UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________.
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol |
Name of exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 5, 2020,
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
J. Alexander’s Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except share amounts)
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September 27, |
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December 29, |
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2020 |
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2019 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts and other receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Other assets |
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Property and equipment, at cost, less accumulated depreciation and amortization of $ |
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Right-of-use lease assets, net |
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Goodwill |
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- |
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Tradename and other indefinite-lived assets |
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Deferred income taxes, net |
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Deferred charges, less accumulated amortization of $ |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Unearned revenue |
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Current portion of long-term debt |
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Current portion of lease liabilities |
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Total current liabilities |
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Long-term debt, net of portion classified as current and deferred loan costs |
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Long-term lease liabilities |
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Deferred compensation obligations |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Common stock, par value $ |
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Preferred stock, par value $ |
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Additional paid-in capital |
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(Accumulated deficit) Retained earnings |
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( |
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Total stockholders' equity attributable to J. Alexander's Holdings, Inc. |
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Non-controlling interests |
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Total stockholders' equity |
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Commitments and contingencies |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
J. Alexander’s Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(Unaudited in thousands, except per share amounts)
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Quarter Ended |
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Nine Months Ended |
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September 27, |
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September 29, |
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September 27, |
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September 29, |
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2020 |
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2019 |
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2020 |
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2019 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Costs and expenses: |
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Food and beverage costs |
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Restaurant labor and related costs |
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Depreciation and amortization of restaurant property and equipment |
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Other operating expenses |
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Total restaurant operating expenses |
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Transaction, contested proxy and other related expenses |
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General and administrative expenses |
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Goodwill impairment |
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- |
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- |
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- |
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Long-lived asset impairment charges and restaurant closing costs |
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- |
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- |
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Pre-opening expenses |
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Total operating expenses |
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Operating (loss) income |
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( |
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Other (expense) income: |
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Interest expense |
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( |
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( |
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( |
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Other, net |
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Total other expense |
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( |
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(Loss) income from continuing operations before income taxes |
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( |
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( |
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Income tax (expense) benefit |
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( |
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Loss from discontinued operations, net |
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( |
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( |
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( |
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( |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Basic (loss) earnings per share: |
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(Loss) income from continuing operations, net of tax |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Loss from discontinued operations, net |
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( |
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( |
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( |
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( |
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Basic (loss) earnings per share |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Diluted (loss) earnings per share: |
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(Loss) income from continuing operations, net of tax |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Loss from discontinued operations, net |
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( |
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( |
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( |
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( |
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Diluted (loss) earnings per share |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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Comprehensive (loss) income |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
Per share amounts may not sum due to rounding.
4
J. Alexander’s Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited in thousands, except share amounts)
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Outstanding shares |
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Common stock |
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Additional paid-in capital |
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Retained earnings (Accumulated deficit) |
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Non-controlling interests |
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Total |
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Balances at December 29, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
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- |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Balances at March 29, 2020 |
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Share-based compensation |
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- |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Balances at June 28, 2020 |
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Issuance of restricted stock awards |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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Vested shares withheld to pay employee portion of payroll taxes |
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( |
) |
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- |
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( |
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- |
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- |
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( |
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Net loss |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Balances at September 27, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Outstanding shares |
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Common stock |
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Additional paid-in capital |
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Retained earnings |
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Non-controlling interests |
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Total |
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Balances at December 30, 2018 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Cumulative effect of change in accounting policy (Note 10) |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
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Share-based compensation |
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- |
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- |
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- |
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- |
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Cancellation of subsidiary Class B Units (Note 2 (h)) |
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- |
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- |
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- |
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( |
) |
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- |
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Net income |
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- |
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- |
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- |
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- |
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Balances at March 31, 2019 |
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Share-based compensation |
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- |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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- |
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Balances at June 30, 2019 |
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Issuance of restricted and performance stock awards |
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- |
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- |
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- |
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- |
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- |
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Share-based compensation |
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- |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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- |
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Balances at September 29, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
5
J. Alexander’s Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
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Nine Months Ended |
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September 27, |
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September 29, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
) |
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$ |
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Depreciation and amortization of property and equipment |
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Share-based compensation expense |
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Asset impairment charges |
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- |
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Deferred income taxes |
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( |
) |
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( |
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Other, net |
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Changes in assets and liabilities: |
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Accounts and other receivables |
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( |
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Prepaid expenses and other current assets |
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Accounts payable |
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( |
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( |
) |
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Accrued expenses and other current liabilities |
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( |
) |
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( |
) |
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Lease right-of-use assets and liabilities |
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Other assets and liabilities, net |
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( |
) |
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Net cash (used in) provided by operating activities |
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( |
) |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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( |
) |
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|
( |
) |
|
Proceeds from sale of property and equipment |
|
|
|
|
|
|
- |
|
|
Other investing activities |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from borrowing under debt agreement |
|
|
|
|
|
|
- |
|
|
Payments on long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Other financing activities |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by (used in) financing activities |
|
|
|
|
|
|
( |
) |
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
Property and equipment obligations accrued at beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Property and equipment obligations accrued at end of period |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
J. Alexander’s Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited, dollars in thousands except per share data)
Note 1 – Organization and Business
J. Alexander’s Holdings, Inc. (the “Company”) was incorporated on
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 September 27, 2020 and December 29, 2019, the Company operated
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 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 in the third quarter and first nine months of 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 utilizing the services of ChowNow, 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 at certain of its locations with a complete rollout anticipated by the end of the fiscal year 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.
7
In addition to the decline in restaurant sales, the Company has also incurred approximately $
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 $
To preserve financial flexibility, the Company drew the remaining $
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 $
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 $
|
|
(f) |
Transaction, Contested Proxy and other Related Expenses |
Transaction, contested proxy and other related expenses totaled $
|
|
(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,
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 $
|
|
(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
|
|
(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
10
Company’s loans to
The Fourth Loan Agreement consists of the following loans: (i) a $
During the first quarter of 2020, the Company announced it drew down the remaining $
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 $
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 $
11
payable quarterly beginning on September 3, 2020. Under the Fourth Loan Agreement, the interest rate on this credit facility remains the same and all outstanding principal and interest is now due and payable at the end of fiscal 2022.
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 $
|
|
(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 $
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 $
Additionally, the Company recorded a long-lived asset impairment charge of $
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
Note 3 – Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share:
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
(Dollars and shares in thousands, except per share amounts) |
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Loss from discontinued operations, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator for basic (loss) earnings per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Adjusted weighted average shares and assumed conversions (denominator for diluted (loss) earnings per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Loss from discontinued operations, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Basic (loss) earnings per share |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Diluted (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Loss from discontinued operations, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Diluted (loss) earnings per share |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We incurred a net loss for the quarter and nine-month period ended September 27, 2020, and therefore, diluted shares outstanding equaled basic shares outstanding for each of these periods.
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
The number of additional shares of common stock related to stock option awards is calculated using the treasury stock method, if dilutive. There were
As of September 27, 2020 and September 29, 2019, there were
13
date of grant. During the third quarter of 2020,
As of September 27, 2020 and September 29, 2019, there were
Note 4 – Income Taxes
On March 27, 2020, the 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 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. Additionally, the CARES Act provides for non-income tax-related relief such as refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes. As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund from the carryback of NOLs expected to be generated in fiscal 2020, and it is currently in the process of quantifying the estimated total amount of that carryback. The Company also intends to take full advantage of the deferral offered for the employer-paid portion of social security taxes and the refundable employee retention tax credits. As of September 27, 2020, the Company has deferred the payment of $
Prior to the third quarter of 2020, the interim tax provision was prepared on an actual effective tax rate basis rather than on an estimated annual effective rate basis as the Company determined at the time that a reliable estimate of the annual effective tax rate could not be made due to the uncertainty presented by the COVID-19 pandemic and its impact on the Company’s ability to effectively forecast results for fiscal 2020 on which an annual effective tax rate could be based in accordance with ASC 740 – Income Taxes. However, during the third quarter of 2020, the Company determined that a reliable annual effective tax rate could be estimated and that it would be appropriate to record its income tax provision for the quarter ended September 27, 2020 based on such estimated annual effective tax rate.
The Company recognized an income tax expense of $
The Company regularly assesses the need for a valuation allowance related to its deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized. In its assessment, the Company considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. The Company has evaluated the need for valuation allowances as of the nine-month period ended September 27, 2020 and has determined that a valuation allowance of $
14
operating losses and other deferred tax assets which are not expected to be realized. Management also determined at September 27, 2020 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. The Company will continue to assess the likelihood of the realization of its deferred tax assets, especially in light of the COVID-19 pandemic and related economic uncertainty, and the valuation allowance will be adjusted accordingly in future periods, if required.
Note 5 – Commitments and Contingencies
|
|
(a) |
Contingent Leases |
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
|
|
(b) |
Tax Contingencies |
The Company and its subsidiaries are subject to real property, personal property, business, franchise, income, withholding, unemployment, unclaimed property, sales and use taxes in various jurisdictions within the United States and are regularly under audit by tax authorities. This is believed to be common for the restaurant industry. Management believes the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
|
|
(c) |
Litigation Contingencies |
The Company and its subsidiaries are defendants from time to time in various claims or legal proceedings arising in the ordinary course of business, including claims relating to workers’ compensation matters, labor-related claims, discrimination and similar matters, claims resulting from guest accidents while visiting a restaurant, claims relating to lease and contractual obligations, federal and state tax matters, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns, and injury or wrongful death under “dram shop” laws that allow a person to sue the Company and its subsidiaries based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of the Company’s restaurants.
Management does not believe that any of the legal proceedings pending against the Company and its subsidiaries as of the date of this report will have a material adverse effect on the Company’s liquidity, consolidated results of operations or financial condition. The Company may incur liabilities, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal year, which may adversely affect its consolidated results of operations, or on occasion, receive settlements that favorably affect its consolidated results of operations.
Note 6 – Fair Value Measurements
As of September 27, 2020 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 unaudited Condensed 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. |
15
|
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
As discussed in Note 2(m) above, 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 $
The Company updated its impairment analyses for its long-lived and indefinite-lived intangible assets as of September 27, 2020 as the Company continued to be impacted by the COVID-19 pandemic during the third quarter.
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
|
|
|
September 27, 2020 |
|
|||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
|
Cash and cash equivalents * |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
U.S. government obligations * |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Corporate bonds * |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Mutual and money market funds ** |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Cash surrender value - life insurance * |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019 |
|
|||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
|
Cash and cash equivalents * |
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
U.S. government obligations * |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Corporate bonds * |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Mutual and money market funds ** |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Cash surrender value - life insurance * |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* - As held in the Trust (as defined below). |
|
|
|
|
|
|
|
|
|
|
|
|
|
** - As held in the 409a Trust (as defined below). |
|
|
|
|
|
|
|
|
|
|
|
|
16
Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in a rabbi trust established under a retirement benefit arrangement with certain of the Company’s current and former officers (the “Trust”). Cash held in the Trust is invested through an overnight repurchase agreement the investments of which may include U.S. Treasury securities, such as 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 September 27, 2020 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 September 27, 2020 (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).
Cash surrender value - life insurance is classified as Level 2 in the fair value hierarchy. The value of each policy was determined by MassMutual Financial Group, an A-rated insurance company, which provides the value of these policies to the Company on a regular basis.
