Notes to Condensed Consolidated Financial Statements
(Unaudited, dollars in thousands except per share data)
Note 1 – Organization and Business
Separation from FNF and Equity Structure
On August 15, 2014, J. Alexander’s Holdings, Inc. (the “Company”) was incorporated in the state of Tennessee as a wholly-owned subsidiary of Fidelity National Financial, Inc. (“FNF”). On September 16, 2015, the Company entered into a separation and distribution agreement with FNF, pursuant to which FNF agreed to distribute one hundred percent of its shares of the Company’s common stock, par value $0.001, on a pro rata basis, to the holders of then Fidelity National Financial Ventures, LLC (“FNFV”) Group common stock, FNF’s then tracking stock traded on The New York Stock Exchange (“The NYSE”). Holders of then FNFV Group common stock received, as a distribution from FNF, approximately 0.17271 shares of the Company’s common stock for every one share of then FNFV Group common stock held at the close of business on September 22, 2015, the record date for the distribution (the “Distribution”). FNFV is now conducting business independently as Cannae Holdings, Inc., (“Cannae”) subsequent to its split-off from FNF effective November 20, 2017. Concurrent with the Distribution, certain reorganization changes were made, resulting in the Company owning all of the outstanding Class A Units and becoming the sole managing member of J. Alexander’s Holdings, LLC, the parent company of all its operating subsidiaries. Also concurrent with the Distribution, the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC was entered into, resulting in a total number of Class A Units outstanding of 15,000,235. Additionally, a total of 833,346 Class B Units granted to certain members of management effective on January 1, 2015 were also outstanding at the date of Distribution. The Distribution was completed on September 28, 2015.
On September 28, 2015, immediately prior to the Distribution, J. Alexander’s Holdings, LLC entered into a Management Consulting Agreement with Black Knight Advisory Services, LLC (“Black Knight”), pursuant to which Black Knight provides corporate and strategic advisory services to J. Alexander’s Holdings, LLC. In accordance with the Management Consulting Agreement, J. Alexander’s Holdings, LLC granted 1,500,024 Class B Units to Black Knight as a profits interest grant on October 6, 2015.
As a result of the Distribution, the Company became an independent public company with its common stock listed under the symbol “JAX” on The NYSE, effective September 29, 2015. As of September 30, 2018, a total of 14,695,176 shares of the Company’s common stock, par value $0.001, were outstanding.
On October 29, 2015, the Company’s Board of Directors (the “Board”) authorized a share repurchase program for up to 1,500,000 shares of the Company’s outstanding common stock over the three years ending October 29, 2018. Share repurchases under the program have been made solely from cash on hand and available operating cash flow. As of September 30, 2018, 305,059 shares have been repurchased and retired under this program at an aggregate purchase price of $3,203. There was no common stock repurchase activity during the first nine months of 2018. See further discussion regarding the share repurchase program in Note 10 – Subsequent Events.
Business of J. Alexander’s
The Company, through J. Alexander’s Holdings, LLC and its subsidiaries, owns and operates full service, upscale restaurants including J. Alexander’s, Redlands Grill, Lyndhurst Grill, Overland Park Grill and Stoney River Steakhouse and Grill (“Stoney River”). At September 30, 2018 and December 31, 2017, the Company operated 45 and 44 restaurants in 16 and 15 states, respectively. The Company’s restaurants are concentrated primarily in the East, Southeast, and Midwest regions of the United States. The Company does not have any restaurants operating under franchise agreements.
Note 2 – Basis of Presentation
|
(a)
|
Interim Financial Statements
|
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with 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 (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine-month period ended September 30, 2018 are not necessarily indicative of the results that may
6
be expected for th
e
fiscal year ending December 30, 2018
. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the fiscal year ended December 31, 2017 included in the Annual Report on Form 10-K of the Company filed with the SEC
on March 15, 2018.
Total comprehensive (loss) income is comprised solely of net (loss) income for all periods presented.
(b) Principles of Consolidation
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company as well as the accounts of its majority-owned subsidiaries. All intercompany profits, transactions, and balances between the Company and its subsidiaries have been eliminated.
It is the Company’s policy to reclassify prior year amounts to conform to the current year’s presentation for comparative purposes, if such a reclassification is warranted.
