10-Q 1 jax-10q_20180701.htm SECOND QUARTER FORM 10-Q jax-10q_20180701.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended July 1, 2018

or

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: 1-37473

 

J. Alexander’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Tennessee

 

47-1608715

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3401 West End Avenue, Suite 260

 

 

Nashville, Tennessee

 

37203

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (615) 269-1900

 

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.    Yes      No  

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).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (check one):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

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      No

As of August 9, 2018, 14,695,176 shares of the registrant’s Common Stock, $0.001 par value, were outstanding.

 

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

2

 

 

 

Item 1. Financial Statements (Unaudited)

 

2

 

 

 

Condensed Consolidated Balance Sheets

 

2

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

3

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

Item 4. Controls and Procedures

 

30

 

 

 

PART II. OTHER INFORMATION

 

31

 

 

 

Item 1. Legal Proceedings

 

31

 

 

 

Item 1A. Risk Factors

 

31

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

Item 3. Defaults Upon Senior Securities

 

31

 

 

 

Item 4. Mine Safety Disclosures

 

31

 

 

 

Item 5. Other Information

 

31

 

 

 

Item 6. Exhibits

 

32

 

 

 

Signatures

 

33

 

 

 

 

 

 


PART I.  FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements

J. Alexander’s Holdings, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

 

 

 

 

July 1,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,259

 

 

$

10,711

 

Accounts and notes receivable

 

 

1,021

 

 

 

1,446

 

Inventories

 

 

2,611

 

 

 

2,804

 

Prepaid expenses and other current assets

 

 

3,931

 

 

 

3,769

 

Total current assets

 

 

14,822

 

 

 

18,730

 

Other assets

 

 

5,776

 

 

 

6,183

 

Property and equipment, at cost, less accumulated depreciation and amortization of $48,538 and $43,484 as of July 1, 2018 and December 31, 2017, respectively

 

 

107,033

 

 

 

103,615

 

Goodwill

 

 

15,737

 

 

 

15,737

 

Tradename and other indefinite-lived assets

 

 

25,631

 

 

 

25,202

 

Deferred charges, less accumulated amortization of $268 and $247 as of July 1, 2018 and December 31, 2017, respectively

 

 

167

 

 

 

184

 

Total assets

 

$

169,166

 

 

$

169,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,840

 

 

$

6,587

 

Accrued expenses and other current liabilities

 

 

9,091

 

 

 

10,745

 

Unearned revenue

 

 

2,373

 

 

 

3,695

 

Current portion of long-term debt

 

 

9,000

 

 

 

9,000

 

Total current liabilities

 

 

26,304

 

 

 

30,027

 

Long-term debt, net of portion classified as current and deferred loan costs

 

 

8,322

 

 

 

10,781

 

Deferred compensation obligations

 

 

6,592

 

 

 

6,451

 

Deferred income taxes

 

 

1,193

 

 

 

2,075

 

Other long-term liabilities

 

 

6,779

 

 

 

6,456

 

Total liabilities

 

 

49,190

 

 

 

55,790

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001 per share: Authorized 30,000,000 shares; issued and outstanding 14,695,176 shares as of July 1, 2018 and December 31, 2017, respectively

 

 

15

 

 

 

15

 

Preferred stock, par value $0.001 per share: Authorized 10,000,000 shares; no shares issued and outstanding as of July 1, 2018 or December 31, 2017

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

95,680

 

 

 

95,151

 

Retained earnings

 

 

17,227

 

 

 

13,495

 

Total stockholders' equity attributable to J. Alexander's Holdings, Inc.