There were no transfers between the levels listed above during either of the reporting periods.
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 Condensed 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 Condensed Consolidated Balance Sheets.
Note 7 – Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 unaudited Condensed Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”). This update simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step quantitative goodwill impairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit, not to exceed the carrying value of the reporting unit goodwill. The option remains for an entity to perform a qualitative assessment of a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 requires prospective adoption and is effective commencing in fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance at the beginning of fiscal year 2020, which it followed in assessing goodwill for impairment as of March 29, 2020 as discussed in Note 2(m) above.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”). This update eliminates, modifies and adds a number of disclosure requirements related to fair value measurements in connection with the FASB’s disclosure framework project, the objective of which is to improve the effectiveness of disclosures in the notes to financial statements. ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. The Company adopted this guidance at the beginning of fiscal year 2020, and it did not have a significant impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
17
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. 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 unaudited Condensed 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 Accounting Standards Codification (“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 continues to assess the potential impact of ASU No. 2020-04 on its unaudited Condensed Consolidated Financial Statements and related disclosures.
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. See Note 10 – Leases below for additional discussion regarding rent concessions granted during the second and third quarters of 2020. The Company continues to have discussions and negotiations are ongoing with its landlords regarding future rent concessions.
Note 8 – Related Party Transactions
On September 28, 2015, J. Alexander’s Holdings, LLC entered into a management consulting agreement (“Management Consulting Agreement”) with Black Knight, pursuant to which Black Knight provided corporate and strategic advisory services to J. Alexander’s Holdings, LLC. On
Under the Management Consulting Agreement, J. Alexander’s Holdings, LLC issued Black Knight
Under the terms of the Termination Agreement, Black Knight had
18
Note 9 – Revenue
The following table presents the Company’s revenues disaggregated by revenue source for the periods presented:
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Quarter Ended |
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Nine Months Ended |
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September 27, |
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September 29, |
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September 27, |
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September 29, |
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2020 |
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2019 |
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2020 |
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2019 |
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Restaurant |
$ |
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$ |
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$ |
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$ |
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Gift card breakage |
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Net sales |
$ |
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$ |
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$ |
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$ |
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The Company recognized revenue associated with gift cards redeemed by guests of $
Note 10 – 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 right-of-use (“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 Condensed 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 Condensed Consolidated Balance Sheets. The adoption of Topic 842 did not have a material effect on the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and Condensed Consolidated Statements of Cash Flows.
During the first nine months of 2020, the Company took possession of the new restaurant location in San Antonio, Texas, the construction of which is scheduled to be completed during the fourth quarter of 2020. However, due to the current restrictions associated with the COVID-19 pandemic in Texas, coupled with the lead time associated with preparing a new location for opening, the Company has scheduled this restaurant to open in the first quarter of fiscal year 2021. The Company recorded a ROU asset in exchange for a new lease liability of $
The Company modified an existing lease related to its Stoney River Annapolis location during the first quarter of 2020, which included changes to the length of the lease’s option periods. However, the total number of years between the two option periods remained the same, and the modification did not extend the total lease period beyond that which was agreed upon in the original lease. While base rental payments remained unchanged, the breakpoint and percentages applicable to percentage rental payments were modified should the restaurant’s sales exceed such thresholds. The amendment also provided for a lease incentive payment of $
Additionally, in the second quarter of 2020, the Company modified the lease for its Redlands Grill location in Nashville to extend the upcoming renewal term of the lease to
In the second and third quarters of 2020, the Company was granted COVID-19 related rent concessions for 13 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
19
concession results in a substantial increase in the Company’s obligations, taking into consideration the recent guidance issued by the FASB in its Staff question-and-answer document regarding rent concessions related to the effects of the COVID-19 pandemic. During the nine months ended September 27, 2020,
The cash paid during the third quarter and first nine months of 2020 for amounts included in the measurement of lease liabilities totaled $
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:
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September 27, |
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2020 |
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2020 (1) |
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$ |
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2021 |
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2022 |
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2023 |
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2024 |
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2025 and thereafter |
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Total minimum lease payments |
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Less: Imputed interest (2) |
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Present value of lease liabilities |
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$ |
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(1) Excluding the 39 weeks ended September 27, 2020
(2) Amount necessary to reduce net minimum lease payments to present value calculated using the Company’s 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 or modification date (for those leases entered into or modified after the adoption date).
Note 11 – Subsequent Events
On October 28, 2020, the Company entered into the Fourth Loan Agreement with Pinnacle Bank to modify certain terms within the Third Loan Agreement in place as of September 27, 2020 as discussed in Note 2(l) – Debt above.
Also discussed in Note 2(l), the Company considered the terms of the Fourth Loan Agreement when determining the Company’s 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. Further, in October 2020, the Company paid $
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
J. Alexander’s Holdings, Inc. (also referred to herein as the “Company”, “we”, “us” or “our”) cautions that certain information contained or incorporated by reference in this report and our other filings with the United States Securities and Exchange Commission (the “SEC”), in our press releases and in statements made by or with the approval of authorized personnel is forward-looking information that involves risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements contained herein. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements are typically identified by words or phrases such as “may,” “will,” “would,” “can,” “should,” “likely,” “anticipate,” “potential,” “estimate,” “pro forma,” “continue,” “expect,” “project,” “intend,” “seek,” “plan,” “believe,” “target,” “outlook,” “forecast,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding our expectations, intentions or strategies and regarding the future, including the impact of the novel coronavirus (“COVID-19”) pandemic, reopening of the Company’s restaurants, the Company’s cash burn rate, cost containment efforts, new restaurant openings and the Company’s plans to continue its review of strategic alternatives. We expressly disclaim any intent or obligation to update these forward-looking statements. Other risks, uncertainties and factors which could affect actual results include, but are not limited to:
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the health and financial effects of the COVID-19 pandemic; |
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our ability to keep our restaurants open for in-person dining, and thereafter to reestablish and maintain satisfactory guest count levels and maintain or increase sales and operating margin in our restaurants under varying economic conditions; |
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the impact of recent surges in positive COVID-19 cases on our operations, including potential future governmental mandates that could result in restaurant closures or suspension of dine-in services and our ability to staff our restaurants while adhering to quarantine guidelines; |
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the effect of higher commodity prices, unemployment and other economic factors on consumer demand as a result of COVID-19; |
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COVID-19-related increases in food input costs or product/supply shortages and our response to them; |
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our ability to comply with financial covenants under our loan agreement and to borrow available amounts under our lines of credit; |
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our ability to defer additional lease or contract payments or otherwise obtain additional concessions from landlords, vendors and other parties in light of the impact of the COVID-19 pandemic; |
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the impact of, and our ability to pursue, any potential strategic alternatives in light of the impact of the COVID-19 pandemic; |
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the impact of pandemics, such as outbreaks of viruses, foodborne illnesses or other diseases; |
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the impact of, and our ability to adjust to, general economic conditions and changes in consumer preferences; |
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our ability to open new restaurants and operate them profitably, including our ability to locate and secure appropriate sites for restaurant locations, obtain favorable lease terms, attract guests to our restaurants or hire and retain personnel; |
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our ability to obtain financing on favorable terms, or at all; |
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the strain on our infrastructure caused by the implementation of our growth strategy; |
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our ability to successfully transition certain of our existing J. Alexander’s locations to Redlands Grill locations and any other future concept locations; |
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the significant competition we face for guests, real estate and employees; |
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the impact of economic downturns, volatile retail area traffic patterns or other disruptions in markets in which we have revenue or geographic concentrations within our restaurant base; |
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our ability to increase sales at our existing restaurants and improve our margins at existing Stoney River restaurants; |
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the impact of increases in the price of, and/or reductions in the availability of, commodities, particularly beef; |
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the impact of negative publicity or damage to our reputation, which could arise from concerns regarding food safety and foodborne illnesses or other matters; |
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the impact of changes in new information and attitudes regarding health and diets; |
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the impact of proposed and future government regulation and changes in healthcare, labor, including minimum wage rates, and other laws; |
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our ability to utilize and manage social media; |
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our expectations regarding litigation or other legal proceedings or claims; |
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our inability to cancel and/or renew leases and the availability of credit to our landlords and other retail center tenants; |
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operating and financial restrictions imposed by our loan agreement, our level of indebtedness and any future indebtedness; |
21
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the impact of the loss of key executives and management-level employees; |
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our ability to enforce our intellectual property rights; |
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the impact of information technology system failures or breaches of our network security; |
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the impact of any future impairment of our long-lived assets, including tradenames; |
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the impact of any future acquisitions, joint ventures or other initiatives; |
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the impact of shortages, interruptions and price fluctuations on our ability to obtain ingredients from our limited number of suppliers; |
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our expectations regarding the seasonality of our business; |
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the impact of adverse weather conditions, including hurricanes and other weather-related disturbances; |
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the impact of store closures, decreased business levels and property damage related to civil disturbances; |
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factors that are under the control of third parties, including governmental agencies; and |
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the other matters found under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 filed with the SEC on March 13, 2020, as amended on April 17, 2020 (the “2019 Annual Report”), under “Risk Factors” discussed in our Form 10-Q for the quarters ended March 29, 2020 and June 28, 2020 filed with the SEC on June 9, 2020 and August 6, 2020, respectively, in subsequent filings and in Part II, Item 1A. Risk Factors of this report. |
These factors should not be construed as exhaustive and should be read with the other cautionary statements in the 2019 Annual Report and this report. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results including the economic impact of the ongoing COVID-19 pandemic. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in the 2019 Annual Report, in subsequent filings and in Part II, Item 1A. Risk Factors of this report. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. We expressly disclaim any intent or obligation to update these forward-looking statements.
Dollar amounts within this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands except for average weekly sales per restaurant, average weekly same store sales per restaurant and average check per guest.
Overview
The Company, as the sole managing member of its subsidiary J. Alexander’s Holdings, LLC, owns and operates complementary upscale dining restaurants including: J. Alexander’s, Redlands Grill, Overland Park Grill, Merus Grill and Stoney River Steakhouse and Grill (“Stoney River”). For more than 29 years, J. Alexander’s guests have enjoyed a contemporary American menu, polished service and an attractive ambiance. In February 2013, our team brought our quality and professionalism to the steakhouse category with the addition of the Stoney River concept. Stoney River provides “white tablecloth” service and food quality in a casual atmosphere at a competitive price. Our Redlands Grill concept offers guests a different version of our contemporary American menu and a distinct architectural design and feel. In 2018, we successfully converted one of our previous J. Alexander’s locations in Kansas to the Overland Park Grill. In 2019, we opened Merus Grill in Houston, Texas. Each of these locations offers a contemporary American menu.
During the second quarter of 2020, the Company made the decision not to reopen the Lyndhurst Grill location in Cleveland, Ohio, after a review of its projected and historical financial performance. This location was required to be closed in mid-March 2020 due to COVID-19 related traffic limitations unique to that specific restaurant and remained closed. The Company completed the sale of the remaining long-lived assets at this location, including the land and building, during the third quarter of 2020.
