What changed in this filing

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Item 1. Financial Statements

2020-08-03 compared with 2020-06-22 · 196 added, 120 removed, 340 unchanged (48% of the section changed)

15 unchanged sentences

Total other assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Commitments and contingencies (Note 10)

Series A convertible preferred stock, $ .01 par value, 203,694 shares authorized;

203,694 and 0 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Stockholders’ equity:

Preferred stock, $ .01 par value, 5,000,000 shares authorized;

Preferred stock, $ .01 par value, other than Series A convertible preferred stock, 4,796,306 shares authorized;

Common stock, $ .01 par value, 250,000,000 shares authorized;

98,452,351 and 97,685,178 shares issued at March 31, 2020 and December 31, 2019, respectively

98,465,059 and 97,685,178 shares issued at June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

Retained earnings

Treasury stock, 52,991,015 and 52,916,434 shares at cost at March 31, 2020 and December 31, 2019, respectively

Treasury stock, 53,003,428 and 52,916,434 shares at cost at June 30, 2020 and December 31, 2019, respectively

( 1,695,974 )

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Total stockholders’ equity

Total liabilities and stockholders’ equity

Total liabilities, convertible preferred stock and stockholders’ equity

See the accompanying notes to the condensed consolidated financial statements

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(In thousands, except per share data)

March 31, 2020

April 2, 2019

June 30, 2020

Costs and expenses:

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Loss on investment in unconsolidated affiliates

Interest and other income/(expense), net

Interest and other expense, net

(Loss)/income before income taxes

1 unchanged sentence

Net (loss)/income

Net (loss)/income per share:

Weighted average shares outstanding:

Net (loss)/income per common share (Note 11):

Weighted-average common shares outstanding:

See the accompanying notes to the condensed consolidated financial statements.

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(In thousands)

March 31, 2020

April 2, 2019

June 30, 2020

Net (loss)/income

6 unchanged sentences

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND CONVERTIBLE PREFERRED STOCK

(In thousands)

For the thirteen weeks ended March 31, 2020:

For the twenty-six weeks ended June 30, 2020:

Preferred Stock

Comprehensive

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( 1,695,708 )

For the thirteen weeks ended April 2, 2019:

Foreign currency translation adjustment

Change in derivative, net of tax

Stock-based compensation

Common stock issued under stock-based compensation plans

Treasury stock purchases

Preferred stock issuance

Preferred stock direct costs

Paid-in-kind preferred stock dividend, including beneficial conversion feature

Balance, June 30, 2020

( 1,695,974 )

For the twenty-six weeks ended July 2, 2019:

Comprehensive

11 unchanged sentences

( 1,653,211 )

Foreign currency translation adjustment

Cash dividends declared Common stock, $ 0.33 per share

Stock-based compensation

Common stock issued under stock-based compensation plans

Treasury stock purchases

Balance, July 2, 2019

( 1,681,304 )

See the accompanying notes to the condensed consolidated financial statements.

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(In thousands)

March 31, 2020

April 2, 2019

June 30, 2020

Cash flows from operating activities:

Net (loss)/income

Adjustments to reconcile net income to cash provided by operating activities:

Adjustments to reconcile net income to cash (used in)/provided by operating activities:

Depreciation and amortization expenses

19 unchanged sentences

Cash flows from financing activities:

Preferred stock issuance

Preferred stock direct costs

Borrowings on credit facility

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The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 11, 2020 (“fiscal 2019 10-K”).

On October 2, 2019, we completed the acquisition of North Italia and the remaining business of Fox Restaurant Concepts LLC, including Flower Child and all other FRC brands (the "Acquisitions").

On October 2, 2019, we completed the acquisition of North Italia and the remaining business of Fox Restaurant Concepts LLC (“FRC”), including Flower Child and all other FRC brands (the "Acquisitions").

The results of operations, financial position and cash flows of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

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In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms.

As of June 22, 2020, we have reopened dining rooms in 194 locations across our concepts, however we will be operating under capacity restrictions for some time as social distancing protocols remain in place.