As discussed in Note 1, as a result of the Distribution, certain reorganization changes were made resulting in the Company owning all of the outstanding Class A Units and becoming the sole managing member of J. Alexander’s Holdings, LLC. The reorganization transactions were accounted for as a non-substantive transaction in a manner similar to a transaction between entities under common control pursuant to Accounting Standards Codification (“ASC”) 805-50,
Transactions between Entities under Common Control
, and as such, the Company recognized the assets and liabilities transferred at their carrying amounts on the date of transfer. The Company is a holding company with no direct operations and that holds as its sole asset an equity interest in J. Alexander’s Holdings, LLC and, as a result, relies on J. Alexander’s Holdings, LLC to provide it with funds necessary to meet its financial obligations.
The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks. The quarter and nine-month period ended September 30, 2018 and October 1, 2017 each included 13 and 39 weeks of operations, respectively. Fiscal years 2018 and 2017 each include 52 weeks of operations.
|
(d)
|
Discontinued Operations and Restaurant Closures
|
During 2013, three J. Alexander’s restaurants were closed, and two of these restaurants were considered to be discontinued operations. Additionally, the Company closed one J. Alexander’s location during the first quarter of 2017 as the restaurant’s lease had reached the end of its term. Since the closure of this restaurant did not represent a strategic shift that would have a major effect on the Company’s operations and financial results, its results of operations and expenses associated with its closure were not included in discontinued operations. Income from continuing operations before income taxes associated with this location was $30 for the nine-month period ended October 1, 2017. The $118 and $111 loss from discontinued operations included in the quarters ended September 30, 2018 and October 1, 2017, respectively, and losses for the nine-month periods ended September 30, 2018 and October 1, 2017 of $339 and $334, respectively, consist solely of exit and disposal costs which are primarily related to a continuing obligation under a lease agreement for one of these closed locations.
The Company incurred transaction expenses associated primarily with the proposed acquisition of the Ninety Nine Restaurant and Pub concept (“99 Restaurants”) totaling $0 and $933 for the quarter and nine-month periods ended September 30, 2018, respectively. Additionally, for the quarter and nine-month periods ended October 1, 2017, the Company incurred a total of $1,975 and $2,435, respectively, related to this proposed acquisition. Such costs consisted primarily of legal and other professional and consulting fees as well as other miscellaneous costs. During the first quarter of 2018, the Company announced that it did not receive the required number of disinterested shareholder votes to approve the proposed acquisition, and the merger agreement was thereafter terminated.
7
|
(f)
|
Earnings (Loss) per Share
|
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the reporting period. Diluted earnings (loss) per share of common stock is computed similarly to basic earnings (loss) per share except the weighted average shares outstanding are increased to include potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents for this purpose. The number of additional shares of common stock related to these common stock equivalents is calculated using the if-converted method, if dilutive. The number of additional shares of common stock related to stock option awards is calculated using the treasury method, if dilutive. Refer to Note 3 – Earnings (loss) per Share for the basic and diluted earnings (loss) per share calculations and additional discussion.
|
(g)
|
Non-controlling Interests
|
Non-controlling interests presented on the Condensed Consolidated Balance Sheets represent the portion of net assets of the Company attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders. As of September 30, 2018 and December 31, 2017, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $8,294 and $5,200, respectively, and consist solely of the non-cash compensation expense relative to the profits interest awards to management and Black Knight. The Hypothetical Liquidation at Book Value method was used as of each of September 30, 2018 and October 1, 2017 to determine allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, no allocation of net (loss) income was made to non-controlling interests for either of the quarters or nine-month periods ended September 30, 2018 and October 1, 2017.
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.