 

 

112,922

 

 

 

108,661

 

Non-controlling interests

 

 

7,054

 

 

 

5,200

 

Total stockholders' equity

 

 

119,976

 

 

 

113,861

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

169,166

 

 

$

169,651

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2

 


J. Alexander’s Holdings, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited in thousands, except per share amounts)

 

 

 

 

Quarter Ended

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

July 1,

 

 

July 2,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

60,420

 

 

$

58,216

 

 

$

122,329

 

 

$

118,038

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

19,433

 

 

 

19,197

 

 

 

38,694

 

 

 

37,628

 

Restaurant labor and related costs

 

 

18,781

 

 

 

17,959

 

 

 

37,007

 

 

 

35,904

 

Depreciation and amortization of restaurant property and equipment

 

 

2,696

 

 

 

2,500

 

 

 

5,265

 

 

 

4,878

 

Other operating expenses

 

 

11,943

 

 

 

11,539

 

 

 

23,961

 

 

 

23,109

 

Total restaurant operating expenses

 

 

52,853

 

 

 

51,195

 

 

 

104,927

 

 

 

101,519

 

Transaction and integration expenses

 

 

7

 

 

 

460

 

 

 

933

 

 

 

460

 

General and administrative expenses

 

 

4,722

 

 

 

6,336

 

 

 

11,247

 

 

 

11,164

 

Pre-opening expenses

 

 

504

 

 

 

10

 

 

 

830

 

 

 

886

 

Total operating expenses

 

 

58,086

 

 

 

58,001

 

 

 

117,937

 

 

 

114,029

 

Operating income

 

 

2,334

 

 

 

215

 

 

 

4,392

 

 

 

4,009

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(186

)

 

 

(224

)

 

 

(360

)

 

 

(398

)

Other, net

 

 

55

 

 

 

51

 

 

 

13

 

 

 

72

 

Total other expense

 

 

(131

)

 

 

(173

)

 

 

(347

)

 

 

(326

)

Income from continuing operations before income taxes

 

 

2,203

 

 

 

42

 

 

 

4,045

 

 

 

3,683

 

Income tax benefit (expense)

 

 

12

 

 

 

254

 

 

 

(126

)

 

 

(590

)

Loss from discontinued operations, net

 

 

(110

)

 

 

(110

)

 

 

(221

)

 

 

(223

)

Net income

 

$

2,105

 

 

$

186

 

 

$

3,698

 

 

$

2,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

0.15

 

 

$

0.02

 

 

$

0.27

 

 

$

0.21

 

Loss from discontinued operations, net

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.02

)

 

 

(0.02

)

Basic earnings per share

 

$

0.14

 

 

$

0.01

 

 

$

0.25

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

0.15

 

 

$

0.02

 

 

$

0.26

 

 

$

0.21

 

Loss from discontinued operations, net

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.02

)

Diluted earnings per share

 

$

0.14

 

 

$

0.01

 

 

$

0.25

 

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,695

 

 

 

14,695

 

 

 

14,695

 

 

 

14,695

 

Diluted

 

 

14,901

 

 

 

14,905

 

 

 

14,869

 

 

 

14,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,105

 

 

$

186

 

 

$

3,698

 

 

$

2,870

 

See accompanying Notes to Condensed Consolidated Financial Statements.

Per share amounts may not sum due to rounding.

3

 


 

J. Alexander’s Holdings, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited in thousands, except share amounts)

 

 

 

Outstanding

shares

 

 

Common

stock

 

 

Additional

paid-in capital

 

 

Retained

earnings

 

 

Non-controlling

interests

 

 

Total

 

Balances at December 31, 2017

 

 

14,695,176

 

 

$

15

 

 

$

95,151

 

 

$

13,495

 

 

$

5,200

 

 

$

113,861

 

Cumulative effect of change in accounting policy (Note 9)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

34

 

 

 

-

 

 

 

34

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

529

 

 

 

-

 

 

 

1,854

 

 

 

2,383

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,698

 

 

 

-

 

 

 

3,698

 

Balances at July 1, 2018

 

 

14,695,176

 

 

$

15

 

 

$

95,680

 

 

$

17,227

 

 

$

7,054

 

 

$

119,976

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4

 


J. Alexander’s Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

 

 

 

Six Months Ended

 

 

 

July 1,

 

 

July 2,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,698

 

 

$

2,870

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

5,411

 

 

 

5,021

 

Equity-based compensation expense

 

 

2,383

 

 

 

2,308

 

Other, net

 

 

(282

)

 

 

52

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

425

 

 

 

(1,089

)

Prepaid expenses and other current assets

 

 

(162

)

 

 

(88

)

Accounts payable

 

 

(653

)

 

 

(861

)

Accrued expenses and other current liabilities

 

 

(1,654

)