Our business plan has evolved over time to include a collection of restaurants dedicated to providing guests with what we believe to be high quality food and beverages, high levels of professional service and a comfortable ambiance. By offering multiple restaurant concepts and utilizing unique non-standardized architecture and specialized menus, we believe we are positioned to continue to scale and grow our overall restaurant business in an efficient manner in urban and affluent suburban areas. We want each of our restaurants to be perceived by our guests as a locally managed, stand-alone dining experience. This differentiation permits us to successfully operate multiple restaurants in the same geographic market. If this strategy continues to prove successful, we may
22
expand beyond our current existing concepts in the future. While each restaurant concept operates under a unique trade name, each of our restaurants is identified as a “J. Alexander’s Holdings Restaurant.”
We believe our restaurants deliver on our guests’ desire for freshly-prepared, high-quality food and exemplary service in a restaurant with architecture and design that varies from location to location. Through our combination with Stoney River and opening new restaurants, we have grown from 33 restaurants across 13 states in 2012 to 46 restaurants across 16 states as of November 5, 2020. Our financial performance has allowed us to invest significant amounts of capital to drive growth through the continuous improvement of existing locations, the development of plans to open new restaurants, and the hiring of personnel to support our growth plans.
We plan to execute the following strategies to continue to enhance the awareness of our restaurants, grow our sales and improve our profitability by:
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leveraging our new carry-out platform to drive off-premise sales both while restrictions in response to the COVID-19 pandemic are in effect and on a long‑term incremental basis; |
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increasing our same store guest counts and sales by providing high quality food and service; |
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pursuing new restaurant development in the long-term; |
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potentially expanding beyond our current existing restaurant concepts; and |
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improving our margins and leveraging infrastructure. |
The most recent restaurant openings include a Merus Grill in Houston, Texas, during November 2019 and a Stoney River restaurant in Troy, Michigan, during October 2018. Additionally, the Company has announced the signing of two leases to open a new Redlands Grill in San Antonio, Texas, and a new J. Alexander’s restaurant in Madison, Alabama. The Company is currently constructing the new Redlands Grill which is scheduled to be completed during the fourth quarter of 2020. However, due to the current restrictions associated with the COVID-19 pandemic in Texas, coupled with the lead time associated with preparing a new location for opening, the Company has scheduled this restaurant to open in the first quarter of fiscal year 2021. The J. Alexander’s restaurant in Madison, Alabama, is also slated to begin operations in 2021. The opening of the Madison, Alabama, location has been delayed from its previously anticipated opening in 2020 due to the Company’s decision to limit capital expenditures in response to the COVID-19 pandemic. Our restaurants often have a slower ramp up than many other restaurant groups due to our reliance on repeat business from a relatively small group of guests within each market. Having opened seven restaurants since the beginning of 2016, all of which are at different stages of maturity, our near-term focus will be on building guest traffic and sales at certain of the newer locations while we continue to evaluate promising opportunities for new restaurant development as well as react to the impact of the COVID-19 pandemic on our liquidity and restaurant performance in the near‑term.
The locations that have been transitioned from a J. Alexander’s restaurant to a Redlands Grill, Lyndhurst Grill (now closed) or Overland Park Grill restaurant or opened as a Merus Grill restaurant have been included in the J. Alexander’s results of operations, average weekly same store sales calculations and all other applicable disclosures, and, with the J. Alexander’s restaurants, are collectively referred to herein as “J. Alexander’s / Grill” restaurants.
Recent Developments and Trends Impacting our Business
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the United States declared it a national public health emergency. Since March 2020, we have experienced substantial disruptions in our operations including, but not limited to, temporary restaurant closings, reopening of restaurants at limited capacity, suggested and mandated social distancing and stay-at-home orders, limited staffing and to-go only service in our restaurants. Despite the fact that all of our locations’ dining rooms were allowed to reopen by the end of the second quarter, the Company continues to be impacted by governmental orders that restrict capacity for the majority of its restaurants. Additionally, in October 2020, the state of Illinois again closed dining rooms to in-restaurant dining in certain locations which impacted the Company’s operations in those locations. Also, the in-restaurant dining capacity for one location in Florida was reduced to 50% from full capacity due to a local mandate. There can be no assurance that other state or local authorities will allow dining rooms to remain open even at reduced capacity if there is a surge in cases of COVID‑19 in those locations. Each of these factors have limited our ability to generate revenue impacting results from operations and cash flows during the first nine months of 2020 and may continue to do so for an extended period of time depending on the length of the pandemic and how significantly it affects the economy. There is significant uncertainty concerning consumer behavior, including guests’ propensity to spend disposable income or changes in consumer habits due to fear of contracting the virus in public or as a result of unemployment or reduced income. Governmental mandates required the Company to keep its dining rooms closed for a significant portion of the second quarter with reopening dates varying by state or local municipality and varying capacity limitations during the third quarter. Further, we expect that most of our restaurants will operate on a limited-capacity basis for the balance of the
23
fourth quarter in response to orders issued by government officials in an effort to limit the spread of COVID-19, which could be more limiting particularly in response to a second wave of COVID-19 infections as some health officials believe could occur during the fall and winter months of 2020 and 2021. The Company is also closely monitoring the impact of the pandemic on all aspects of its business, including on guests, employees, suppliers, vendors, landlords, distribution channels and other business partners.
As a result of factors noted above, the Company has taken steps to modify its operations, where necessary, for a limited period of time, including pivoting to a carry-out model as a means of generating revenue and cash flow and reopening dining rooms at a limited capacity in compliance with state and local government guidelines. We have made employee and guest health and safety our first priority as we serve our guests during these uncertain times. We have provided personal protective equipment, such as masks, gloves and hand sanitizer to our team members, and we are checking employee temperatures daily. We are also observing social distancing requirements and routinely sanitizing high-touch surface areas in our restaurants. We have sought to develop menus that are friendly to an off-premise model providing guests with appetizers, salads, entrées, sides, wine, cocktails, family meal kits that can be prepared at home and “butcher shop” style beef offerings at select restaurants. We have also implemented an online ordering platform to allow for ease of ordering and to increase off-premises sales. We have implemented contactless menus in all of our dining rooms as well as contactless payments at certain locations, with the remaining locations anticipated to incorporate contactless payments by the end of 2020. We have also added pub and booth partitions in many locations in an effort to increase capacity while maintaining guest safety. Restaurant and corporate management have evaluated, and continue to evaluate, ways to curtail spending including an ongoing review of operations to maximize efficiency, adjusting restaurant-level labor and reducing purchases of inventory to align with new levels of demand, limiting discretionary operating expenses including business travel, suspending all significant non-essential capital expenditures, and negotiating the deferral of new restaurant capital expenditures with contractors in addition to certain rent, insurance, tax and debt payments where possible. We also eliminated certain positions at the Company’s corporate office during the second quarter of 2020. During the first quarter of 2020, we made the difficult decision to furlough restaurant employees that were not able to assist with the Company’s carry-out program, but have brought a significant number of these employees back to their restaurants during the reopening process at a volume warranted by the allowed dine-in capacity, as applicable, until normal staffing levels can resume. Additionally, the Company has held, and will continue to engage in, discussions with its lender to further enhance its liquidity including the full draw down on its available lines of credit in March 2020 as well as negotiating for modifications of these credit facilities during the second quarter of 2020 in order to make additional funds available for operations. In October 2020, the Company was able to extend the maturity date of its credit facilities as well as make certain other amendments to its debt agreements. See the discussion contained in “Liquidity and Capital Resources – Credit Facility” below for additional information. Similarly, we have been in discussions with many of our landlords and were able to secure COVID-19 rent concessions for varying lengths of time in order to defer or abate rent payments to conserve cash. The remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses a number of ways our business has been impacted by COVID-19.
Performance Indicators
We use the following key metrics in evaluating our performance:
Same Store Sales. We include a restaurant in the same store restaurant group starting in the first full accounting period following the 18th month of operations. Our same store restaurant base consisted of 45 restaurants at September 27, 2020. Changes in same store restaurant sales reflect changes in sales for the same store group of restaurants over a specified period of time. This measure highlights the performance of existing restaurants, as the impact of new restaurant openings and closed locations is excluded.
Measuring our same store restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact same store sales including:
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COVID-19-related capacity restrictions and other effects of the COVID-19 pandemic; |
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consumer recognition of our restaurants and our ability to respond to changing consumer preferences; |
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overall economic trends, particularly those related to consumer spending; |
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our ability to operate restaurants effectively and efficiently to meet guest expectations; |
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pricing; |
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guest traffic; |
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spending per guest and average check amounts; |
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local competition; |
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trade area dynamics; and |
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introduction of new menu items. |
Average Weekly Sales. Average weekly sales per restaurant is computed by dividing total restaurant sales for the period by the total number of days all restaurants were open for the period to obtain a daily sales average. The daily sales average is then
24
multiplied by seven to arrive at average weekly sales per restaurant. Days on which restaurants are closed for business for any reason other than scheduled closures on Thanksgiving and Christmas are excluded from this calculation. Revenue associated with reduction in liabilities for gift cards which are not redeemed, commonly referred to as gift card breakage, is not included in the calculation of average weekly sales per restaurant.
Average Weekly Same Store Sales. Average weekly same store sales per restaurant is computed by dividing total restaurant same store sales for the period by the total number of days all same store restaurants were open for the period to obtain a daily sales average. The daily same store sales average is then multiplied by seven to arrive at average weekly same store sales per restaurant. Days on which restaurants are closed for business for any reason other than scheduled closures on Thanksgiving and Christmas are excluded from this calculation. Sales and sales days used in this calculation include only those for restaurants in operation at the end of the period which have been open for more than 18 months. Gift card breakage is not included in the calculation of average weekly same store sales per restaurant.
Average Check. Average check is calculated by dividing total restaurant sales by guest counts for a given time period. Total restaurant sales include food, alcohol and beverage sales. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in guests’ preferences, the effectiveness of menu changes and price increases on per guest expenditures.
Average Unit Volume. Average unit volume consists of the average sales of our restaurants over a certain period of time. This measure is calculated by multiplying average weekly sales by the relevant number of weeks for the period presented. This indicator assists management in measuring changes in guest traffic, guest spending patterns, pricing and development of our concepts.
Guest Counts. Guest counts are measured by the number of entrees sold either for in-restaurant dining or for off-premise dining over a given time period. For purposes of guest count calculations, family pack meals sales are counted as an average of three guests.
Key Financial Definitions
Net Sales. Net sales consist primarily of food and beverage sales at our restaurants, net of any discounts, such as management meals and employee meals, associated with each sale. Net sales are directly influenced by the number of operating weeks in the relevant period, the number of restaurants we operate and same store sales growth. Gift card breakage is also included in net sales.
Food and beverage costs. Food and beverage costs is presented net of earned vendor rebates. Food and beverage costs are generally influenced by the input cost of food and beverage items, distribution costs and menu mix. The components of food and beverage costs are variable in nature, increase with revenues, are subject to increases or decreases based on fluctuations in commodity costs, including beef prices, and depend in part on the controls we have in place to manage costs at our restaurants.
Restaurant Labor and Related Costs. Restaurant labor and related costs includes restaurant management salaries, hourly staff payroll and other payroll-related expenses, including management bonus expenses, vacation pay, payroll taxes, emergency sick leave pay, fringe benefits and health insurance expenses.
Depreciation and Amortization. Depreciation and amortization principally includes depreciation on restaurant fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for restaurants. We depreciate capitalized leasehold improvements over the shorter of the total expected lease term or their estimated useful life. As we open additional restaurants, depreciation and amortization is expected to increase as a result of our increased capital expenditures.