8
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 30,
|
|
|
October 1,
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(515
|
)
|
|
$
|
(765
|
)
|
|
|
$
|
3,404
|
|
|
$
|
2,328
|
|
Loss from discontinued operations, net
|
|
|
(118
|
)
|
|
|
(111
|
)
|
|
|
|
(339
|
)
|
|
|
(334
|
)
|
Net (loss) income
|
|
$
|
(633
|
)
|
|
$
|
(876
|
)
|
|
|
$
|
3,065
|
|
|
$
|
1,994
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (denominator for basic (loss) earnings per share)
|
|
|
14,695
|
|
|
|
14,695
|
|
|
|
|
14,695
|
|
|
|
14,695
|
|
Effect of dilutive securities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
224
|
|
|
|
97
|
|
Adjusted weighted average shares and assumed conversions
(denominator for diluted (loss) earnings per share)
|
|
|
14,695
|
|
|
|
14,695
|
|
|
|
|
14,919
|
|
|
|
14,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
|
$
|
0.23
|
|
|
$
|
0.16
|
|
Loss from discontinued operations, net
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
Basic (loss) earnings per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
Diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
|
$
|
0.23
|
|
|
$
|
0.16
|
|
Loss from discontinued operations, net
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Per share amounts may not sum due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares outstanding for the reporting period. Diluted (loss) earnings per share gives effect during the reporting period to all dilutive potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. The J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents for this purpose. The number of additional shares of common stock related to these common stock equivalents is calculated using the if-converted method. The 833,346 Class B Units associated with management’s profits interest awards are considered to be dilutive as of September 30, 2018 only. Therefore, 4,959 shares have been included in the diluted earnings per share calculations for the nine-month period then ended. Additionally, the 1,500,024 Black Knight profits interest Class B Units were considered dilutive as of September 30, 2018 and October 1, 2017, and the impact for the nine-month periods then ended on the diluted (loss) earnings per share calculation was 173,484 and 96,669 shares, respectively.
The number of additional shares of common stock related to stock option awards is calculated using the treasury method, if dilutive. There were 1,495,750 stock option awards outstanding as of September 30, 2018, and the dilutive impact on the number of weighted average shares in the diluted (loss) earnings per share calculation was 45,082 shares for the nine-month period then ended. A portion of the stock option awards outstanding for the nine-month period ended September 30, 2018 include awards to purchase 510,000 shares of common stock at an exercise price of $9.55 issued on February 21, 2018. These awards were considered antidilutive for the quarter and nine-month period ended September 30, 2018, and are excluded from the diluted (loss) earnings per share calculation for such reporting periods. Additionally, the 985,750 stock option awards outstanding as of October 1, 2017 were considered antidilutive and, therefore, are excluded from the diluted (loss) earnings per share calculation for the quarter and nine-month period then ended.
Note 4 – Income Taxes
The net effective tax rate (including the impact of discrete items) for the nine-month periods ended September 30, 2018 and October 1, 2017 was (2.4)% and (13.8)%, respectively. The factors that cause the net effective tax rate to vary from the federal statutory rate of 21% for the nine-month period ended September 30, 2018 and 35% for the nine-month period ended October 1, 2017 include the
9
impact of the Federal Insurance Contribution Act tip and other credits, pa
rtially offset by state income taxes and certain non-deductible expenses.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a number of changes to the U.S. tax code, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the acceleration of depreciation for certain assets placed into service after September 27, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of the Tax Act for the reporting period of enactment. SAB 118 allows the Company to provide a provisional estimate of the impacts of the Tax Act during a one-year measurement period similar to the measurement period used when accounting for business combinations. Adjustments to provisional estimates and additional impacts from the Tax Act must be recorded as they are identified during the measurement period as provided for in SAB 118.
In connection with its initial analysis of the impact of the Tax Act, the Company recorded a provisional net tax benefit of $1,345 in fiscal year 2017 related to the revaluation of the Company's deferred tax assets and liabilities due to the enacted (but not then effective) change in the statutory tax rate. No material adjustments to this amount were recorded in the nine-month period ended September 30, 2018.
Note 5 – Commitments and Contingencies
As a result of the disposition of the Company’s predecessor’s Wendy’s operations in 1996, subsidiaries of the Company may remain secondarily liable for certain real property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these five leases at September 30, 2018 was approximately $388. In connection with the sale of the Company’s predecessor’s Mrs. Winner’s Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, subsidiaries of the Company also may remain secondarily liable for a certain real property lease. The total estimated amount of lease payments remaining on this lease at September 30, 2018 was approximately $12. Additionally, in connection with the previous disposition of certain other Wendy’s restaurant operations, primarily the southern California restaurants in 1982, subsidiaries of the Company may remain secondarily liable for certain real property leases with remaining terms of one to three years. The total estimated amount of lease payments remaining on these three leases as of September 30, 2018 was approximately $103. There have been no payments by subsidiaries of the Company of such contingent liabilities in the history of the Company. Management believes any significant loss is remote.