 

 

(338

)

Other assets and liabilities, net

 

 

(587

)

 

 

229

 

Net cash provided by operating activities

 

 

8,579

 

 

 

8,104

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(9,019

)

 

 

(6,597

)

Other investing activities

 

 

(512

)

 

 

(273

)

Net cash used in investing activities

 

 

(9,531

)

 

 

(6,870

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on long-term debt and obligations under capital leases

 

 

(2,500

)

 

 

(1,111

)

Other financing activities

 

 

-

 

 

 

(2

)

Net cash used in financing activities

 

 

(2,500

)

 

 

(1,113

)

(Decrease) increase in cash and cash equivalents

 

 

(3,452

)

 

 

121

 

Cash and cash equivalents at beginning of period

 

 

10,711

 

 

 

6,632

 

Cash and cash equivalents at end of period

 

$

7,259

 

 

$

6,753

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Property and equipment obligations accrued at beginning of period

 

$

1,854

 

 

$

2,587

 

Property and equipment obligations accrued at end of period

 

 

1,760

 

 

 

969

 

Cash paid for interest

 

 

402

 

 

 

395

 

Cash paid for income taxes

 

 

234

 

 

 

1,838

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5

 


J. Alexander’s Holdings, Inc.

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 July 1, 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 and 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.  As of July 1, 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 half of 2018.

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 July 1, 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

6

 


adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the quarter and six-month period ended July 1, 2018 are not necessarily indicative of the results that may be expected for the 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 income is comprised solely of net 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.

 

(c)

Fiscal Year

The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks.  The quarters and six-month periods ended July 1, 2018 and July 2, 2017 each included 13 and 26 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 $35 for the six-month period ended July 2, 2017.  The $110 loss from discontinued operations included in the quarters ended July 1, 2018 and July 2, 2017, respectively, and losses for the six-month periods ended July 1, 2018 and July 2, 2017 of $221 and $223, 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.

 

(e)

Transaction Expenses

The Company incurred transaction expenses associated primarily with the proposed acquisition of the Ninety Nine Restaurant and Pub concept (“99 Restaurants”) totaling $7 and $933 for the quarter and six-month period ended July 1, 2018, respectively.  Additionally, for the quarter and six-month period ended July 2, 2017, the Company incurred a total of $460 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 per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the reporting period.  Diluted earnings per share gives effect during the reporting period to all dilutive potential shares outstanding resulting from share-based compensation awards.  Diluted earnings per share of common stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include 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 per Share for the basic and diluted earnings 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 July 1, 2018 and December 31, 2017, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $7,054 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 July 1, 2018 and July 2, 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 income was made to non-controlling interests for either of the quarters and six-month periods ended July 1, 2018 and July 2, 2017.  

 

(h)

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.

8

 


Note 3 – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

 

 

Quarter Ended

 

 

 

Six Months Ended

 

(Dollars and shares in thousands, except per share amounts)

 

July 1,

 

 

July 2,

 

 

 

July 1,

 

 

July 2,

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

2,215

 

 

$

296

 

 

 

$

3,919

 

 

$

3,093

 

Loss from discontinued operations, net

 

 

(110

)

 

 

(110

)

 

 

 

(221

)

 

 

(223

)

Net income

 

$

2,105

 

 

$

186

 

 

 

$

3,698

 

 

$

2,870

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator for basic earnings per share)

 

 

14,695

 

 

 

14,695

 

 

 

 

14,695

 

 

 

14,695

 

Effect of dilutive securities

 

 

206

 

 

 

210

 

 

 

 

174

 

 

 

105

 

Adjusted weighted average shares and assumed conversions

     (denominator for diluted earnings per share)

 

 

14,901

 

 

 

14,905

 

 

 

 

14,869

 

 

 

14,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

0.15

 

 

$

0.02

 

 

 

$

0.27

 

 

$

0.21

 

Loss from discontinued operations, net

 

 

(0.01

)

 

 

(0.01

)

 

 

 

(0.02

)

 

 

(0.02

)

Basic earnings per share

 

$

0.14

 

 

$

0.01

 

 

 

$

0.25

 

 

$

0.20

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

$

0.15

 

 