As of March 31, 2020 and June 22, 2020 respectively, 33 and 19 of our restaurants were temporarily closed and 261 and 81 restaurants were operating in an off-premise only model.

In response to the pandemic, the Company and its Board of Directors implemented the following measures to preserve liquidity and enhance financial flexibility:

However, restrictions on the type of operating model and occupancy capacity continue to change.

We began to reopen dining rooms across our concepts the second week of May.

The following table presents the number of restaurants and their operating model as of July 29, 2020:

The Cheesecake

Indoor dining with limited capacity

Outdoor only with social distancing

Off-premise only

Currently closed

In our initial response to the pandemic, the Company and its Board of Directors implemented the following measures to preserve liquidity and enhance financial flexibility:

● Eliminated non-essential capital expenditures and expenses;

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The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on consumer spending behavior, will determine the significance of the impact to our operating results and financial position.

In addition, these considerable developments have triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC.

In the first quarter of fiscal 2020, these considerable developments triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC.

No additional impairment assessments were required in the second quarter of fiscal 2020.

Future changes in estimates could further impact the carrying value of these items.

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Our only derivative is an interest rate swap which is designated as a cash flow hedge.

Therefore, the effective portion of the changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings, and the ineffective portion of changes in the fair value are immediately recognized in earnings as interest expense.

Therefore, the effective portion of the changes in fair value are recognized in accumulated other comprehensive income when the hedged item is recognized in earnings, and the ineffective portion of changes in the fair value are immediately recognized in earnings as interest expense.

We classify cash inflows and outflows from derivatives within operating activities on the consolidated statements of cash flows.

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Inventories consisted of (in thousands):

March 31, 2020

June 30, 2020

December 31, 2019

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Based on the results of these assessments, we recorded $ 8.9 million of expense primarily related to the impairment of one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants.

These amounts are recorded in impairment of assets and lease terminations on the consolidated statements of income.

These amounts were recorded in impairment of assets and lease terminations on the consolidated statements of income.

Intangible Assets, net

The following table presents the components of our intangible assets, net (in thousands):

March 31, 2020

June 30, 2020

December 31, 2019

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Accordingly, actual results could vary significantly from such estimates.

Based on the results of these assessments, we recorded impairment expense of $ 79.4 million, $ 101.0 million and $ 2.3 million related to goodwill, trade names and trademarks, and licensing agreements, respectively.

More than half of the total impairment amount was driven by the impact on our market capitalization, with the balance related to lower future cash flow estimates.

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The following tables present information related to gift cards (in thousands):

June 30, 2020

Gift card liabilities:

March 31, 2020

April 2, 2019

Beginning balance

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Ending balance

March 31, 2020

April 2, 2019

June 30, 2020

Gift card contract assets:

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Ending balance

(1) Included in prepaid expenses on the condensed consolidated balance sheets.

(1) Included in prepaid expenses on the consolidated balance sheets.

Components of lease expense were as follows (in thousands):

March 31, 2020

April 2, 2019

Supplemental information related to leases (in thousands, except percentages):

June 30, 2020

Supplemental cash flow information related to leases (in thousands):

June 30, 2020

Cash paid for amounts included in the measurement of lease liabilities:

March 31, 2020

April 2, 2019

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new operating lease liabilities

In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract) rather than as a lease modification.

Lessees may make the election for any lessor-provided lease concession related to the impact of the COVID-19 pandemic if the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee.

During the second quarter of fiscal 2020, we received a number of lease concessions, primarily in the form of rent deferral or reduction over the period of time when our restaurant business was adversely impacted and have elected to apply the interpretive guidance.

This election did not have a material impact on our consolidated financial statements.

Two concession agreements did not qualify for this accounting election and were treated as lease modifications.

Long-Term Debt

1 unchanged sentence

The Facility, which terminates on July 30, 2024, provides us with revolving loan commitments that total $ 400 million (of which $ 40 million may be used for issuances of letters of credit).

The Facility contains a commitment increase feature that could provide for an additional $ 200 million in available credit upon our request and subject to the participating lenders electing to increase their commitments or new lenders being added to the Facility.