The Company and its subsidiaries are subject to real property, personal property, business, franchise, income, withholding, unemployment, sales and use taxes in various jurisdictions within the United States, and are regularly under audit by tax authorities. This is believed to be common for the restaurant industry. Management believes the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
|
(c)
|
Litigation Contingencies
|
The Company and its subsidiaries are defendants from time to time in various claims or legal proceedings arising in the ordinary course of business, including claims relating to workers’ compensation matters, labor-related claims, discrimination and similar matters, claims resulting from guest accidents while visiting a restaurant, claims relating to lease and contractual obligations, federal and state tax matters, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns, and injury or wrongful death under “dram shop” laws that allow a person to sue the Company based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of its restaurants.
Management does not believe that any of the legal proceedings pending against the Company as of the date of this report will have a material adverse effect on the Company’s liquidity, results of operations or consolidated financial condition. The Company may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal
10
proceedings in a particular fiscal year, which may adversely affect its consolidat
ed results of operations, or on occasion, receive settlements that favorably affect its consolidated results of operations.
Note 6 – Fair Value Measurements
The Company utilizes the following fair value hierarchy, which prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:
Level 1
|
Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
Defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3
|
Defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.
|
The following tables present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
|
|
September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
394
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
1,978
|
|
|
|
-
|
|
|
|
-
|
|
Cash surrender value - life insurance *
|
|
|
-
|
|
|
|
2,120
|
|
|
|
-
|
|
Total
|
|
$
|
2,462
|
|
|
$
|
2,120
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Cash and cash equivalents *
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U.S. government obligations *
|
|
|
397
|
|
|
|
-
|
|
|
|
-
|
|
Corporate bonds *
|
|
|
1,841
|
|
|
|
-
|
|
|
|
-
|
|
Cash surrender value - life insurance *
|
|
|
-
|
|
|
|
2,106
|
|
|
|
-
|
|
Total
|
|
$
|
2,450
|
|
|
$
|
2,106
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* - As held in the Trust as defined below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in a rabbi trust established under a retirement benefit arrangement with certain of our current and former officers (the “Trust”). Cash held in the Trust is invested through an overnight repurchase agreement the investments of which may include U.S. Treasury securities, such as bonds or Treasury bills, and other agencies of the U.S. government. Such investments are valued using quoted market prices in active markets.
U.S. government obligations held in the Trust include U.S. Treasury Bonds. These bonds as well as the corporate bonds listed above are classified as Level 1 of the fair value hierarchy given their readily available quoted prices in active markets.
Cash surrender value - life insurance is classified as Level 2 in the fair value hierarchy. The value of each policy was determined by MassMutual Financial Group, an A-rated insurance company, which provides the value of these policies to the Company on a regular basis by which the Company adjusts the recorded value accordingly.
There were no transfers between the levels listed above during either of the reporting periods.
Unrealized gains or losses on investments held in the Trust are presented as a component of “Other, net” on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
11
As o
f each of September 30, 2018 and December 31, 2017, 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 ca
rrying amounts of the long-term debt approximate fair value as interest rates and negotiated terms and conditions are consistent with current market rates because of the close proximity of recent refinancing transactions and the quotes obtained for potenti
al financings to the dates of these unaudited Condensed Consolidated Financial Statements (Level 2).
There were no assets and liabilities measured at fair value on a nonrecurring basis during the quarters ended September 30, 2018 and October 1, 2017.
Note 7 – Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“ASU No. 2014-09”) which created ASC Topic 606. The core principle of the standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 replaced most existing revenue recognition guidance in GAAP. New qualitative and quantitative disclosure requirements aim to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Since the issuance of ASU No. 2014-09, certain updates have been issued to clarify the implementation guidance, and the effective dates for ASU No. 2014-09 have been updated by ASU No. 2015-14, Deferral of the Effective Date. The requirements were effective for annual and interim periods in fiscal years beginning after December 15, 2017 for public business entities. The Company adopted the requirements under ASC Topic 606 as of January 1, 2018. ASU No. 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has selected the cumulative effect transition method. The Company does not currently have any franchise or similar arrangements that were required to be evaluated under ASU No. 2014-09, and the Company has determined that this guidance does not impact the recognition of revenue from sales within our restaurant operations. Gift card breakage has historically been recognized when redemption is unlikely to occur and there is no legal obligation to remit the value of the unredeemed gift cards. Based on our historical experience, we had considered the probability of redemption of our concepts’ gift cards to be remote when cards have been outstanding for 24 months. With the adoption of ASU No. 2014-09 as of January 1, 2018, the Company began analyzing gift card breakage based upon company-specific historical redemption patterns, and gift card breakage is now recognized in revenue in proportion to redemptions. See Note 9 – Revenue for additional discussion surrounding the adoption of ASC Topic 606 as well as related disclosures.