$

0.02

 

 

 

$

0.26

 

 

$

0.21

 

Loss from discontinued operations, net

 

 

(0.01

)

 

 

(0.01

)

 

 

 

(0.01

)

 

 

(0.02

)

Diluted earnings per share

 

$

0.14

 

 

$

0.01

 

 

 

$

0.25

 

 

$

0.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:  Per share amounts may not sum due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the reporting period.  Diluted earnings per share gives effect during the reporting period to all dilutive potential shares outstanding resulting from share-based compensation awards.  Diluted earnings per share of common stock is computed similarly to basic earnings per share except the weighted average shares outstanding are increased to include 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 antidilutive and, therefore, have been excluded from the diluted earnings per share calculations for the quarters and six-month periods ended July 1, 2018 and July 2, 2017.  However, the 1,500,024 Black Knight profits interest Class B Units were considered dilutive as of July 1, 2018, and the impact for the quarter and six-month period then ended on the diluted earnings per share calculation was 136,111 and 139,316 shares, respectively.  Further, the Black Knight profits interest Class B Units were considered dilutive for the quarter and six-month period ended July 2, 2017, and the impact on the number of weighted average shares in the diluted earnings per share calculation was 210,309 and 105,155, 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 July 1, 2018, and the dilutive impact on the number of weighted average shares in the diluted earnings per share calculation was 69,581 and 34,791 for the quarter and six-month period ended July 1, 2018, respectively.  A portion of the stock option awards outstanding as of the quarter ended July 1, 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 six-month period ended July 1, 2018, and are excluded from the diluted earnings per share calculation for such reporting periods.  Additionally, the 985,750 stock option awards outstanding as of July 2, 2017 were considered antidilutive and, therefore, are excluded from the diluted earnings per share calculation for the quarter and six-month period then ended.

9

 


Note 4 – Income Taxes

The net effective tax rate (including the impact of discrete items) for the six-month periods ended July 1, 2018 and July 2, 2017 was 3.3% and 17.1%, respectively.  The factors that cause the net effective tax rate to vary from the federal statutory rate of 21% for the six-month period ended July 1, 2018 and 35% for the six-month period ended July 2, 2017 include the impact of the Federal Insurance Contribution Act tip and other credits, partially 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 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 six-month period ended July 1, 2018.

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 one to five years.  The total estimated amount of lease payments remaining on these five leases at July 1, 2018 was approximately $466.  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 July 1, 2018 was approximately $30.  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 July 1, 2018 was approximately $135.  There have been no payments by subsidiaries of the Company of such contingent liabilities in the history of the Company.  Management does not believe any significant loss is likely.

 

(b)

Tax Contingencies

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.

10

 


On December 8, 2017, Margie Elstein, a purported shareholder of the Company, filed a putative class action lawsuit in the Tennessee Chancery Court for Davidson County, 20th Judicial District (the “Elstein Action”) against the Company, members of the Board, Fidelity Newport Holdings, LLC (“FNH”), then FNFV and FNF.  The Elstein Action alleged that the members of the Board breached their fiduciary duties to shareholders because the directors of the Company and Stephens, Inc. had conflicts of interest related to the Company’s proposed acquisition of 99 Restaurants.  The Elstein Action also alleged that the Board and the Company made materially inadequate disclosures and material omissions in its preliminary proxy statement for the acquisition of 99 Restaurants.  The Elstein Action further alleged that FNH, then FNFV, and FNF defendants aided and abetted the Board’s purported breach of its fiduciary duties.  As discussed in Note 2(e), in the first quarter of 2018, the merger agreement was terminated.  During the second quarter of 2018, the Elstein Action was dismissed without prejudice, and no further developments or costs related thereto are anticipated.  

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 or consolidated financial condition.  The Company may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal year, which may adversely affect its consolidated 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:

 

 

July 1, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash and cash equivalents *

 

$

106

 

 

$

-

 

 

$

-

 

U.S. government obligations *

 

 

394

 

 

 

-

 

 

 

-

 

Corporate bonds *

 

 

1,982

 

 

 

-

 

 

 

-

 

Cash surrender value - life insurance *

 

 

-

 

 

 

2,109

 

 

 

-

 

Total

 

$

2,482

 

 

$

2,109

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

11

 


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 Income and Comprehensive Income.