At March 31, 2020, we had net availability for borrowings of $ 0.6 million, based on a $ 380.0 million outstanding debt balance and $ 19.4 million in standby letters of credit.

During the first quarter of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility given the impact of the COVID-19 pandemic on our operations.

At March 31, 2020, we were subject to certain financial covenants under the Facility requiring us to maintain (i) a maximum "Net Adjusted Leverage Ratio"

The Facility contains a commitment increase feature that could provide for additional available credit upon our request and subject to the participating lenders electing to increase their commitments or new lenders being added to the Facility.

Certain financial covenants under the Facility require us to maintain (i) a maximum "Net Adjusted Leverage Ratio"

of 4.75 and (ii) a minimum ratio of EBITDAR to interest and rent expense of 1.9 ("EBITDAR Ratio"), as well as customary events of default that, if triggered, could result in acceleration of the maturity of the Facility.

The Facility also limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

At March 31, 2020.

borrowings under the Facility bore interest, at our option, at a rate equal to either:

The Facility also limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

During the first half of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility given the impact of the COVID-19 pandemic on our operations.

To provide additional financial flexibility, on May 1, 2020 (the “Effective Date”), we entered into a First Amendment (the “Amendment”) to the Facility (as amended by the Amendment, the “Amended Facility”).

The Amended Facility provides for, among other things, (i) a covenant relief period (the “Covenant Relief Period”) from the Effective Date until we demonstrate compliance with our financial covenants as of the quarter ending on or after June 29, 2021, during which we are not required to comply with financial covenants requiring maintenance of the maximum Net Adjusted Leverage Ratio and minimum EBITDAR Ratio, (ii) a substitution of the Net Adjusted Leverage Ratio and EBITDAR Ratio covenants with a liquidity covenant for the calendar month ending May 31, 2020 and continuing through the calendar month ending February 28, 2021 that requires our Liquidity to be at least $ 65,000,000 at the end of each calendar month (with Liquidity being the sum of (a) unrestricted cash and cash equivalents and (b) the unused portion of the revolving facility) (and solely for the fiscal quarter ending March 30, 2021, we can meet either (x) both the Net Adjusted Leverage Ratio test and the EBITDAR Ratio test or (y) meet the minimum Liquidity test), with the minimum Liquidity covenant to be tested again from the calendar month ending April 30, 2021 until we demonstrate compliance with the Net Adjusted Leverage Ratio and EBITDAR Ratio for a fiscal quarter ending on or after March 30, 2021, (iii) a lowered amount of permitted increases to revolving loan commitments under the Amended Facility during the Covenant Relief Period from $ 200,000,000 to $ 125,000,000 , (iv) a limit on capital expenditures not to exceed $ 90,000,000 during the Covenant Relief Period, and (v) increased limitations on our ability to make restricted payments, incur debt, and consummate acquisitions during the Covenant Relief Period.

Borrowings under the Amended Facility during the Covenant Relief Period bear interest, at our option, at a rate equal to either:

(i) the adjusted LIBO Rate (as customarily defined, the “Adjusted LIBO Rate”) plus 2.5 %, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5 %, and (3) the one-month Adjusted LIBO Rate plus 1.0 %, plus (b) 1.50 %.

We also pay a fee of 0.4 % on the daily amount of unused commitments under the Amended Facility.

Subsequent to the Covenant Relief period, borrowings under the Amended Facility will bear interest, at our option, at a rate equal to either:

(i) the adjusted LIBO Rate (as customarily defined) (the “Adjusted LIBO Rate”) plus a margin that is based on our net adjusted leverage ratio, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5 %, and (3) the one-month Adjusted LIBO Rate plus 1.0 %, plus (b) a margin that is based on our net adjusted leverage ratio.

Letters of credit issued under the Facility bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted LIBO Rate plus other customary fees charged by the issuing bank.

Under the Facility, we paid certain customary loan origination fees and will pay an unused fee on the unused portion of the Facility that is also based on our Net Adjusted Leverage Ratio.