Other Operating Expenses. Other operating expenses includes china and supplies, laundry and linens, repairs and maintenance, credit card fees, rent, property taxes, insurance, utilities, operating supplies and other restaurant-level related operating expenses.
Pre-opening Expense. Pre-opening expense consists of expenses incurred prior to opening a new restaurant and include principally manager salaries and relocation costs, payroll and related costs for training new employees, travel and lodging expenses for employees who assist with training new employees, and the cost of food and other expenses associated with practice of food preparation and service activities. Pre-opening expense also includes rent expense for leased properties for the period of time between taking control of the property and the opening of the restaurant.
25
General and Administrative Expenses. General and administrative expenses consist of costs related to certain corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future company growth. These expenses reflect management, supervisory and staff salaries and employee benefits, non-cash share-based compensation, travel, information systems, training, corporate rent, depreciation of corporate assets, professional and consulting fees, technology and market research. These expenses include costs associated with being a public company, and we believe such expenses will increase over time in response to our anticipated growth. However, as we are able to leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of net sales over time.
Interest Expense. Interest expense consists primarily of interest on our outstanding indebtedness. During periods of restaurant construction, interest expense is capitalized at a rate commensurate with the cost incurred to construct the restaurant. Our debt issuance costs are recorded at cost and are amortized over the lives of the related debt.
Income Tax (Expense) Benefit. This represents tax expense or benefit related to the taxable income at the federal, state and local level.
Discontinued Operations. We remain a party to a lease for a restaurant that closed in 2013 which we determined met the criteria for classification as discontinued operations. Expenses related to continuing obligations under this lease agreement are recognized as discontinued operations, net.
Seasonality
Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth quarters has been higher due, in part, to increased gift card redemptions, guest traffic and private dining during the year-end holiday season. In addition, we operate on a 52-week or 53-week fiscal year that ends on the Sunday closest to December 31st. Each quarterly period includes 13 weeks of operations, except for a 53-week year when the fourth quarter has 14 weeks of operations. Fiscal year 2020 is a 53-week year. As many of our operating expenses have a fixed component, our operating income and operating income margins have historically varied from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter, or for the full fiscal year.
26
Results of Operations
The following tables set forth, for the periods indicated, (i) the items in the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, including our results expressed as a percentage of net sales, and (ii) other selected operating data:
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||
|
|
|
September 27, |
|
|
September 29, |
|
|
Percent Change |
|
|
September 27, |
|
|
September 29, |
|
|
Percent Change |
|
||||||
|
(Unaudited) |
|
2020 |
|
|
2019 |
|
|
2020 vs. 2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 vs. 2019 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
46,230 |
|
|
$ |
56,867 |
|
|
|
(18.7 |
)% |
|
$ |
130,804 |
|
|
$ |
183,830 |
|
|
|
(28.8 |
)% |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and beverage costs |
|
|
14,251 |
|
|
|
18,110 |
|
|
|
(21.3 |
) |
|
|
43,289 |
|
|
|
58,441 |
|
|
|
(25.9 |
) |
|
Restaurant labor and related costs |
|
|
15,592 |
|
|
|
18,835 |
|
|
|
(17.2 |
) |
|
|
48,484 |
|
|
|
57,542 |
|
|
|
(15.7 |
) |
|
Depreciation and amortization of restaurant property and equipment |
|
|
3,037 |
|
|
|
2,968 |
|
|
|
2.3 |
|
|
|
9,191 |
|
|
|
8,847 |
|
|
|
3.9 |
|
|
Other operating expenses |
|
|
10,666 |
|
|
|
11,916 |
|
|
|
(10.5 |
) |
|
|
31,156 |
|
|
|
37,028 |
|
|
|
(15.9 |
) |
|
Total restaurant operating expenses |
|
|
43,546 |
|
|
|
51,829 |
|
|
|
(16.0 |
) |
|
|
132,120 |
|
|
|
161,858 |
|
|
|
(18.4 |
) |
|
Transaction, contested proxy and other related expenses |
|
|
12 |
|
|
|
117 |
|
|
|
(89.7 |
) |
|
|
635 |
|
|
|
768 |
|
|
|
(17.3 |
) |
|
General and administrative expenses |
|
|
3,811 |
|
|
|
4,288 |
|
|
|
(11.1 |
) |
|
|
12,646 |
|
|
|
13,816 |
|
|
|
(8.5 |
) |
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,737 |
|
|
|
- |
|
|
|
100.0 |
|
|
Long-lived asset impairment charges and restaurant closing costs |
|
|
173 |
|
|
|
- |
|
|
|
100.0 |
|
|
|
1,040 |
|
|
|
- |
|
|
|
100.0 |
|
|
Pre-opening expenses |
|
|
72 |
|
|
|
211 |
|
|
|
(65.9 |
) |
|
|
163 |
|
|
|
357 |
|
|
|
(54.3 |
) |
|
Total operating expenses |
|
|
47,614 |
|
|
|
56,445 |
|
|
|
(15.6 |
) |
|
|
162,341 |
|
|
|
176,799 |
|
|
|
(8.2 |
) |
|
Operating (loss) income |
|
|
(1,384 |
) |
|
|
422 |
|
|
|
NCM |
|
|
|
(31,537 |
) |
|
|
7,031 |
|
|
|
NCM |
|
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(283 |
) |
|
|
(135 |
) |
|
|
109.6 |
|
|
|
(588 |
) |
|
|
(490 |
) |
|
|
20.0 |
|
|
Other, net |
|
|
24 |
|
|
|
55 |
|
|
|
(56.4 |
) |
|
|
151 |
|
|
|
191 |
|
|
|
(20.9 |
) |
|
Total other expense |
|
|
(259 |
) |
|
|
(80 |
) |
|
|
NCM |
|
|
|
(437 |
) |
|
|
(299 |
) |
|
|
46.2 |
|
|
(Loss) income from continuing operations before income taxes |
|
|
(1,643 |
) |
|
|
342 |
|
|
|
NCM |
|
|
|
(31,974 |
) |
|
|
6,732 |
|
|
|
NCM |
|
|
Income tax (expense) benefit |
|
|
(64 |
) |
|
|
495 |
|
|
|
(112.9 |
) |
|
|
5,742 |
|
|
|
238 |
|
|
|
NCM |
|
|
Loss from discontinued operations, net |
|
|
(53 |
) |
|
|
(66 |
) |
|
|
(19.7 |
) |
|
|
(160 |
) |
|
|
(183 |
) |
|
|
(12.6 |
) |
|
Net (loss) income |
|
$ |
(1,760 |
) |
|
$ |
771 |
|
|
|
NCM |
|
|
$ |
(26,392 |
) |
|
$ |
6,787 |
|
|
|
NCM |
|
Note: NCM means not considered meaningful
27
|
As a Percentage of Net Sales |
|
Quarter Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 27, |
|
|
September 29, |
|
|
September 27, |
|
|
September 29, |
|
||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and beverage costs |
|
|
30.8 |
|
|
|
31.8 |
|
|
|
33.1 |
|
|
|
31.8 |
|
|
Restaurant labor and related costs |
|
|
33.7 |
|
|
|
33.1 |
|
|
|
37.1 |
|
|
|
31.3 |
|
|
Depreciation and amortization of restaurant property and equipment |
|
|
6.6 |
|
|
|
5.2 |
|
|
|
7.0 |
|
|
|
4.8 |
|
|
Other operating expenses |
|
|
23.1 |
|
|
|
21.0 |
|
|
|
23.8 |
|
|
|
20.1 |
|
|
Total restaurant operating expenses |
|
|
94.2 |
|
|
|
91.1 |
|
|
|
101.0 |
|
|
|
88.0 |
|
|
Transaction, contested proxy and other related expenses |
|
|
0.0 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
General and administrative expenses |
|
|
8.2 |
|
|
|
7.5 |
|
|
|
9.7 |
|
|
|
7.5 |
|
|
Goodwill impairment |
|
|
- |
|
|
|
- |
|
|
|
12.0 |
|
|
|
- |
|
|
Long-lived asset impairment charges and restaurant closing costs |
|
|
0.4 |
|
|
|
- |
|
|
|
0.8 |
|
|
|
- |
|
|
Pre-opening expenses |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
Total operating expenses |
|
|
103.0 |
|
|
|
99.3 |
|
|
|
124.1 |
|
|
|
96.2 |
|
|
Operating (loss) income |
|
|
(3.0 |
) |
|
|
0.7 |
|
|
|
(24.1 |
) |
|
|
3.8 |
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
Other, net |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Total other expense |
|
|
(0.6 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
Income (loss) from continuing operations before income taxes |
|
|
(3.6 |
) |
|
|
0.6 |
|
|
|
(24.4 |
) |
|
|
3.7 |
|
|
Income tax (expense) benefit |
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
4.4 |
|
|
|
0.1 |
|
|
Loss from discontinued operations, net |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Net (loss) income |
|
|
(3.8) |
% |
|
|
1.4 |
% |
|
|
(20.2) |
% |
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Certain percentage totals do not sum due to rounding. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants open at end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Alexander's / Grill Restaurants |
|
|
33 |
|
|
|
34 |
|
|
|
33 |
|
|
|
34 |
|
|
Stoney River Steakhouse and Grill |
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average weekly sales per restaurant: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Alexander's / Grill Restaurants |
|
$ |
85,200 |
|
|
$ |
104,500 |
|
|
$ |
79,300 |
|
|
$ |
111,800 |
|
|
Percent change |
|
|
(18.5) |
% |
|
|
|
|
|
|
(29.1) |
% |
|
|
|
|
|
Stoney River Steakhouse and Grill |
|
$ |
58,800 |
|
|
$ |
71,900 |
|
|
$ |
55,200 |
|
|
$ |
78,800 |
|
|
Percent change |
|
|
(18.2) |
% |
|
|
|
|
|
|
(29.9) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average weekly same store sales per restaurant: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Alexander's / Grill Restaurants |
|
$ |
86,700 |
|
|
$ |
105,900 |
|
|
$ |
80,500 |
|
|
$ |
113,300 |
|
|
Percent change |
|
|
(18.1) |
% |
|
|
|
|
|
|
(28.9) |
% |
|
|
|
|
|
Stoney River Steakhouse and Grill |
|
$ |
58,800 |
|
|
$ |
71,900 |
|
|
$ |
55,100 |
|
|
$ |
78,400 |
|
|
Percent change |
|
|
(18.2) |
% |
|
|
|
|
|
|
(29.7) |
% |
|
|
|
|
Net Sales
Net sales decreased by $10,637, or 18.7%, in the third quarter of 2020 compared to the third quarter of 2019. Further, for the first nine months of 2020, net sales decreased by $53,026, or 28.8%, compared to the first nine months of 2019 primarily due to the COVID-19 related dining room closures and capacity restrictions that began March 16, 2020, and continued at varying levels through
28
the end of the third quarter of 2020. These closures resulted in the Company pivoting to a carry-out only program until dining rooms began to reopen at limited capacities in late April 2020, which significantly limited sales volumes during the affected weeks. Once reopened, our dining rooms continued to operate at limited capacities under governmental mandates throughout the third quarter limiting net sales in the first nine months of 2020 compared to the first nine months of 2019. A small number of our restaurants are currently operating at full capacity where state and local authorities have fully lifted governmental mandates to limit dining room capacities.