In January 2016, the FASB issued ASU No. 2016-01
, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU No. 2016-01”). The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes became effective for the Company’s 2018 fiscal year. The Company adopted this guidance during the first quarter of fiscal year 2018, and it did not have a significant impact on the Company’s unaudited Condensed Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU No. 2016-02”), which supersedes ASC Topic 840,
Leases,
and creates a new topic, ASC Topic 842,
Leases
. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update may be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the Consolidated Financial Statements. Alternatively, in July 2018, FASB issued ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements
(“ASU No. 2018-011”), that, among other things, permits a company to use its effective date as the date of initial adoption which will allow it to recognize its cumulative effect transition adjustment as of the effective date. Further, as a result of ASU No. 2018-11, a company is no longer required to restate comparative period financial information for the effects of ASC Topic 842 or to make the new lease disclosures in comparative periods beginning before the effective date. The Company anticipates that the adoption of ASU No. 2016-02 will materially increase the assets and liabilities on the Company’s Consolidated Balance Sheets and related disclosures since the Company has a significant number of operating lease arrangements for which it is the lessee. The Company is still evaluating the adoption method to be selected and impact that the adoption of this ASU will have on the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The impact of this ASU is non-cash in nature, and as such, it is not expected to have a material impact on the Company’s cash flows and liquidity. The Company is assessing this
12
ASU’s impact, if any, on our existing debt covenants. However, the Company anticipates that consideration will be given by its lender with respect to t
he adoption of this ASU and its impact on components within the related debt covenant calculation once the ASU becomes effective in fiscal year 2019.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
(“ASU No. 2016-15”). This update is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update became effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company adopted this guidance during the first quarter of fiscal year 2018, and it did not have a significant impact on the Company’s unaudited Condensed Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles – Goodwill and Other
(Topic 350)
: Simplifying the Test for Goodwill Impairment (
“ASU No. 2017-04”). This update simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step quantitative goodwill impairment test. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit, not to exceed the carrying value of the reporting unit goodwill. The option remains for an entity to perform a qualitative assessment of a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 requires prospective adoption and is effective commencing in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU No. 2017-09”), which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in ASU No. 2017-09 became effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company adopted this guidance during the first quarter of fiscal year 2018, and it did not have a significant impact on the Company’s unaudited Condensed Consolidated Financial Statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718)
(“ASU No. 2018-07”)
, in an effort to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718,
Compensation - Stock Compensation
, to include share-based payment transactions for acquiring goods and services from nonemployees. Under ASU No. 2018-07, most of the guidance on stock compensation payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. While the Company continues to assess the potential impact of ASU No. 2018-07, it does not expect the adoption of this standard to have a material impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU No. 2018-13”). This update eliminates, modifies and adds a number of disclosure requirements related to fair value measurements in connection with the FASB’s disclosure framework project the objective of which is to improve the effectiveness of disclosures in the notes to financial statements. ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. While the Company continues to assess the potential impact of ASU No. 2018-13, it does not expect the adoption of this standard to have a significant impact on the notes to its unaudited Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40)
(“ASU No. 2018-15”)
. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. ASU No. 2018-15 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. While the Company continues to assess the potential impact of ASU No. 2018-15, it does not expect the adoption of this standard to have a material impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.
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Note 8 – Related Party Transactions
As discussed in Note 1, on September 28, 2015, immediately prior to the Distribution, J. Alexander’s Holdings, LLC entered into a Management Consulting Agreement with Black Knight, pursuant to which Black Knight provides corporate and strategic advisory services to J. Alexander’s Holdings, LLC. The principal member of Black Knight is William P. Foley, II, Chairman of the board of Cannae and non-Executive Chairman of the board of directors of FNF. The other members of Black Knight consist of Lonnie J. Stout II, our President, Chief Executive Officer and one of our directors, and other officers of Cannae and FNF.