Our Net Adjusted Leverage and EBITDAR Ratios were 4.3 and 2.3 , respectively, at March 31, 2020, and we were in compliance with all covenants in effect at that date.

Our obligations under the Facility are unsecured.

Certain of our material subsidiaries have guaranteed our obligations under the Facility.

The Facility will be used for our general corporate purposes, including for the issuance of standby letters of credit to support our self-insurance programs, and to fund dividends, stock repurchases and permitted acquisitions.

As further discussed in Note 15, on May 1, 2020, we amended the Facility to provide additional financial flexibility, including relief of certain of the covenants discussed above.

Letters of credit bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted LIBO Rate plus other customary fees charged by the issuing bank.

We paid certain customary loan origination fees in conjunction with both the Facility and Amendment.

Our obligations under the Amended Facility are unsecured, and certain of our material subsidiaries have guaranteed these obligations.

At June 30, 2020, we had net availability for borrowings of $ 0.6 million, based on a $ 376.0 million outstanding debt balance and $ 23.4 million in standby letters of credit.

Our Liquidity balance was $ 254 .1 million at June 30, 2020, and we were in compliance with all covenants under the Amended Facility in effect at that date.

On March 13, 2020, we entered into an interest rate swap agreement to manage our exposure to interest rate movements on our Facility.

3 unchanged sentences

The differences between the variable LIBO rate and the interest rate swap rate are settled monthly.

We did not make any payments to settle the interest rate swap during the three months ended March 31, 2020.

At March 31, 2020, the fair value of our interest rate swap was a liability of $ 3.1 million and was included in long-term other liabilities in the condensed consolidated balance sheet.

Changes in the valuation of the interest rate swap were included as a component of other comprehensive income and will be reclassified to earnings as realized.

We determined that at June 30, 2020, the interest rate swap agreement was an effective hedging agreement.

At June 30, 2020, the fair value of our interest rate swap was a liability of $ 5.1 million and was included in long-term other liabilities in the condensed consolidated balance sheet.

Changes in the valuation of the interest rate swap are initially included as a component of accumulated other comprehensive loss (AOCL) and subsequently reclassified to earnings as realized.

We reclassified $ 0.2 million out of AOCL in both the thirteen and twenty-six weeks ended June 30, 2020 for the monthly settlement of the interest rate swap.

This amount was recorded in interest and other expense, net on the consolidated statement of income.

No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings for the six months ended June 30, 2020.

The following table summarizes the changes in AOCL, net of tax, related to the interest rate swap (in thousands):

Balance, December 31, 2019

Other comprehensive loss before reclassifications

Amounts reclassified from AOCL

Other comprehensive loss, net of tax

Balance, June 30, 2020

We classified this interest rate swap within Level 2 of the valuation hierarchy described in Note 9.

Our counterparty under this arrangement provided monthly statements of the market values of these instruments based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability.

The impact on the derivative liabilities for the Company’s and the counterparty’s non-performance risk to the derivative trades was considered when measuring the fair value of derivative liabilities.

Our counterparty under this arrangement provided monthly statements of the market values of this instrument based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability.

The impact on the derivative liability for the Company’s and the counterparty’s non-performance risk to the derivative trade was considered when measuring the fair value of derivative liability.

Fair Value Measurements

4 unchanged sentences

The following tables present the components and classification of our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

March 31, 2020

June 30, 2020

Assets (Liabilities)

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Change in fair value

Balance, March 31, 2020

The significant change in the fair value of the contingent consideration during the first quarter of fiscal 2020 related to the impact of the COVID-19 pandemic on the estimated cash flows used in the valuation, primarily stemming from the delay of future new restaurant openings.

Balance, June 30, 2020

The significant change in the fair value of the contingent consideration primarily stemmed from the delay of future new restaurant openings caused by the impact of the COVID-19 pandemic on the estimated cash flows used in the valuation.

The fair values of our cash and cash equivalents, accounts receivable, income taxes receivable, other receivables, prepaid expenses, accounts payable, income taxes payable and other accrued expenses approximate their carrying amounts due to their short duration.