Average weekly same store sales at J. Alexander’s / Grill restaurants for the third quarter of 2020 decreased by 18.1% to $86,700, compared to $105,900 in the third quarter of 2019. For the first nine months of 2020, J. Alexander’s / Grill restaurants’ average weekly same store sales totaled $80,500, a 28.9% decrease from $113,300 in the first nine months of 2019. Average weekly same store sales at Stoney River restaurants for the third quarter of 2020 decreased by 18.2% to $58,800 compared to $71,900 in the third quarter of 2019. For the first nine months of 2020, Stoney River restaurants average weekly same store sales totaled $55,100, a 29.7% decrease from $78,400 in the first nine months of 2019. During the first two months of 2020, average weekly same store sales at the J. Alexander’s / Grill restaurants increased by 2.1% but decreased by 1.4% at the Stoney River restaurants compared to the same periods in 2019, respectively. This is partly due to the fact that Stoney River experienced the effects of COVID-19 on sales earlier than the J. Alexander’s / Grill restaurants as cancellations related to private dining and business travel and functions began prior to the dining room closures in March 2020. During the third month of 2020, when widespread mandatory closures of our dining rooms occurred in response to COVID-19, average weekly same store sales at the J. Alexander’s / Grill and Stoney River restaurants decreased by 37.0% and 37.2%, respectively, compared to the same period in 2019. While states and municipalities began allowing for limited capacities inside our restaurants at various points in the second quarter and further eased them during the third quarter in certain locations, such restrictions continued to negatively impact average weekly same store sales in the second and third quarters of 2020 compared to the same periods in 2019 as noted above. To provide additional detail, in the months of April, May and June of 2020, average weekly same store sales for J. Alexander’s / Grill restaurants decreased by 81.0%, 61.5% and 28.2%, respectively, compared to the same months in 2019. We experienced improvement in the downward trend of same store sales during the third quarter of 2020 relative to the second quarter of 2020. In the months of July, August and September of 2020, average weekly same store sales decreased by 25.8%, 20.0% and 10.8%, respectively, compared to the same months of 2019 for J. Alexander’s / Grill restaurants. For Stoney River restaurants, in the months of April, May and June of 2020, average weekly same store sales decreased by 78.3%, 62.0% and 33.7%, respectively, compared to the same months in 2019. Similar to the third quarter trend noted for the J. Alexander’s / Grill restaurants, in the months of July, August and September of 2020, Stoney River average weekly same store sales decreased by 25.2%, 20.6% and 10.4%, respectively, compared to the same months of 2019. Off-premise sales represented a significant portion of the Company’s total net sales during the second and third quarters of 2020. In the months of April, May and June 2020, off-premise sales represented approximately 99%, 56% and 22%, respectively, of total net sales recorded by the Company. Off-premise sales during the third quarter of 2020 averaged 15%–20% of total sales on a weekly basis, which represents approximately $625,000 on average in off-premise sales weekly.
At J. Alexander’s / Grill restaurants, the average check per guest, including alcoholic beverage sales, increased by 6.1% to $34.15 in the third quarter of 2020 from $32.19 in the third quarter of 2019,and increased by 0.4% to $32.38 for the first nine months of 2020 from $32.25 for the first nine months of 2019. For the 32 locations in the same store base of restaurants, the average check per guest increased by 5.8% for the third quarter of 2020 relative to the same period of 2019, and by 0.1% for the first nine months of 2020 compared to the same period of 2019. Management estimates the impact of a price increase that was taken in August 2020 at J. Alexander’s / Grill restaurants was approximately 3.9%, and included non-alcoholic beverages, certain wines by the glass and craft cocktails, as well as certain entrees and other menu items. Management estimates that weekly average guest counts decreased by approximately 22.7% and 28.9% in the third quarter and first nine months of 2020 compared to the same periods of 2019, respectively, within the same store base of restaurants. On a consolidated basis, management estimates that weekly average guest counts decreased by approximately 23.2% and 29.3% in the third quarter and first nine months of 2020, respectively, compared to the corresponding periods of 2019. Each of the guest count decreases noted above can be primarily attributed to limited restaurant operations during March through September of fiscal 2020 caused by the COVID-19 pandemic.
At Stoney River, the average check per guest, including alcoholic beverage sales, increased by 0.2% to $41.92 in the third quarter of 2020 from $41.82 in the third quarter of 2019, but decreased by 2.8% to $40.81 for the first nine months of 2020 from $41.99 for the first nine months of 2019. For the first nine months of 2020, the average check per guest also decreased by 2.8% from the corresponding period of 2019 within the same store base of restaurants (which includes all 13 locations). Management estimates the impact of a price increase that was taken in August 2020 at Stoney River restaurants was approximately 4.7%, and included non-alcoholic beverages, certain wines by the glass and craft cocktails, as well as certain entrees and other menu items. Management estimates that weekly average guest counts decreased by approximately 18.3% and 27.7% within the same store base of restaurants during the third quarter and first nine months of 2020, respectively, compared to the same periods of 2019. Similar to the J. Alexander’s / Grill restaurants, each of the guest count decreases noted above can be primarily attributed to limited restaurant operations during March through June fiscal 2020 caused by the COVID-19 pandemic.
29
Restaurant Costs and Expenses
Total restaurant operating expenses increased to 94.2% and 101.0% of net sales in the third quarter and first nine months of 2020, respectively, from 91.1% and 88.0% of net sales in the third quarter and first nine months of 2019, respectively. The increase in the third quarter and first nine months of 2020 compared to the corresponding periods of 2019, respectively, was due to lower same store sales as a result of dining room closures and capacity restrictions in response to the COVID-19 pandemic.
Food and beverage costs decreased to 30.8% of net sales from 31.8% of net sales in the third quarter of 2020 and 2019, respectively. The decrease during the third quarter of 2020 compared to the same quarter in 2019 is largely due to favorable pricing on certain inputs featured on our menus as well as an approximately 4.1% blended price increase discussed above. For the first nine months of 2020, food and beverage costs increased to 33.1% from 31.8% in the first nine months of 2019. The increase during the first nine months of 2020 compared to the same period in 2019 is largely due to the effect of lower same store sales compared to the first nine months of 2019. In addition, selected offerings under the Company’s carry-out program were marketed at a price point intended to quickly move product and, as such, did not reflect margins typical of the Company’s historical menu offerings. Further, supply constraints experienced throughout the country as a result of COVID-19 created upward pressure on input costs, particularly for beef, during the first nine months of fiscal year 2020 (specifically in the second quarter of 2020). Management estimates that inflation in total food costs was approximately 0.4% in the third quarter of 2020 for J. Alexander’s / Grill restaurants while management estimates that Stoney River restaurants experienced deflation in total food costs of approximately 0.7% in the third quarter of 2020. Management also believes that inventory waste related to the COVID-19 dining room closures caused food and beverage costs to be somewhat higher during the first nine months of 2020.
Beef purchases represent the largest component of consolidated food and beverage costs and generally comprise approximately 30% of this expense category. However, during the first nine months of 2020, beef costs represented 35% of consolidated food and beverage costs due to the factors discussed above. We purchase beef at weekly market prices. Prices paid for beef within the J. Alexander’s / Grill restaurants were higher in the third quarter compared to the same period of 2019 by approximately 0.8%. At Stoney River, prices paid for beef were slightly lower by approximately 0.1% in the third quarter compared to the same period of 2019. Our beef purchases currently remain subject to variable market conditions. While the Company experienced some disruptions to its supply chain, particularly with regard to beef, coupled with increased input costs during the first half of the year, procurement in general has become much more dependable than it was during the end of the first half of 2020. Management anticipates that there will be adequate product available for the upcoming holiday season.
Restaurant labor and related costs totaled 33.7% and 33.1% of net sales in the third quarters of 2020 and 2019, respectively, and totaled 37.1% and 31.3% of net sales in the first nine months of 2020 and 2019, respectively. The increase noted during the third quarter and first nine months of 2020 was primarily due to the effect of lower same store sales during the third quarter and first nine months of 2020 compared to the same periods in 2019 and additional labor costs associated with the Emergency Sick Leave Policy (“ESLP”), which provided for up to two weeks of paid leave for team members who were either infected by COVID-19 or employed at a restaurant that closed its dining room in response to the COVID-19 pandemic. Under the terms of the ESLP, hourly employees were paid the higher of their normal hourly rate or the federal minimum wage for the average hours worked over the previous eight-week period. This resulted in certain employees receiving the higher federal minimum wage rate who otherwise would have been paid at the tipped minimum wage rate effective within their respective state. During the first nine months of 2020, the Company incurred approximately $3,210 in costs related to continuing benefits, ESLP payments, vacation and other sick leave payments made to its staff members as a result of the COVID-19 pandemic. The majority of these costs were incurred during the first half of the fiscal year with expenses of approximately $60 being incurred during the third quarter of 2020.
Depreciation and amortization of restaurant property and equipment increased by $69, or 2.3%, and by $344, or 3.9%, for the third quarter and first nine months of 2020, respectively, compared to the corresponding periods of 2019. The increases noted during the third quarter and first nine months of 2020 relative to the same periods in 2019 were partially due to the Merus Grill restaurant that opened in Houston, Texas during the fourth quarter of 2019. Further, we recorded additional depreciation expense associated with fixed asset additions for restaurant remodels which occurred during the latter part of 2019.
Other operating expenses, which include restaurant level expenses such as china and supplies, laundry and linen costs, repairs and maintenance, utilities, credit card fees, rent, property taxes and insurance, totaled 23.1% and 21.0% of net sales in the third quarter of 2020 and 2019, respectively. The increased expense as a percentage of net sales was a result of lower same store sales compared to the same quarter of 2019. The increased expense as a percentage of net sales was partially offset by decreased expense due to cost cutting initiatives during the period and certain expenses that fluctuate based on guest counts or revenue. We recorded decreased expense associated with credit card fees, contracted services and maintenance, china and smallwares, laundry and linens, repairs and maintenance, utilities and various other restaurant supplies used in the ordinary course of operations. These decreases were partially offset by increases in packaging costs for our carry-out program and personal protective equipment costs for our restaurant employees
30
as well as property insurance. Other operating expenses increased to 23.8% of net sales during the first nine months of 2020 compared to 20.1% of net sales for the first nine months of 2019 due primarily to the same factors discussed above.
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. During the first quarter of 2020, the Company announced that given the uncertainties in the business community, the restaurant industry and the financial markets, 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. As a result, minimal expenses were incurred during the third quarter of 2020 while the year-to-date expense primarily includes those costs incurred during the first quarter of fiscal 2020. Transaction, contested proxy and other related expenses for the quarter and nine months ended September 29, 2019 totaled $117 and $768, respectively. Expenses in 2019 included costs associated with both soliciting shareholder proxies for our 2019 annual meeting of shareholders as well as costs related to the evaluation of strategic opportunities.
General and Administrative Expenses
Total general and administrative expenses, which include all supervisory costs and expenses, management training and relocation costs, equity compensation expenses and other costs incurred above the restaurant level, decreased by $477, or 11.1%, in the third quarter of 2020 compared to the third quarter of 2019. During the third quarter of 2020, the Company recorded decreased expense associated with restaurant management training salaries, corporate salaries, incentive compensation and various other miscellaneous costs. Further, travel and employee relocation costs were reduced in response to the COVID-19 outbreak in an effort to conserve cash. These reductions in costs were partially offset by increased expense related to non‑cash share-based compensation for restricted share awards and performance share awards granted during the third quarter of 2020, payroll processing fees, legal fees and general insurance.