Under the Management Consulting Agreement, J. Alexander’s Holdings, LLC has issued Black Knight non-voting Class B Units and is required to pay Black Knight an annual fee equal to 3% of the Company’s Adjusted EBITDA for each fiscal year during the term of the Management Consulting Agreement and to reimburse Black Knight for its direct out-of-pocket costs incurred for management services provided to J. Alexander’s Holdings, LLC. Under the Management Consulting Agreement, “Adjusted EBITDA” means the Company’s net income (loss) before interest expense, income tax (expense) benefit, depreciation and amortization, and adding asset impairment charges and restaurant closing costs, loss on disposals of fixed assets, transaction and integration costs, non-cash compensation, loss from discontinued operations, gain on debt extinguishment, pre-opening costs and certain unusual items.
The Management Consulting Agreement will continue in effect for an initial term of seven years and be renewed for successive one-year periods thereafter unless earlier terminated (i) by J. Alexander’s Holdings, LLC upon at least six months’ prior notice to Black Knight or (ii) by Black Knight upon 30 days’ prior notice to J. Alexander’s Holdings, LLC. In the event that the Management Consulting Agreement is terminated by J. Alexander’s Holdings, LLC prior to the tenth anniversary thereof, or Black Knight terminates the Management Consulting Agreement within 180 days after a change of control, J. Alexander’s Holdings, LLC will be obligated to pay to Black Knight an early termination payment equal to the product of (i) the annual base fee for the most recent fiscal year and (ii) the difference between ten and the number of years that have elapsed under the Management Consulting Agreement, provided that in the event of such a termination following a change of control event, the multiple of the annual base fee to be paid shall not exceed three.
During the quarters ended September 30, 2018 and October 1, 2017, consulting fees of $139 and $120, respectively, were recorded relative to the Black Knight Management Consulting Agreement. During the nine-month periods ended September 30, 2018 and October 1, 2017, consulting fees of $587 and $559, respectively, were recorded relative to the aforementioned agreement. Such costs are presented as a component of “General and administrative expenses” on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The consulting fees associated with fiscal year 2017 and 2016 of approximately $749 and $729, respectively, were paid by the Company during the nine-month periods ended September 30, 2018 and October 1, 2017, respectively.
As discussed in Note 1, a grant of 1,500,024 Class B Units in J. Alexander’s Holdings, LLC was made to Black Knight on October 6, 2015 in accordance with the terms of the Management Consulting Agreement (the “Black Knight Grant”). The Black Knight Grant has a hurdle rate of approximately $151,052, which was calculated as the product of the number of shares of the Company’s common stock issued and outstanding and $10.07, which represents the volume weighted average of the closing price of the Company’s common stock over the five trading days following the Distribution date of September 28, 2015. The Class B Units granted to Black Knight vest in equal installments on the first, second, and third anniversaries of the grant date, and are subject to acceleration upon a change in control of the Company or J. Alexander’s Holdings, LLC, the termination of the Management Consulting Agreement by J. Alexander’s Holdings, LLC without cause or the termination of the Management Consulting Agreement by Black Knight as a result of J. Alexander’s Holdings, LLC’s breach of the Management Consulting Agreement. The Black Knight Grant has been measured at fair value at each reporting date through the date of vesting, and will be recognized as a component of continuing income in future financial statements of the Company. The valuation of the Black Knight Grant as of September 30, 2018 was $6,761 and, as of October 6, 2018, was $6,287. As a result, a benefit of approximately $450 will be included as a component of continuing income during the fourth quarter of 2018. Vested Class B Units held by Black Knight may be exchanged for shares of common stock of the Company. However, upon termination of the Management Consulting Agreement for any reason, Black Knight must exchange its Class B Units within 90 days or such units will be forfeited for no consideration.
During the quarters ended September 30, 2018 and October 1, 2017, profits interest expense of $1,240 and $40, respectively, was recorded relative to the Black Knight Grant. During the nine-month periods ended September 30, 2018 and October 1, 2017, profits interest expense of $3,094 and $1,715, respectively, was recorded relative to the grant. In accordance with the result of the quarterly valuation, an adjustment is recorded based on the calculated amount of cumulative profits interest expense required to be recognized as determined by the valuation as of quarter end and the profits interest expense previously recorded by the Company in its financial statements. Such expense is presented as a component of “General and administrative expenses” in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.
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Note 9 – Revenue
Adoption of ASC Topic 606, Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASC Topic 606 using the cumulative effect method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted, and continue to be reported in accordance with the Company’s historic accounting policy under ASC Topic 605. The Company’s accounting policies with respect to revenue are discussed in further detail below, including policies implemented prior to and with the adoption of ASC Topic 606.