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We intend to vigorously defend our position in litigation and based on our analysis of the law, regulations and relevant facts, we have not reserved for any potential future payments.

Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other claims.

Within the ordinary course of our business, we are subject to private lawsuits, government audits and investigations, administrative proceedings and other claims.

These matters typically involve claims from customers, staff members and others related to operational and employment issues common to the foodservice industry.

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We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether they are valid or whether we are legally determined to be liable.

At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity.

At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any pending lawsuits, audits, investigations, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity.

It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims.

Legal costs related to such claims are expensed as incurred.

Stockholders’ Equity

On February 18, 2020, our Board of Directors (“Board”) approved a quarterly cash dividend of $ 0.36 per share that was paid on March 20, 2020 to the stockholders of record at the close of business on March 9, 2020.

Stockholders’ Equity and Convertible Preferred Stock

Dividends and Share Repurchases

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Facility, as amended on May 1,2020 , our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

(See Note 7 for further discussion of our long-term debt.)

Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the Facility and applicable law, and such other factors that our Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $ 1,695.7 million through March 31, 2020, including 0.1 million shares at a cost of $ 2.6 million repurchased during the first quarter of fiscal 2020.

Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $ 1,696.0 million through June 30, 2020 with 12,413 shares repurchased at a cost of $ 0.3 million during the second quarter of fiscal 2020 to satisfy tax withholding obligations on vested restricted share awards.

Our objectives regarding share repurchases have been to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.

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The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Facility that limit share repurchases based on a defined ratio.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Facility, as amended on May 1, 2020, our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

(See Notes 7 and 15 for further discussion of our Facility.) As further discussed in Note 15, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we sold 200,000 shares of Series A Convertible Preferred Stock on April 20, 2020 for an aggregate purchase price of $ 200 million.

Series A Convertible Preferred Stock

On April 20, 2020, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we issued 200,000 shares of Series A Convertible Preferred Stock (“Preferred Stock”) for an aggregate purchase price of $ 200 million, or $ 1,000 per share.

In connection with the issuance, we incurred direct and incremental costs of $ 10.3 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses.

These direct and incremental costs reduced the Preferred Stock balance at the issuance date and were recognized through retained earnings on June 30, 2020, the first measurement date.

The Preferred Stock ranks senior to our common stock with respect to dividends and distributions on liquidation, winding-up and dissolution upon which each share of Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) the purchase price (without giving effect to any commitment fee), plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the holder of Preferred Stock would have been entitled to receive at such time if the Preferred Stock were converted into common stock.

At June 30, 2020, the Liquidation Preference was $ 1,018.47 per share.

Dividend Rights

The holders are entitled to dividends on the Liquidation Preference at the rate of 9.5 % per annum, payable in cash or, at our option, paid-in-kind.

The holders are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis.

During the second quarter of fiscal 2020, we issued 3,694 shares of Preferred Stock to satisfy a payment-in-kind dividend of $ 18.47 per share.

Conversion Rights

Each holder has the right, at its option, to convert its Preferred Stock into common stock at a conversion price equal to $ 22.23 per share.

As of June 30, 2020, the number of common shares that would be required to be issued upon conversion of the outstanding shares of Preferred Stock was 9.2 million.

The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events.

The conversion price is also subject to adjustment for certain anti-dilutive offerings occurring through April 19, 2021.

Pursuant to the terms of the Certificate of Designations, unless and until approval of our stockholders is obtained as contemplated by Nasdaq listing rules (the “Stockholder Approval”), no holder may convert shares of Preferred Stock through either an optional or a mandatory conversion into shares of common stock if and solely to the extent that such conversion would result in the holder beneficially owning in excess of 19.9 % of then outstanding common stock.

The Company has the right to settle any conversion in cash.

Subject to certain conditions, we may, at our option, require conversion of all of the outstanding shares of Preferred Stock to common stock if, for at least 20 trading days during the 30 consecutive trading days immediately preceding the date we notify the holders of the election to convert, the closing price of the common stock is at least 200 % of the conversion price.