General and administrative expenses decreased by $1,170, or 8.5%, for the first nine months of 2020 compared to the corresponding period of 2019 primarily due to the same factors discussed above for the third quarter as well as decreased expense associated with consulting services and other costs associated with new enterprise systems implemented during the first nine months of 2019. In addition to the offsetting increases noted for the quarter, we incurred additional expense for severance, other employee benefits and 401(k) contributions during the first nine months of 2020 relative to the first nine months of 2019.
Goodwill Impairment and Long-lived Asset Impairment Charges and Restaurant Closing Costs
In response to the decline in the market price of the Company’s common stock in March 2020, 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 at the end of the Company’s first quarter 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 during the first quarter of 2020. 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 / Grill reporting unit’s carrying value exceeded its fair value to such an extent that the full write-off 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, we recorded a long-lived asset impairment charge of $689 to state the assets at our 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, management 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. Restaurant closing costs recorded during the third quarter and first nine months of 2020 totaled $173 and $351, respectively, and included labor expenses incurred after closure, severance, the loss on sale of fixed assets at this location and other miscellaneous costs. These restaurant closing costs have also been included as a component of the same line previously mentioned for impairment charges at this location. The Company assessed its other restaurant locations for indicators of impairment as of the quarter ended September 27, 2020 and assessed recoverability of certain fixed assets as warranted. No additional impairment was identified as of September 27, 2020.
31
The Company also performed a quantitative impairment analysis 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.
Pre-opening Expenses
For the quarters ended September 27, 2020 and September 29, 2019, pre-opening expenses of $72 and $211, respectively, was recorded. Further, for the nine-month periods ended September 27, 2020 and September 29, 2019, pre-opening expenses of $163 and $357, respectively, were recorded. During the third quarter and first nine months of 2020, the Company recorded pre-opening expenses associated with a new Redlands Grill in San Antonio, Texas, for which we began incurring rent expense as we took possession of the property in March 2020. Similarly, pre-opening expense recorded during the third quarter and first nine months of 2019 included rent expense associated with the Merus Grill in Houston, Texas, as we took possession of the property in March 2019 as well as other pre-opening related expenses.
Other Income (Expense)
Interest expense increased by $148, or 109.6%, in the third quarter of 2020 compared to the third quarter of 2019 due to an increased debt balance throughout the third quarter of 2020. During March 2020, the Company drew down the remaining $17,000 of available capacity (at the time of the draw) under its credit facilities as well as negotiated deferral of debt principal payments with its lender, resulting in additional interest expense. For the first nine months of 2020, interest expense increased by $98, or 20.0%, due to the impact of the same factors previously discussed.
Other, net decreased by $31 and $40 for the third quarter and first nine months of 2020, respectively, compared to the corresponding periods of 2019. The decrease compared to the same periods in 2019 was primarily related to the market performance of the underlying trading securities held in the “rabbi trust” pursuant to the Salary Continuation Agreements discussed in greater detail below.
Income Taxes
We reported income tax expense of $64 and income tax benefit of $5,742 for the quarter and nine-month period ended September 27, 2020, respectively, and income tax benefit of $495 and $238 for the quarter and nine-month period ended September 29, 2019, respectively, reflecting the Company’s federal, state and local income tax liability or benefit, as applicable, for its allocable share of (loss) income of J. Alexander’s Holdings, LLC. Prior to the third quarter of 2020, the interim tax provision was prepared on an actual effective tax rate basis rather than on an estimated annual effective rate basis as the Company determined at the time that a reliable estimate of the annual effective tax rate could not be made due to the uncertainty presented by the COVID-19 pandemic and its impact on the Company’s ability to effectively forecast results for fiscal 2020 on which an annual effective tax rate could be based in accordance with ASC 740 – Income Taxes. However, during the third quarter of 2020, the Company determined that a reliable annual effective tax rate could be estimated for fiscal 2020 and that it would be appropriate to record its income tax provision for the third quarter of 2020 based on that estimated annual effective rate. The income tax benefit recognized during 2020 includes $508 of current benefit related to the carryback of calculated net operating losses (“NOLs”) for the first nine months of 2020 to prior years as allowed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The estimated annual net effective tax rate for the first nine months of 2020 was impacted by the nondeductible book goodwill impairment charge recorded during the year, partially offset by the Federal Insurance Contribution Act (“FICA”) tip credit, state income taxes, the anticipated carryback of the NOLs generated during the current year to prior years, including the impact of the correction of the qualified improvement property regulations on the anticipated carryback, and other items. For the first nine months of 2019, the net effective tax rate included the impact of the FICA tip credit and other credits, partially offset by state income taxes and certain non-deductible expenses. The change in recorded income taxes of $5,504 in the first nine months of 2020 compared to the same period of 2019 was primarily due to the loss from continuing operations before income taxes of $31,974 compared to income from continuing operations before taxes of $6,732 recorded during the first nine months of 2019.
Discontinued Operations
Losses from discontinued operations totaling $53 and $66 for the quarters ended September 27, 2020 and September 29, 2019, respectively, and $160 and $183 for the nine-month periods ended September 27, 2020 and September 29, 2019, respectively, consist solely of exit and disposal costs which are primarily related to a continuing obligation under one lease agreement for a closed location to which the Company remains a party.
32
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company is a holding company and the sole managing member of J. Alexander’s Holdings, LLC. As such, we control the business and affairs of J. Alexander’s Holdings, LLC and its subsidiaries and consolidate J. Alexander’s Holdings, LLC and subsidiaries into our financial statements. Our principal sources of cash are cash and cash equivalents on hand, cash flow from operations and available borrowings under our credit facility. As of September 27, 2020, cash and cash equivalents totaled $17,184.
Our liquidity has been impacted by the government mandated closure of dining rooms in response to the COVID-19 pandemic. The most immediate impact has been to cash flows from operations which were significantly reduced as all our restaurants were operating under a carry-out only model for a period of time. By June 9, 2020, all of our restaurants were permitted to resume in-person dining, subject to varying capacity restrictions, and the majority of those restrictions remain in place as of November 5, 2020. In October 2020, the state of Illinois again closed dining rooms to in-restaurant dining in certain locations which impacted the Company’s operations in those locations. Additionally, the in-restaurant dining capacity for one location in Florida was reduced to 50% from full capacity due to a local mandate. There can be no assurance that other state or local authorities will allow dining rooms to remain open even at reduced capacity if there is a surge in cases of COVID‑19 in those locations. We have continued carry-out services in all of our restaurants as well. While the Company quickly pivoted to a carry-out model to generate sales when dining room closures began, this approach inherently limits our guest traffic relative to historical levels. To supplement our cash on hand, in March 2020, the Company drew down the remaining $17,000 of available capacity (at the time of the draw) under the line of credit facilities discussed in detail below. This was undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of the disruption in operations and uncertainty resulting from the COVID-19 pandemic. The proceeds from the credit draws are available to be used for general corporate purposes including working capital. In the second quarter of 2020, management was able to negotiate with the Company’s lender a modification to the payment terms of its existing debt delaying principal payments otherwise due in the months of April through September 2020 and interest payments otherwise payable in the months of April through June 2020 to September 2021 and modified financial covenants, as well as the expansion of its Revolving Line of Credit (as defined below) which occurred in June 2020 and is discussed in detail below. In October 2020, the Company was also able to extend the maturity date of its credit facilities among other modifications to its debt also discussed below. Further, in October 2020, the Company was able to repay $10,000 of outstanding borrowings on its development line of credit as cash flow during the third quarter and projected cash flow during the fourth quarter improved beyond original expectations. This repayment will reduce interest expense for the fourth quarter and such funds are available for reborrowing if needed. The Company has made targeted reductions in spending at its restaurants and within its corporate office, which has been discussed throughout this report. Further, the Company executed deferral and abatement agreements for lease payments at certain of its restaurant locations with the respective landlords as well as for its corporate office while negotiations for other locations are currently ongoing. Any significant non-essential capital expenditures have been deferred as well as certain scheduled payments to conserve cash on hand as uncertainty remains as to when government restrictions will be fully lifted, when restaurants will fully reopen and future business levels. Based on actions taken to date and projected future cash flows, we believe our cash on hand, expected cash flows from operations and available borrowings under the loan agreements with our lender will be sufficient to finance our capital expenditures and other operating activities for the next 12 months.
As of November 1, 2020, the Company has cash on hand of approximately $9,025. Cash inflow from operations for the third quarter of 2020 was $2,225, and total cash flow was nearly breakeven for the third quarter of 2020. The Company estimates that, excluding the $10,000 voluntary debt repayment in October 2020, it will be cash flow positive in the range of $400 to $450 per week for the fourth quarter of 2020 (which contains 14 weeks due to the 53rd week in fiscal 2020). The Company estimates that it will have adequate liquidity for the next 12 months. Including the $10,000 repayment in the cash flow estimate for the fourth quarter results in a cash burn rate of $265 to $315 weekly. These estimates include required debt service payments and capital expenditure commitments, including the construction of one new location scheduled to be completed in the fourth quarter of 2020 and opened in the first quarter of 2021. Consistent with many other restaurant companies, we use operating lease arrangements for many of our restaurants. We believe that these operating lease arrangements provide appropriate leverage for our capital structure in a financially efficient manner.
Our liquidity may also be adversely affected by a number of factors not specifically addressed above, but are described in detail in the 2019 Annual Report, under the heading “Risk Factors” and in Part II, Item 1A. Risk Factors of this report.
33
Cash Flows
The table below shows our net cash flows from operating, investing and financing activities for the nine-month periods ended September 27, 2020 and September 29, 2019:
|
|
|
Nine Months Ended |
|
|||||
|
|
|
September 27, |
|
|
September 29, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(1,539 |
) |
|
$ |
10,754 |
|
|
Investing activities |
|
|
(5,302 |
) |
|
|
(7,879 |
) |
|
Financing activities |
|
|
15,222 |
|
|
|
(3,793 |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
8,381 |
|
|
$ |
(918 |
) |
Operating Activities. Net cash flows used in operating activities totaled $1,539 for the first nine months of 2020 compared to net cash flows provided by operating activities of $10,754 for the corresponding period of 2019, a decrease of $12,293. Our operations generate receipts from customers in the form of cash and cash equivalents, with receivables related to credit card payments considered cash equivalents due to their relatively short settlement period, and the majority of our expenses are paid within a 30-day pay period. During the first nine months of 2020, net sales decreased by $53,039, which excludes the impact of the comparative increase in gift card breakage of $13, relative to the corresponding period of 2019, and total restaurant operating expenses decreased by $29,738 compared to the first nine months of 2019, resulting in a net decrease to cash flow from operations of approximately $23,301 due to limited restaurant operations caused by COVID-19. This decrease was offset by tenant incentive payments received in 2020 from our lessors at the Merus Grill restaurant in Houston, Texas, and at our Stoney River restaurant in Annapolis pursuant to the terms of the lease agreements, which totaled $790 and $527, respectively. Additionally, transaction cost payments were approximately $4,383 lower during the first nine months of 2020 compared to the corresponding period of 2019, which was primarily related to the Black Knight Advisory Services, LLC (“Black Knight”) termination fee paid in 2019 of $4,560. Further, in the first nine months of 2019, the Company paid approximately $705 to Black Knight which represented the pro-rata portion of its consulting fees earned during 2018. No such payment occurred in the first nine months of 2020. Further, cash paid for income taxes and interest decreased by $634 and $62, respectively during the first nine months of 2020 compared to the same period in 2019. Finally, pursuant to relief granted under the CARES Act, we have deferred $2,143 in social security tax payments as of September 27, 2020.