As of each of July 1, 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 carrying 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 potential 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 July 1, 2018 and July 2, 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 are 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.

12

 


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 impact that the adoption of this ASU will have on the Company’s Condensed Consolidated Statements of Income and Comprehensive 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 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 the 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.  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.  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.

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

13

 


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.  J. Alexander’s Holdings, LLC will also 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 July 1, 2018 and July 2, 2017, consulting fees of $205 and $174, respectively, were recorded relative to the Black Knight Management Consulting Agreement.  During the six-month periods ended July 1, 2018 and July 2, 2017, consulting fees of $449 and $439, 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 Income and Comprehensive Income.  The consulting fees associated with fiscal year 2017 and 2016 of approximately $749 and $729, respectively, were paid by the Company during the six-month periods ended July 1, 2018 and July 2, 2017, respectively.

As discussed in Note 1, a grant of an additional 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 will be 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 will be 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 July 1, 2018 was $6,018.  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 July 1, 2018 and July 2, 2017, profits interest expense of $(53) and $1,714, respectively, was recorded relative to the Black Knight Grant.  During the six-month periods ended July 1, 2018 and July 2, 2017, profits interest expense of $1,854 and $1,676, respectively, was recorded relative to the grant.  A benefit was recorded for the second quarter of 2018 as a result of the decrease in the valuation as of the end of the quarter as compared to the prior quarter’s valuation.  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 benefit or expense is presented as a component of “General and administrative expenses” in the Condensed Consolidated Statements of Income and Comprehensive Income.

14

 


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 six-month period ended July 1, 2018 was an increase of $239 as a result of applying ASC Topic 606.  Unearned revenue decreased by $273 for the six-month period ended July 1, 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 Income and Comprehensive Income.

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

 

 

Six Months Ended

 

 

July 1,

 

 

July 2,

 

 

July 1,

 

 

July 2,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Restaurant

$

60,363

 

 

$

58,186

 

 

$

122,045

 

 

$

118,020

 

Gift Card Breakage

 

57

 

 

 

30

 

 

 

284

 

 

 

18

 

Net Sales

$

60,420

 

 

$

58,216

 

 

$

122,329

 

 

$

118,038

 

The Company recognized revenue associated with gift cards redeemed by guests during the quarters ended July 1, 2018 and July 2, 2017 of $890 and $850, respectively, and $2,279 and $2,191 for the six-month periods ended July 1, 2018 and July 2, 2017, respectively.  Further, of the amount that was redeemed during the first half of 2018, $1,719 was recorded within unearned revenue at the beginning of the fiscal year.  Unearned revenue increased by $1,275 as a result of gift cards sold during the first half of 2018.

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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 conditions, 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.  We 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:

 

the impact of, and our ability to adjust to, general economic conditions and changes in consumer preferences;

 

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, control development expenses, attract customers to our restaurants or hire and retain personnel;

 

our ability to successfully transition certain of our existing J. Alexander’s locations to Redlands Grill locations and any other future concept locations;

 

our ability to obtain financing on favorable terms, or at all;

 

the strain on our infrastructure caused by the implementation of our growth strategy;

 

the significant competition we face for guests, real estate and employees;

 

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;

 

our ability to increase sales at existing J. Alexander’s, Redlands Grill, Lyndhurst Grill, Overland Park Grill and Stoney River restaurants and improve our margins at existing Stoney River restaurants;

 

the impact of increases in the price of, and/or reductions in the availability of, commodities, particularly beef;

 

the impact of negative publicity or damage to our reputation, which could arise from concerns regarding food safety and foodborne illnesses or other matters;

 

the impact of proposed and future government regulation and changes in healthcare, labor, including minimum wage rates, and other laws;

 

our expectations regarding litigation or other legal proceedings;

 

our inability to cancel and/or renew leases and the availability of credit to our landlords and other retail center tenants;

 

operating and financial restrictions imposed by our credit facility, our level of indebtedness and any future indebtedness;

 

the impact of the loss of key executives and management-level employees;

 

our ability to enforce our intellectual property rights;