We will not exercise our right to mandatorily convert all outstanding shares of Preferred Stock unless certain liquidity conditions with regard to the shares of common stock to be issued upon such conversion are satisfied.

We determined that the nature of the Preferred Stock was more akin to an equity instrument than a debt instrument and that the economic characteristics and risks of the embedded conversion options were clearly and closely related to the Preferred Stock.

As such, the conversion options were not required to be bifurcated from the host under ASC 815, Derivatives and Hedging.

We also determined that the Preferred Stock did not generate a beneficial conversion feature (“BCF”) upon issuance.

However, the associated dividend for the quarter ended June 30, 2020 generated a BCF of $ 0.1 million based on the fair value of our stock price on the date the dividends were declared to be paid-in-kind.

Redemption Rights

On and after October 20,2027, holders of the Preferred Stock have the right to require redemption of all or any part of the Preferred Stock for an amount equal to the Liquidation Preference.

Upon certain change of control events, we are required to redeem, subject to conversion rights of the holders, all of the outstanding shares of Preferred Stock for cash consideration equal to the greater of (i) the Liquidation Preference and (ii) the amount that such holder would have been entitled to receive at such time if the Preferred Stock were converted into common stock.

We may redeem any or all of the Preferred Stock for an amount equal to (i) 120 % of the Liquidation Preference thereof at any time between April 21, 2025 and April 19, 2026 and (ii) 100 % of the Liquidation Preference at any time beginning on April 20, 2026, provided that such holder will have the right to convert the Preferred Stock immediately prior to and in lieu of such redemption.

To the extent such holder elects to convert the Preferred Stock in lieu of such redemption and the number of shares of common stock issuable upon such conversion would exceed 19.9 % of the outstanding shares of common stock, and the Stockholder Approval has not been obtained as of such date, any portion in excess of such limit will remain outstanding as Preferred Stock.

Since the redemption of the Preferred Stock is contingently redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity.

As the Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within our control, we have classified the Preferred Stock separately from stockholders’ equity in the consolidated balance sheets.

As noted above, we determined that the nature of the Preferred Stock was more akin to an equity instrument than a debt instrument.

However, we determined that the economic characteristics and risks of the embedded put option, call option and redemption upon change of control provision were not clearly and closely related to the Preferred Stock.

Therefore, we assessed these items further and determined they did not meet the definition of a derivative under ASC 815, Derivatives and Hedging .

Voting Rights

Holders of Preferred Stock are generally entitled to vote with the holders of the common stock on an as-converted basis.

Holders of Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Preferred Stock and issuances of securities that are senior to, or equal in priority with, the Preferred Stock.

Stock-Based Compensation

On April 5, 2017, our Board approved an amendment to our 2010 Stock Incentive Plan to increase the number of shares of common stock reserved for grant under the plan to 12.7 million shares from 9.2 million shares.

This amendment was approved by our stockholders at our annual meeting held on June 8, 2017.

On April 4, 2019, our Board adopted The Cheesecake Factory Incorporated Stock Incentive Plan.

This plan was approved by our stockholders at our annual meeting held on May 30, 2019.

The maximum number of shares of common stock available for grant under this plan is 4.8 million shares plus 1.8 million shares, which, as of May 30, 2019, were available for issuance under our 2010 Stock Incentive Plan plus 1.9 million shares which may become available for issuance under The Cheesecake Factory Incorporated Stock Incentive Plan due to forfeiture or lapse of awards under our 2010 Stock Incentive Plan following May 30, 2019.

Approximately 4.8 million of these shares were available for grant as of March 31, 2020.

The following table presents information related to stock-based compensation, net of forfeitures (in thousands):

March 31, 2020

April 2, 2019

On April 4, 2019, our Board adopted The Cheesecake Factory Incorporated Stock Incentive Plan (the “Plan”) under which incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares and restricted share units may be granted to staff members, consultants and non-employee directors.

The Plan replaced the 2010 Stock Incentive Plan.

The following table presents the stock-based compensation recorded in the consolidated financial statements:

June 30, 2020

Labor expenses

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(1) It is our policy to capitalize the portion of stock-based compensation costs for our internal development department that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations and equipment installation.