Investing Activities. Net cash used in investing activities for the first nine months of 2020 totaled $5,302 compared to $7,879 in the corresponding period of 2019, with the 2020 use of cash being attributed primarily to the ongoing construction of one location expected to be completed in the fourth quarter of 2020 and anticipated to begin operations in the first quarter of 2021 as well as one restaurant remodel and routine additions at other locations. The Company also sold the land and building associated with its Lyndhurst Grill in Cleveland, Ohio, resulting in proceeds of $1,070 partially offsetting its use of cash during the first nine months of 2020. Cash used in investing activities in the first nine months of 2019 was attributed primarily to capital expenditures related to the construction of the Merus Grill location in Houston, Texas, opened in November 2019, restaurant remodels that occurred at certain locations and routine additions at other locations.
Financing Activities. Net cash provided by financing activities for the first nine months of 2020 totaled $15,222 compared to net cash used of $3,793 in the corresponding period of 2019. Net cash provided by financing activities in the first nine months of 2020 included a $17,000 draw down of the Company’s lines of credit which represented all remaining available balances at the time. The circumstances surrounding this draw down are discussed in detail below. This amount was partially offset by routine debt payments made during the first quarter of the year prior to deferral of principal payments that have been negotiated with the Company’s lender for principal payments due April through September of 2020. The Company also paid $508 of financing fees associated with the expansion of its Revolving Line of Credit (as defined below) which occurred during the second quarter of 2020 discussed in detail below under “Capital Resources—Credit Facility.” Further, the Company qualified for and received $15,100 in loans under the Paycheck Protection Program of the CARES Act during the second quarter of 2020. The Company subsequently repaid those loans in full during the second quarter of 2020.
Net cash used in financing activities in the first nine months of 2019 included debt service payments as well as a $43 payment for deferred financing fees related to the modification of our loan agreement in 2019.
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Capital Resources
Long-term Capital Requirements
Our capital requirements are primarily dependent upon the pace of our growth plan and resulting new restaurants. Our growth plan is dependent on many factors, including economic conditions, availability of capital resources, real estate markets, restaurant locations and the nature of lease agreements. Our capital expenditure outlays are also dependent on costs for maintenance in our existing restaurants as well as information technology and other general corporate capital expenditures.
The capital resources required for a new restaurant depend on the concept, the size of the building, the day parts the restaurant will offer and whether the restaurant is a ground-up build-out or a conversion. We estimate development costs, net of landlord contributions and excluding pre-opening costs, will range from $5,000 to $6,000 for a new J. Alexander’s / Grill restaurant or Stoney River location, and anticipate that all new Stoney River restaurants will serve both lunch and dinner. In addition, we expect to spend approximately $700 per restaurant for pre-opening expense including pre-opening rent expense, and expect that such expense will approximate $250 in fiscal year 2020 related to the delayed San Antonio restaurant opening expected to commence operations in 2021 with the balance of pre-opening expense expected to occur during that year.
With respect to the Company’s remodel program, we completed the remodel of our Stoney River Annapolis location during the first nine months of 2020 which resulted in $490 of capital expenditures. Historically, we have completed three to eight remodels each year at an average cost of approximately $425 per location. However, due to the impact of COVID-19, the Company has suspended its remodel program for the remainder of 2020.
For fiscal year 2020, we currently estimate capital expenditure outlays will range between $8,000 and $9,000, approximately $2,000 to $3,000 of which will be spent during the fourth quarter excluding pre-opening expense. These estimates include the completion of construction of one Redlands Grill restaurant during 2020 slated for opening in 2021 for which we are contractually obligated, minor expenditures related to the new J. Alexander’s expected to open in Madison, Alabama, in 2021, and only those capital expenditures necessary to maintain operations at our existing restaurants or those required for corporate purposes. These estimated capital expenditure amounts are included in our cash flow estimates above.
We believe that we can fund such expenditures with cash on hand, cash flows from operations and by the use of our loan agreements as necessary, depending upon the timing of expenditures.
An additional long-term capital requirement is the funding of the Amended and Restated Salary Continuation Agreements (the “Salary Continuation Agreements”) in place with certain current and former officers of the Company and the related “rabbi trust” (the “Trust”). On October 19, 2015, the Trust was established and funded with a total of $4,304, which consisted of $2,415 in cash and $1,889 in cash surrender values of whole life insurance policies. These assets are classified as noncurrent within the Company’s condensed consolidated financial statements. The Company made additional cash contributions of $75 and $95 to the Trust in fiscal years 2019 and 2018, respectively, and will continue to make contributions to the Trust in the future in order to maintain the level of funding required by the Salary Continuation Agreements.
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 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. The repurchase program does not obligate the Company to acquire any particular amount of stock. There was no common stock repurchase activity under the program during the first nine months of 2020.
As of September 27, 2020, we have deferred the payment of $2,143 in employer-related social security taxes as permitted by a provision in the CARES Act. Employers taking advantage of this provision are required to pay 50% of these funds by December 31, 2021 with the remaining portion payable by December 31, 2022.
Short-term Capital Requirements
Our operations have not historically required significant working capital. Many companies in the restaurant industry operate with a working capital deficit. Guests pay for their purchases with cash or by credit card at the time of the sale while restaurant
35
operations do not require significant inventories or receivables. In addition, trade payables for food and beverage purchases and other obligations related to restaurant operations are not typically due for approximately 30 days after the sale takes place. Since requirements for funding accounts receivable and inventories are relatively insignificant, virtually all cash generated by operations is available to meet current obligations. As noted previously, COVID-19 has negatively affected our ability to generate cash flow from operations due to government mandated dining room closures and subsequent seating capacity restrictions and the resulting impact on guest traffic. While the Company has taken, and will continue to take, measures to curtail its spending in step with the reduced cash flow, uncertainty remains as to whether dining rooms will be required to close once again in future periods, for how long and to what extent capacity will be limited going forward and the level of guest traffic the restaurant will be able to generate once government mandated restrictions are fully lifted. These factors may negatively impact the Company’s working capital for an extended period of time. Our current obligations are to fund purchases of inventory and to make required payroll payments, tax payments, rental payments and to fund other required operating payments such as for insurance, building maintenance, utilities and other items necessary to operate our restaurants. Our working capital deficit totaled $8,316 and $13,134 as of September 27, 2020 and December 29, 2019, respectively.
Credit Facility
The Company currently has four separate notes under its Fourth Amended and Restated Loan Agreement (the “Fourth Loan Agreement”) with Pinnacle Bank. Effective October 28, 2020, the Fourth Loan Agreement amended and restated the Company’s Third Amended and Restaurant Loan Agreement (the “Third Loan Agreement”) entered into on June 5, 2020. The Fourth Loan Agreement modifies loan maturity dates as discussed below, adjusts the interest rate on certain facilities and modifies the Company’s previously applicable financial covenants. 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, limits capital expenditures, assets sales and liens and encumbrances, prohibits dividends, and contains certain other provisions customarily included in such agreements. The Fourth Loan Agreement consists of the following:
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|
• |
A $16,000 Revolving Line of Credit, available for general corporate purposes that matures on January 1, 2023. |
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|
• |
A $4,028 term loan (“Mortgage Loan”) that matures on January 1, 2023. |
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• |
A $20,000 development line of credit (“Development Line of Credit”) that matures on January 1, 2023. |
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• |
A $556 term loan (“Term Loan”) that matures on December 10, 2020. |
The current balance of each of these credit facilities is set forth below.
The Fourth Loan Agreement incorporates the financial covenants previously in effect under the Third Loan Agreement and adds a fixed charge coverage ratio covenant that was established under a previous 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. The financial covenants under the Fourth Loan Agreement 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 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 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 the 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. generally accepted accounting principles (“GAAP”).
The Company projects to be in compliance with each of these financial covenants through the next 12 months.
36
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. J. Alexander’s, LLC was in compliance with the existing financial covenants as of December 29, 2019 and the reporting periods subsequent to that date as of September 27, 2020.
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. At September 27, 2020, the Third Loan Agreement was secured by the real estate, equipment and other personal property of 17 restaurant locations with an aggregate net book value of $39,075.
The Third Loan Agreement amended the Revolving Line of Credit effective June 5, 2020 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. These provisions remain in effect in the Fourth Loan Agreement. 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 carried over to 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 through August 2021, and thereafter the revenue hurdle for accessing these funds will expire. The Third 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 and the Fourth Loan Agreement was filed as an exhibit to the Company’s Current Report on Form 8-K on November 2, 2020. Borrowings under the Revolving Line of Credit bear interest at a rate of LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, and are payable quarterly beginning on September 3, 2020. These interest rate terms were not modified by the execution of the Fourth Loan Agreement on October 28, 2020. All outstanding principal and interest under the Revolving Line of Credit will be due and payable on the maturity date of January 1, 2023.
During the second quarter of 2020, the Company entered into a modification agreement to the Term Loan, which deferred the two remaining principal payments totaling $556 until the Term Loan’s then new maturity date of September 3, 2021. However, the Term Loan’s maturity date was accelerated to December 10, 2020 as a result of the Fourth Loan Agreement. During the second quarter of 2020, the Company also negotiated for the deferral of principal and interest payments related to the Mortgage Loan. The six 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 on the Mortgage Loan, the Development Line of Credit and Revolving Line of Credit for the months of April, May and June 2020, were deferred, and interest payments resumed on July 3, 2020 while principal payments resumed in October 2020 for the Mortgage Loan. Under a previous loan agreement in effect as of September 27, 2020, each of the Term and Mortgage Loans and the Development Line of Credit bore interest at LIBOR plus a sliding interest rate scale determined by the now terminated maximum adjusted debt to EBITDAR ratio. The Fourth Loan agreement states that effective October 28, 2020 these credit facilities bear interest at a floating rate equal to 30-day LIBOR plus 2.5%, with a LIBOR floor of 1.5% to bring such rates into alignment with the rate previously applicable to the Revolving Line of Credit. Under the Third Loan Agreement, as of September 27, 2020, the interest rate for these loans were set at LIBOR plus 2.35%.
As previously disclosed in the Company’s Form 8-K filed on March 24, 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 current disruption and uncertainty resulting from the COVID-19 outbreak. The Company repaid $10,000 of the outstanding balance on the Development Line of Credit during the fourth quarter of 2020 as funds were available to do so and the Company believed such repayment was prudent in an effort to avoid related interest expense. The amounts repaid during the fourth quarter will be available to the Company for future borrowings in addition to the $15,000 capacity available under the expanded Revolving Line of Credit.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 27, 2020, we had no financing transactions, arrangements or other relationships with any unconsolidated affiliated entities. Additionally, we are not a party to any financing arrangements involving synthetic leases or trading activities involving commodity contracts.