 

the impact of information technology system failures or breaches of our network security;

 

the impact of any future impairment of our long-lived assets, including tradename and goodwill;

 

the impact of any future acquisitions, joint ventures or other initiatives;

 

the impact of shortages, interruptions and price fluctuations on our ability to obtain ingredients from our limited number of suppliers;

 

our expectations regarding the seasonality of our business;

 

the impact of adverse weather conditions, including hurricanes and other weather-related disturbances;

 

the impact of the Management Consulting Agreement with Black Knight Advisory Services, LLC (“Black Knight”); and

 

the other matters found under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” discussed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 15, 2018 (the “2017 Annual Report”).  

These factors should not be construed as exhaustive and should be read with the other cautionary statements in the 2017 Annual 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.  Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors,”

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in the 2017 Annual 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, Lyndhurst Grill, Overland Park Grill and Stoney River Steakhouse and Grill (“Stoney River”).  For more than 25 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 2017, we successfully converted one of our previous J. Alexander’s locations in Ohio to the Lyndhurst Grill.  Further, in the second quarter of 2018, we successfully converted one of our previous J. Alexander’s locations in Kansas to the Overland Park Grill.  Each of these recently converted locations will continue to offer a contemporary American menu.

Our business plan has evolved over time to include a collection of restaurants dedicated to providing guests with what we believe to be the highest quality food, 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 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.”  As of August 10, 2018, we operated a total of 45 locations across 16 states.  In April 2018, we opened one new J. Alexander’s location in King of Prussia, Pennsylvania.

We believe our restaurants deliver on our guests’ desire for freshly-prepared, high quality food and high quality service in a restaurant that feels “unchained” with architecture and design that varies from location to location.  Through our combination with Stoney River, we have grown from 33 restaurants across 13 states in 2009 to 45 restaurants across 16 states as of August 10, 2018.  Our sales growth in recent years 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 revenue and improve our profitability by:

 

pursuing new restaurant development;

 

expanding beyond our current existing restaurant concepts;

 

increasing our same store sales through providing high quality food and service; and

 

improving our margins and leveraging infrastructure.

We believe there are opportunities to open up to four new restaurants annually.  We are actively pursuing development opportunities within certain of our concepts, and we are currently evaluating approximately 20 locations in approximately 15 separate markets in order to meet our stated growth objectives. The most recent restaurant openings include J. Alexander’s restaurants in King of Prussia, Pennsylvania in April 2018 and in Lexington, Kentucky in March 2017 and a Stoney River restaurant in Chapel Hill, North Carolina in February 2017.  In addition, the Company’s next Stoney River restaurant is under construction in Troy, Michigan, and is currently expected to open during the fourth quarter of 2018.

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The locations that began the transition from a J. Alexander’s restaurant to a Redlands Grill restaurant during 2015, the J. Alexander’s location in Ohio that converted to Lyndhurst Grill in 2017 and the J. Alexander’s location in Kansas that converted to Overland Park Grill in the second quarter of 2018 have been included in the J. Alexander’s results of operations, average weekly same store sales calculations and all other applicable disclosures, and are collectively referred to herein as “J. Alexander’s / Grills” restaurants or locations.

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 eighteenth month of operations.  Our same store restaurant base consisted of 41 restaurants at each of July 1, 2018 and July 2, 2017.  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 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:

 

consumer recognition of our restaurants and our ability to respond to changing consumer preferences;

 

overall economic trends, particularly those related to consumer spending;

 

our ability to operate restaurants effectively and efficiently to meet guest expectations;

 

pricing;

 

guest traffic;

 

spending per guest and average check amounts;

 

local competition;

 

trade area dynamics; and

 

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 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.  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 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 customers’ 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 customer traffic, pricing and development of our concepts.

Guest Counts.  Guest counts are measured by the number of entrées ordered at our restaurants over a given time period.

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

19

 


holiday season.  In addition, we operate on a 52-week or 53-week fiscal year that ends on the Sunday closest to December 31.  Each quarterly period includes 13 weeks of operations, except for a 53-week year when the fourth quarter has 14 weeks of operations.  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.

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.

Cost of Sales.  Cost of sales is comprised primarily of food and bever