Capitalized stock-based compensation is included in property and equipment, net on the condensed consolidated balance sheets.

Capitalized stock-based compensation is included in property and equipment, net on the consolidated balance sheets.

Stock Options

The weighted-average fair value at the grant date for options issued during the first quarter of fiscal 2020 and 2019 was $ 6.66 and $ 9.90 per share, respectively.

The fair value of options was estimated utilizing the Black-Scholes valuation model with the following weighted-average assumptions for the first quarter of fiscal 2020 and 2019, respectively:

(a) an expected option term of 6.9 years in both periods, (b) expected stock price volatility of 25.7 % and 26.3 %, (c) a risk-free interest rate of 1.5 % and 2.6 %, and (d) a dividend yield on our stock of 3.6 % and 2.9 %.

Stock option activity during the thirteen weeks ended March 31, 2020 was as follows:

We did not issue any stock options during the second quarter of fiscal 2020 or 2019.

Stock option activity during the twenty-six weeks ended June 30, 2020 was as follows:

Exercise Price

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Forfeited or cancelled

Outstanding at March 31, 2020

Exercisable at March 31, 2020

Outstanding at June 30, 2020

Exercisable at June 30, 2020

(1) Aggregate intrinsic value is calculated as the difference between our closing stock price at fiscal period end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised their options on the fiscal period end date.

The total intrinsic value of options exercised during the thirteen weeks ended March 31, 2020 and April 2, 2019 was $ 35.6 million and $ 3.4 million, respectively.

As of March 31, 2020, total unrecognized stock-based compensation expense related to unvested stock options was $ 10.5 million, which we expect to recognize over a weighted-average period of approximately 4.0 years.

There was no option exercised during the thirteen weeks ended June 30, 2020.

The total intrinsic value of options exercised during the twenty-six weeks ended June 30, 2020 was $ 35.6 million.

The total intrinsic value of options exercised during the thirteen and twenty-six weeks ended July 2, 2019 was $ 0.2 million and $ 3.6 million, respectively.

As of June 30, 2020, total unrecognized stock-based compensation expense related to unvested stock options was $ 9.4 million, which we expect to recognize over a weighted-average period of approximately 5.2 years.

Restricted Shares and Restricted Share Units

Restricted share and restricted share unit activity during the thirteen weeks ended March 31, 2020 was as follows:

Restricted share and restricted share unit activity during the twenty-six weeks ended June 30, 2020 was as follows:

(In thousands)

Outstanding at December 31, 2019

Outstanding at March 31, 2020

Outstanding at June 30, 2020

Fair value of our restricted shares and restricted share units is based on our closing stock price on the date of grant.

The weighted average fair value for restricted shares and restricted share units issued during the first quarter of fiscal 2020 and 2019 was $ 40.01 and $ 46.03 , respectively.

The fair value of shares that vested during the first quarter of fiscal 2020 and 2019 was $ 10.4 million and $ 11.1 million, respectively.

As of March 31, 2020, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $ 47.3 million, which we expect to recognize over a weighted-average period of approximately 3.4 years.

The weighted average fair value for restricted shares and restricted share units issued during the second quarter of fiscal 2020 and 2019 was $ 23.56 and $ 45.15 , respectively.

The fair value of shares that vested during the thirteen weeks and twenty-six weeks ended June 30, 2020 was $ 1.8 million and $ 12.4 million, respectively.

The fair value of shares that vested during the thirteen weeks and twenty-six weeks ended July 2, 2019 was $ 1.3 million and $ 12.4 million, respectively.

As of June 30, 2020, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $ 44.6 million, which we expect to recognize over a weighted-average period of approximately 3.2 years.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.

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We expect to file carryback claims during fiscal 2021, and we estimate that these claims will generate cash refunds of approximately $ 50 million.

Our effective income tax rate was 28.9 % and 6.0 % for the first quarters of fiscal 2020 and 2019, respectively.

Our effective income tax rate was 30.6 % and 6.9 % for the first half of fiscal 2020 and 2019, respectively.