The Company recorded a net increase to opening retained earnings of $34 as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact wholly related to the Company’s accounting for gift card breakage. The impact to net sales for the nine-month period ended September 30, 2018 was an increase of $252 as a result of applying ASC Topic 606. Unearned revenue decreased by $286 for the nine-month period ended September 30, 2018 as a result of adopting ASC Topic 606.
Significant Accounting Policy
Restaurant sales are recognized at a point in time when food and service are provided to guests at one of the Company’s restaurants.
Taxes assessed by a governmental authority that are imposed on the Company’s sales of its food and service, and collected by the Company from the guest for remittance to such authorities, are excluded from net sales. Further, the Company excludes any discounts, such as management meals and employee meals, associated with each sale.
Unearned revenue, as separately stated on the Company’s Condensed Consolidated Balance Sheets, represents the contract liability for gift cards, which have been sold but not redeemed. Upon redemption, when the guest presents a gift card as a form of payment for food and service provided at the restaurant, net sales are recorded and the contract liability is reduced by the amount of card values redeemed. The Company considers its performance obligations associated with gift cards sold to guests to be met when food and service have been provided to its guests, and a gift card is presented as a form of payment. The amount of gift card revenue that was previously deferred is recognized based on the selling price of the menu items at each restaurant.
Prior to the adoption of ASC Topic 606, the Company recorded gift card breakage when such cards were considered to be only remotely likely to be redeemed, and for which there is no legal obligation to remit balances under unclaimed property laws of the relevant jurisdictions. Management considered the probability of redemption of a gift card to be remote when it had been outstanding for 24 months. With the adoption of ASC Topic 606 as of January 1, 2018, the Company began analyzing gift card breakage based upon company-specific historical redemption patterns, and gift card breakage is now recognized as revenue in proportion to guest redemptions. The Company’s gift cards continue to have no expiration date, and it does not deduct non-usage fees from gift card outstanding balances. In applying the guidance under this topic, management estimates the percentage of the value of gift cards sold that will go unused by the purchaser of such card, which is a matter of judgement, and, as noted above, recognizes revenue in proportion to actual gift card redemptions during the reporting period, at which time management believes the underlying performance obligations have been satisfied by the Company. Gift card breakage is recorded on a quarterly basis in conjunction with the Company’s preparation of its financial statements and related disclosures, and is presented as a component of “Net sales” within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company’s net sales and net income have historically been subject to seasonal fluctuations. Net sales and operating income typically reach their highest levels during the fourth quarter of the fiscal year due to holiday business and the first quarter of the fiscal year due in part to the redemption of gift cards sold during the holiday season. The contract liability relative to gift cards and the recognition of revenue associated with such form of payment is impacted accordingly. The Company’s unearned revenue balance has historically decreased throughout the course of the fiscal year until the fourth quarter when an increase in the balance is typically experienced given the seasonality of gift card sales.
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Disaggregation and Recognition of Revenue
The following table presents the Company’s revenues disaggregated by revenue source for the periods presented:
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Restaurant
|
$
|
56,703
|
|
|
$
|
53,871
|
|
|
$
|
178,748
|
|
|
$
|
171,891
|
|
Gift Card Breakage
|
|
27
|
|
|
|
8
|
|
|
|
311
|
|
|
|
26
|
|
Net Sales
|
$
|
56,730
|
|
|
$
|
53,879
|
|
|
$
|
179,059
|
|
|
$
|
171,917
|
|
The Company recognized revenue associated with gift cards redeemed by guests during the quarters ended September 30, 2018 and October 1, 2017 of $743 and $738, respectively, and $3,022 and $2,928 for the nine-month periods ended September 30, 2018 and October 1, 2017, respectively. Further, of the amount that was redeemed during the first nine months of 2018, $2,047 was recorded within unearned revenue at the beginning of the fiscal year. Unearned revenue increased by $1,875 as a result of gift cards sold during the first nine months of 2018.
Note 10 – Subsequent Events
As discussed in Note 1 above, on October 29, 2018, the Company’s share repurchase program expired. On November 1, 2018, the Board authorized a new share repurchase program which allows for the repurchase of shares up to an aggregate purchase price of $15,000 over the three-year period ending November 1, 2021. Share repurchases under the newly authorized 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.
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