| 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 nine-month period ended September 27, 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 the Company’s 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 the Company’s significant accounting policies, other than those described in Note 2(k) – Inventory Method Change and Note 7 – Recent Accounting Pronouncements, as compared to the significant accounting policies described in the Company’s 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 7 In addition to the decline in restaurant sales, the Company has also incurred approximately $3,336 of costs directly related to the COVID-19 pandemic in the nine-month period ended September 27, 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 their respective landlord during the second and third quarters of 2020 while negotiations for other locations are ongoing. 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 nine-month period ended September 27, 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 (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. Finally, 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. See Note 11 – Subsequent Events for further discussion. 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, 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. 8
( 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 quarter and nine-month periods ended September 27, 2020 and September 29, 2019 each included 13 and 39 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 quarter and nine-month period ended September 27, 2020 totaled $173 and $351, respectively, and include labor expenses incurred subsequent to closure, severance, the loss on sale of fixed assets at this location discussed below and other miscellaneous costs. Expenses 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 the Company’s 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 and the transaction closed in the third quarter of 2020. The assets sold included the land and building for which the Company received proceeds of $1,070. The Company previously recorded a long-lived asset impairment charge of $689 related to the fixed assets at this location during the first quarter of 2020 which is 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 $53 and $66 losses from discontinued operations included in the quarters ended September 27, 2020 and September 29, 2019, respectively, and losses for the nine-month periods ended September 27, 2020 and September 29, 2019 of $160 and $183, 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 $12 and $635 for the quarter and nine-month period ended September 27, 2020, respectively. In the first nine months of 2020, the Company incurred legal fees, other professional fees 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 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. Transaction, contested proxy and other related expenses for the quarter and nine-month period ended September 29, 2019 totaled $117 and $768, respectively. 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 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. 9
( 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 September 27, 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 September 27, 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 September 27, 2020 and September 29, 2019 to determine allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, no allocation of net (loss) income was made to non-controlling interests for either of the quarters or nine-month periods ended September 27, 2020 or September 29, 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 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 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 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 On September 27, 2020, the Company was 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 “Third Loan Agreement”). The Third Loan Agreement was subsequently amended by the Fourth Amended and Restated Loan Agreement (the “Fourth Loan Agreement”), dated October 28, 2020 and entered into by the same parties, which extends the maturity of three of the 10 Company’s loans to January 1, 2023 and makes the same interest rate apply to each of the loans as described below. The Fourth Amended and Restated Loan Agreement amends and restates in its entirety the Third Loan Agreement . The discussion that follows describes the terms of the Company’s credit facilities under the Fourth Loan Agreement with deviations from the Third Loan Agreement that was in place as of September 27, 2020 as notated. The Fourth Loan Agreement consists of the following loans: (i) a $4,028 term loan set to mature on January 1, 2023 (the “Mortgage Loan” previously stated at $5,000 and set to mature on September 3, 2021), (ii) a $20,000 development line of credit set to mature on January 1, 2023 (the “Development Line of Credit” previously set to mature on September 3, 2021), (iii) a $556 term loan set to mature on December 10, 2020 (the “Term Loan” previously stated at $10,000 and set to mature on September 3, 2021), and (iv) a $16,000 revolving line of credit set to mature on January 1, 2023 (the “Revolving Line of Credit” previously set to mature on September 3, 2021). At September 27, 2020, the amounts outstanding under the Development Line of Credit and the Revolving Line of Credit were $20,000 and $1,000, respectively. At September 27, 2020, $4,167 was outstanding under the Mortgage Loan and an additional $556 was outstanding under the Term Loan. Due to the modification of each credit facility’s maturity date effective with the Fourth Loan Agreement, the Company considered these dates when determining its intent and ability to reclassify short-term debt as of September 27, 2020 to long-term debt. As such, a portion of the outstanding debt at September 27, 2020 is classified as long-term on the Company’s Condensed Consolidated Balance Sheet at September 27, 2020. 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 current 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. 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 2.35% as of September 27, 2020). Under the Fourth Loan Agreement, each of these credit facilities bear interest at a rate of 30-day LIBOR plus 2.5%, with a floor for LIBOR of 1.5%. The maximum adjusted debt to EBITDAR ratio financial covenant which previously determined these interest rates as of September 27, 2020 was eliminated by the Fourth Loan Agreement. In October 2020, the Company paid $10,000 of the $20,000 outstanding Development Line of Credit balance, which was included in the “Current portion of long-term debt” balance on the Condensed Consolidated Balance Sheet as of September 27, 2020 due to the Company’s intent and ability to pay this amount within a twelve-month period as of the balance sheet date. 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 above, 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 will continue through its current 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. As noted above, under the Fourth Loan Agreement, each of these credit facilities bear interest at a rate of 30-day LIBOR plus 2.5%, with a floor for LIBOR of 1.5%. The maximum adjusted debt to EBITDAR ratio financial covenant which previously determined these interest rates as of September 27, 2020 was eliminated by the Fourth Loan Agreement, and was set at 30-day LIBOR plus 2.35% as of September 27, 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 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. Borrowings under the Revolving Line of Credit under the Third Loan Agreement bore interest at a rate of LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, and was 11 payable quarterly beginning on September 3, 2020. Under the Fourth Loan Agreement, the interest rate on this credit facility remains the same and a ll outstanding principal and interest is now due and payable at the end of fiscal 2022 . The Third Loan Agreement included certain terms agreed upon in a May 2020 waiver, 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, and implemented two new financial covenants included in the Third Loan Agreement. 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 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. The Fourth Loan Agreement also includes a fixed coverage charge ratio covenant of not less than 1.00 to 1.00 for the fiscal third and fourth quarters of 2021 and not less than 1.05 through the end of fiscal 2022. Under the Second Loan Agreement, the fixed coverage charge financial covenant was required to be at a ratio of not less than 1.25 to 1.00 throughout the term of that agreement. 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 Treasury Department and the U.S. Small Business Administration on April 23, 2020,
( m )
Goodwill Impairment and Long-lived Asset Impairment Charges 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 the Company’s first, second and third 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 nine months 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 2020 due to COVID-19-related traffic limitations unique to that specific restaurant which further impacted operating results. 12 The Company also performed a quantitative impairment analysis in the first, second and third 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 September 27, 2020. |