37
CONTINGENT OBLIGATIONS
From 1975 through 1996, the Company’s predecessor operated restaurants in the quick-service restaurant industry. The discontinuation of these quick-service restaurant operations included disposals of restaurants that were subject to lease agreements which typically contained initial lease terms of 20 years plus two additional option periods of five years each. In connection with certain of these dispositions, the Company through its subsidiaries may remain secondarily liable for ensuring financial performance as set forth in the original lease agreements. We can only estimate our contingent liability relative to these leases, as any changes to the contractual arrangements between the current tenant and the landlord subsequent to the assignment are not required to be disclosed to us. A summary of our estimated contingent liability as of September 27, 2020 is as follows:
|
Wendy's restaurants (five leases) |
|
$ |
823 |
|
|
Mrs. Winner's Chicken & Biscuits restaurants (one lease) |
|
|
281 |
|
|
Total contingent liability related to assigned leases |
|
$ |
1,104 |
|
The Company has never been required to pay any such contingent liabilities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that management believes to be the most significant judgments and estimates used in the preparation of the Company’s Condensed Consolidated Financial Statements. Judgments or uncertainties regarding the application of these policies could potentially result in materially different amounts being reported under different assumptions and conditions. There have been no material changes to the critical accounting policies previously reported in the Consolidated Financial Statements and footnotes thereto for the fiscal year ended December 29, 2019 included in the 2019 Annual Report.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding recent accounting pronouncements may be found in Part I, Financial Information, Item 1. Financial Statements, Notes to Condensed Consolidated Financial Statements, Note 7 – Recent Accounting Pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This Item is not applicable to smaller reporting companies.
Item 4. Controls and Procedures
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(a) |
Evaluation of disclosure controls and procedures. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. |
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(b) |
Changes in internal controls. There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference from Part I, Financial Information, Item 1. Financial Statements, Notes to Condensed Consolidated Financial Statements, Note 5 (c) Commitments and Contingencies – Litigation Contingencies.
Item 1A. Risk Factors
The discussion of the Company’s business and operations should be read together with risk factors contained under the heading “Risk Factors” in our 2019 Annual Report, which describe various risks and uncertainties to which we are or may be subject. These risks and uncertainties have the potential to affect our business, revenues, financial condition and results of operations, liquidity, cash flows and prospects in a material adverse manner. As of the date hereof, there have been no material changes to the risk factors set forth in our 2019 Annual Report, except as follows:
The current novel coronavirus (COVID-19) pandemic (and other diseases, outbreaks, or pandemics) has disrupted and may further disrupt our business, and has affected and may further adversely affect our revenues, results of operations, cash flows, liquidity and financial condition.
The COVID-19 pandemic has affected and may continue to adversely affect our revenues, results of operations, cash flows, liquidity and financial condition. Commencing in March 2020 and continuing to the present, we are experiencing unprecedented effects of the COVID-19 pandemic, which has negatively impacted and may continue to negatively impact guest traffic at our restaurants, make it more difficult to staff our restaurants and, in more severe cases, may cause a temporary inability to obtain supplies, increase commodity costs or cause full and partial closures of our affected restaurants, sometimes for prolonged periods of time. All of our currently-open restaurants temporarily shifted to a carry-out operating model in March 2020, suspending dine-in services until applicable state and local governments determined it was safe for restaurants to resume such services. In addition, as our dining rooms gradually began to reopen at the end of April 2020, our restaurants implemented limited service and modified hours in certain circumstances. The Company also determined during the second quarter of 2020 that one of its locations will remain permanently closed, and the Company sold this location in September. As restaurants were permitted to reopen for dining, they have operated at and are expected to continue to operate at, decreased capacity to comply with governmental mandates and social distancing requirements. In June 2020, all of our restaurants were permitted to resume in-person dining, subject to varying capacity restrictions and we have continued carry-out services in all of our restaurants. As a result of these changes to our operations, we have experienced severe decreases in revenues, while continuing to incur significant levels of expenses. Additionally, since the reopening phases began, various states have seen a surge in positive COVID-19 cases, and at the end of June and early July, certain states and local jurisdictions paused or, in some cases, reversed reopening plans. In October 2020, Illinois reclosed dining rooms to in-restaurant dining in certain locations citing a surge in COVID-19 cases, which impacted our operations in those affected areas. Further, one location in Florida was required to reduce its capacity from 100% to 50% pursuant to a local mandate. There can be no assurance that other state or local authorities will allow dining rooms to remain open even at reduced capacity if there is a surge in cases of COVID-19 in those locations. If federal, state or local jurisdictions determine that another closure of restaurants for dine-in services is warranted, whether temporary or prolonged, our results of operations, revenues, cash flows, liquidity and financial condition will be negatively impacted. Additionally, if prolonged increases in positive cases of COVID-19 occurs, it will be difficult for us to staff our restaurants while adhering to quarantine guidelines which could cause temporary closures of our locations. Further, we have new or additional competitors we may not otherwise face under normal operations, and we may not be able to successfully compete with such establishments.
Moreover, the COVID-19 pandemic has impacted, and may continue to impact, the greater economy, causing an economic downturn and generating uncertainty related to factors that may impact our business, such as timing of any economic recovery, changes in guest spending, and changes in consumer habits in light of job losses, lower discretionary income, and higher individual debt levels. The COVID-19 pandemic may also materially adversely affect our ability to implement our growth plans, including closures of existing restaurants, delays in opening new restaurants, and delaying our ongoing exploration of strategic alternatives. These changes have materially adversely affected our revenues, results of operations, cash flows, liquidity and financial condition, and may continue to materially adversely affect such aspects of our business, particularly if these changes continue for an extended period of time.
On June 5, 2020, we entered into the Third Amended and Restated Loan Agreement with our lender which expanded our revolving credit facility, with the additional capacity being available for borrowing subject to the Company achieving certain levels of net sales. Subsequently, on October 28, 2020, we entered in the Fourth Amended and Restated Loan agreement which amends and restates in its entirety the Third Amended and Restated Loan Agreement. The Fourth Amended and Restated Loan Agreement also extends the
39
maturity date of three of our loans, makes the same interest applicable to each of the loans and incorporates certain financial covenants from previous loan agreements while eliminating one previously applicable financial covenant. We are also taking steps to defer payments to landlords and other parties in order to reduce our capital commitments and supplement our liquidity. We cannot assure you that we will be able to access the additional funds available under our loan agreement or obtain any additional payment deferrals or contract concessions sought. If we are unable to obtain additional liquidity, our operations and financial condition may be adversely affected, particularly if restaurant capacity is restricted during worsening COVID-19 outbreaks.
The long-term impact of this or any other pandemic remains uncertain, as viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid gathering in public places, which has adversely impacted our operations, and could further have longer-term adverse effects on our restaurant guest traffic or the ability to adequately staff our restaurants. Additionally, it is possible that we may experience some reputational harm due to our responses to the COVID‑19 pandemic that may negatively impact our business and results of operations. We will be adversely affected if government authorities impose longer-term restrictions on public gatherings, human interactions, operations of restaurants, or mandatory closures. Even if such measures are not implemented and a virus or other disease does not spread significantly after we fully reopen our restaurants, any continuing perceived risk of infection or health risk may adversely affect our business, revenues, cash flows, liquidity, financial condition and results of operations. Further deterioration in our results from operations could prompt additional long-lived and intangible asset impairment charges, an increase in our valuation allowance relative to deferred tax assets, the write‑down of other assets recorded on the Company’s consolidated balance sheets or the inability to comply with required financial debt covenants under our the loan agreement. There may be other effects of the COVID-19 pandemic that are not yet identified and may materially adversely affect our business.
The COVID-19 pandemic has disrupted our Board’s review of strategic alternatives.
As part of the Board’s previously announced review of strategic alternatives, the Company retained the investment banking firm of Piper Sandler in August 2019 to assist the Company in its evaluation of strategic alternatives, with a particular focus on a sale of the entire Company. The Board believed, and took into account the views of shareholders, that the small size of the Company made it inefficient to be a standalone publicly traded company. Piper Sandler ultimately contacted over 125 potential interested parties and through an exhaustive process, three interested parties emerged as serious potential acquirers. One of those parties was in advanced negotiations with the Company for an acquisition at a premium to the then current market price. The initial impacts of the COVID-19 pandemic led the potential acquirer to reduce its proposed purchase price twice and to insist on conditions relating to the performance of the Company. Ultimately, when government entities mandated the closure of the Company’s restaurants, except for limited carry-out, the Board determined that no transaction at a price that reflected the long-term value of the Company would be able to be consummated until the resolution of uncertainties about the pandemic and the return of the Company’s business to satisfactory levels. For the near term, the Company intends to focus on rebuilding its revenue base as its restaurants are able to reopen and increase capacity by providing an outstanding dining experience for its guests. The Board announced its expectation that it will be sometime in 2021 before the Company can conclude its evaluation of strategic alternatives focusing on the potential sale of the Company.
There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction or any other particular outcome. Speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of the Company could cause our stock price to fluctuate significantly. There can be no assurance that our review of strategic alternatives will not cause the diversion of management’s attention, incurrence of significant transaction expenses, failure to retain or attract key personnel, vendors or customers, or exposure to potential litigation. If we are unable to mitigate these or other potential risks related to the uncertainty caused by our exploration of strategic alternatives, it may disrupt our business or could have a material adverse effect on our business, financial condition, results of operations or cash flows.
There can be no assurance that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Further, our Board may determine to suspend or terminate the exploration of strategic alternatives at any time due to various factors. Any potential transaction or other outcome of this process is also dependent upon a number of factors that may be beyond our control, including among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in our business.
40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table discloses shares of the Company’s common stock repurchased during the three periods ended September 27, 2020:
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(Dollars in thousands, except per share data) |
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Period |
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Total Number of Shares Repurchased (1) |
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Weighted Average Price Paid per Share |
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Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
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Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
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||||
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6/29/2020 - 7/26/2020 |
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- |
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- |
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- |
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$ |
15,000 |
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7/27/2020 - 8/23/2020 |
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4,599 |
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$ |
4.43 |
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- |
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15,000 |
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8/24/2020 - 9/27/2020 |
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- |
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- |
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- |
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15,000 |
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Total |
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|
4,599 |
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|
$ |
4.43 |
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|
|
- |
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|
$ |
15,000 |
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______________________
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(1) |
During the quarter ended September 27, 2020, 65,997 shares of restricted stock previously awarded to certain of the participants in the Company’s equity incentive plan vested. The Company withheld 4,599 shares to satisfy tax withholding requirements associated with the vesting of these awards. |
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(2) |
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 period ending November 1, 2021. Any share repurchases under the current program are expected to be made solely from cash on hand and available operating cash flow. Repurchases will be made in accordance with applicable securities laws and may be made from time to time in the open market. The timing, prices and amount of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate the Company to acquire any particular amount of stock. There has been no common stock repurchase activity under the program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
41
Item 6. Exhibits
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Exhibit No. |
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Exhibit Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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3.5 |
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10.1 |
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31.1 |
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31.2 |
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32.1 |
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101 |
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The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2020, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2020, formatted in Inline XBRL (included in Exhibit 101). |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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J. ALEXANDER’S HOLDINGS, INC. |
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Date: November 5, 2020 |
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/s/ Mark A. Parkey |
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Mark A. Parkey |
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President and Chief Executive Officer |
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Date: November 5, 2020 |
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/s/ Jessica L. Hagler |
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Jessica L. Hagler |
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Vice President, Chief Financial Officer, Treasurer and Secretary |
43