The increase resulted primarily from a lower proportion of employment credits in relation to pre-tax (loss)/income and a benefit arising from the expected carryback of our anticipated fiscal 2020 loss to prior years when the federal statutory rate was 35 %.

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We expect to have federal credit carryforwards of approximately $ 37 million at the end of fiscal 2020 compared to $ 14.3 million at December 31, 2019.

This increase was driven primarily by our fiscal 2020 loss.

This increase is driven primarily by our estimated fiscal 2020 loss.

We assess the available evidence to estimate if sufficient future taxable income will be generated to use these carryforwards, which have a 20-year carryforward period and are utilized on a first-in, first-out basis.

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This assessment could change if estimates of future taxable income during the carryforward period are revised.

As a result of the goodwill impairment discussed in Note 4, we recorded a deferred tax asset of $ 17.2 million in the first quarter of fiscal 2020.

As a result of the goodwill impairment discussed in Note 4, we recorded a deferred tax asset of $ 16.4 million.

Net (Loss)/Income Per Share

Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period, reduced by unvested restricted stock awards.

As of March 31, 2020 and April 2, 2019, 2.1 million shares and 1.8 million shares, respectively, of restricted stock issued to staff members were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal periods ended on those dates.

Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method.

Shares of common stock equivalents of 3.8 million and 2.0 million as of March 31, 2020 and April 2, 2019, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

March 31, 2020

April 2, 2019

As of June 30, 2020 and July 2, 2019, 2.0 million shares and 1.8 million shares, respectively, of restricted stock issued to staff members were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal periods ended on those dates.

Diluted net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common stock equivalents outstanding for the period.

Holders of our Preferred Stock participate in dividends on an as-converted basis when declared on common stock.

As a result, our Preferred Stock meets the definition of a participating security which requires us to apply the two-class method to compute both basic and diluted net income per share.

The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders.

In addition, as our Preferred Stock is a participating security, we are required to calculate diluted net income per share under the if-converted method in addition to the two-class method and utilize the most dilutive result.

In periods where there is a net loss, no allocation of undistributed net loss to preferred shareholders is performed as the holders of our Preferred Stock are not contractually obligated to participate in our losses.

June 30, 2020

(In thousands, except per share data)

Basic net (loss)/income per common share:

Net (loss)/income

Dividends on preferred stock

Direct and incremental preferred stock issuance costs

Net (loss)/income available to common stockholders

Basic weighted-average shares outstanding

Basic net (loss)/income per common share

Diluted net (loss)/income per common share:

Net (loss)/income available to common stockholders

Basic weighted-average shares outstanding

Dilutive effect of equity awards (1)

Diluted weighted-average shares outstanding

Basic net (loss)/income per share

Diluted net (loss)/income per share

Diluted net (loss)/income per common share

(1) Shares of common stock equivalents of 3.9 million and 2.0 million as of June 30, 2020 and July 2, 2019, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

Segment Information

Our operating segments, the businesses for which our management reviews discrete financial information for decision-making purposes, are comprised of The Cheesecake Factory, North Italia, Flower Child, the Other FRC brands, our bakery division and Grand Lux Cafe.

Based on quantitative thresholds set forth in FASB Accounting Standards Codification ("

ASC”) 280, “Segment Reporting,” The Cheesecake Factory, North Italia and the other FRC brands are the only businesses that meet the criteria of a reportable operating segment.

The remaining operating segments, including Flower Child, along with our businesses that don’t qualify as operating segments are combined in Other.

Based on quantitative thresholds set forth in FASB Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” The Cheesecake Factory, North Italia and the Other FRC brands are the only businesses that meet the criteria of a reportable operating segment.

The remaining operating segments (Flower Child, our bakery division and Grand Lux Cafe) along with our businesses that don’t qualify as operating segments, including RockSugar Southeast Asian Kitchen, Social Monk Asian Kitchen and our international business, are combined in Other.

Unallocated corporate expenses, capital expenditures and assets, which were previously classified in a separate Corporate line, are also combined in Other.

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Segment information is presented below (in thousands):

March 31, 2020

April 2, 2019

June 30, 2020