with respect to the Development Line of Credit under the Loan Agreement are consistent with those stated in the Second Loan Agreement. The new interest rate terms under the Revolving Line of C redit are discussed below. The Credit Draw was undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of current disruption and uncertainty resulting from the COVID-19 pandemic . The proceeds from the Credit Draw are available to be used for general corporate purposes, including working capital. 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 $555 until the Term Loan’s new maturity date which was modified to be September 3, 2021. On September 3, 2021, this principal amount will be payable in full in addition to interest accrued during the relevant period. 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 will resume through the September 3, 2021 maturity date. 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 to cause such deferrals. The principal payments otherwise due in April through September 2020 totaling $834 will now be payable when the loan matures on September 3, 2021 and interest payments will resume 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 will resume on July 3, 2020. On June 5, 2020, the Company entered into the 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 being available for general corporate purposes, including working capital and letters of credit. This amendment also required the Company to pledge the previously unencumbered five 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 Loan Agreement was included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 9, 2020. Borrowings under the Revolving Line of Credit under the Loan Agreement bear interest at a rate of LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, and will be payable quarterly beginning on September 3, 2020. All outstanding principal and interest under the Revolving Line of Credit will be due and payable on the maturity date of September 3, 2021. Effective May 6, 2020, the Company entered into a waiver with Pinnacle Bank, which waived financial covenant compliance for existing financial covenants under the Second Loan Agreement beginning May 7, 2020 through the period ending July 4, 2021 (the “Waiver Period”), and implemented two new financial covenants now included in the Loan Agreement (the “New Financial Covenants”). The New Financial Covenants require (i) minimum revenue of (a) at least $99,800 for the Company’s fiscal year ending 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, and (ii) a maximum adjusted debt to tangible net worth ratio of 0.80 or less, measured quarterly beginning September 27, 2020. In accordance with the Loan Agreement, upon the expiration of the Waiver Period, the New Financial Covenants will terminate and the financial covenants revert back to (i) a fixed coverage charge ratio of not less than 1.25 to 1.0 and (ii) a maximum adjusted debt to EBITDAR ratio of not more than 4.0 to 1.0, consistent with the historical financial covenants in the Second Loan Agreement prior to the Company obtaining the waiver. The Company projects to be in compliance with these New Financial Covenants through the Waiver Period. For additional information on the former financial covenants under the terms and conditions of the Second Loan Agreement, please see “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 10 – Debt” in the Company’s 2019 Annual Report. 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 Coronavirus Aid Relief and Economic Security Act (“CARES Act”), which was enacted March 27, 2020. 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 11 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 . (m) Goodwill Impairment and Long-lived Asset Impairment Charges In light of the recent 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 the Company’s first and second quarters of 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 the first half of 2020. The Company performed a quantitative goodwill impairment test as of March 29, 2020 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 Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. Additionally, 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 March 29, 2020, which is presented as “Long-lived asset impairment charges and restaurant closing costs” on the Condensed 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 due to COVID-19-related traffic limitations unique to that specific restaurant which further impacted operating results. The Company also performed a quantitative impairment analysis in the first and second quarters of 2020 relative to its indefinite-lived intangible assets and determined that the fair value of these assets substantially exceeded their carrying values and no impairment existed as of June 28, 2020. |
