What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-02-22 compared with 2021-02-24 · 301 added, 410 removed, 859 unchanged (45% of the section changed)

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OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not Applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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The information required by this item is hereby incorporated by reference to the sections entitled “Directors Compensation,” “Executive Compensation,” “Compensation of Named Executive Officers” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is hereby incorporated by reference to the section entitled “Beneficial Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information” in the Proxy Statement.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (KPMG, LLP, Los Angeles, CA, Auditor Firm ID:

Consolidated Balance Sheets

Consolidated Statements of (Loss)/ Income

Consolidated Statements of Comprehensive (Loss)/ Income

Consolidated Statements of Income/(Loss)

Consolidated Statements of Comprehensive Income/(Loss)

Consolidated Statements of Stockholders’ Equity and Series A Convertible Preferred Stock

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

To the Stockholders and the Board of Directors

The Cheesecake Factory Incorporated:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of The Cheesecake Factory Incorporated and subsidiaries (the Company) as of December 29, 2020 and December 31, 2019, the related consolidated statements of (loss)/income, comprehensive (loss)/income, stockholders’ equity and Series A convertible preferred stock, and cash flows for each of the years in the three-year period ended December 29, 2020, and the related notes (collectively, the consolidated financial statements).

We have audited the accompanying consolidated balance sheets of The Cheesecake Factory Incorporated and subsidiaries (the Company) as of December 28, 2021 and December 29, 2020, the related consolidated statements of income/(loss), comprehensive income/(loss), stockholders’ equity and series A convertible preferred stock, and cash flows for each of the years in the three-year period ended December 28, 2021, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of December 28, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 2, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases .

Basis for Opinions

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of long-lived assets for impairment

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This included controls related to the determination of the undiscounted cash flow and fair value of the restaurant asset groups, and the related revenue and operating margin assumptions.

We performed sensitivity analyses over the revenue and operating margin assumptions to assess the impact of changes in those assumptions on the Company’s determination of the undiscounted cash flow and fair value of the restaurant assets groups.

We compared the Company’s prior year revenue and operating margin assumptions to current year actual results to assess the Company’s ability to accurately forecast.

We evaluated the Company’s revenue and operating margin assumptions for the restaurant asset groups by comparing the assumptions to the restaurant asset groups’ historical and peer group performance.

Evaluation of goodwill for impairment

As discussed in Notes 1, 2 and 8 to the consolidated financial statements, goodwill as of December 29, 2020 was $1.5 million.

The Company tests for impairment of goodwill annually or whenever events or changes in circumstances between annual tests indicate a potential impairment.

The Company determined it was necessary to perform an interim impairment evaluation during the first quarter of fiscal 2020 due to the decrease in stock price coupled with the dining room closures related to the COVID-19 pandemic and significant decline to the equity value of peers and overall U.S.

stock market.

Based on the results of this evaluation, the Company recorded impairment expense of $79.4 million.

The estimated fair value of the reporting units was determined using the income approach using a discounted cash flow analysis.

We identified the evaluation of goodwill for impairment as a critical audit matter.

Challenging auditor judgment was involved in evaluating certain assumptions used to determine the fair value of the reporting units.

These assumptions include future unit growth, cash flows, and discount rates used to estimate the fair value of the reporting units.

Minor changes to those assumptions had a significant effect on the Company’s estimate of the fair value of the reporting units.

Additionally, the audit effort associated with the evaluation of the determination of fair value required specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill impairment evaluation process, including controls over the assumptions listed above.

We compared future unit growth and cash flows as a percentage of revenue to historical actual results and to the Company’s most recent plans.

We performed sensitivity analyses over the future unit growth assumption to assess its impact on the Company’s determination of fair value.

In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:

● evaluating the selected discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data

● assessing cash flows as a percentage of revenue by comparing it against cash flows as a percentage of revenue of publicly available market data for comparable companies

● testing the estimates of fair value of the reporting units using independently obtained market data and comparing the results to the Company’s estimates of fair value.

Evaluation of trade name and trademark intangible assets for impairment

As discussed in Notes 1, 2 and 8 to the consolidated financial statements, trade name and trademark intangible assets as of December 29, 2020 was $233.7 million.

The Company tests for impairment of trade name and trademark intangible assets annually or whenever events or changes in circumstances between annual tests indicate a potential impairment.

stock market.

Based on the results of this evaluation, the Company recorded impairment expense of $101.0 million.

The estimated fair value of the trade name and trademark intangible assets was determined using the relief from royalty method.

We identified the evaluation of trade name and trademark intangible assets for impairment as a critical audit matter.

Challenging auditor judgment was involved in evaluating certain assumptions used to determine the fair value of trade name and trademark intangible assets.

These assumptions include future unit growth, discount rates, and royalty rates used to estimate the fair value of trade name and trademark intangible assets.

Minor changes to those assumptions had a significant effect on the Company’s estimate of the fair value of trade name and trademark intangible assets.

Additionally, the audit effort associated with the evaluation of the determination of fair value required specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s trade name and trademark intangible assets impairment evaluation process, including controls over the assumptions listed above.

We compared future unit growth to historical actual results and to the Company’s most recent plans.

We performed sensitivity analyses over the future unit growth assumption to assess its impact on the Company’s determination of fair value.

In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:

● evaluating the selected discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data

● evaluating the selected royalty rates by comparing them against publicly available royalty rates of comparable companies

● testing the estimates of fair value of trade name and trademark intangible assets using independently obtained market data and comparing the results to the Company’s estimates of fair value.

We have served as the Company’s auditor since 2018.

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Total current liabilities

Deferred income taxes

Long-term debt

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THE CHEESECAKE FACTORY INCORPORATED

CONSOLIDATED STATEMENTS OF (LOSS)/INCOME

CONSOLIDATED STATEMENTS OF INCOME/(LOSS)

(In thousands, except per share data)

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Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization (benefit)/expenses

Acquisition-related contingent consideration, compensation and amortization expenses/(benefit)

Preopening costs

Total costs and expenses

(Loss)/income from operations

Gain/(loss) on investments in unconsolidated affiliates

Income/(loss) from operations

Gain on investments in unconsolidated affiliates

Interest and other expense, net

(Loss)/income before income taxes

Income/(loss) before income taxes

Income tax (benefit)/ provision

Net (loss)/ income

Net income/(loss)

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

Net (loss)/income available to common stockholders

Net (loss)/income per common share:

Undistributed earnings allocated to Series A preferred stock

Net income/(loss) available to common stockholders

Net income/(loss) per common share:

Diluted (Note 1)

Weighted-average common shares outstanding:

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THE CHEESECAKE FACTORY INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

Net (loss)/income

Other comprehensive (loss)/gain:

Net income/(loss)

Other comprehensive gain/(loss):

Foreign currency translation adjustment

Unrealized loss on derivative, net of tax

Other comprehensive (loss)/gain

Total comprehensive (loss)/income

Comprehensive (loss)/income attributable to preferred stockholders

Total comprehensive (loss)/income available to common stockholders

Unrealized gain/(loss) on derivative, net of tax

Other comprehensive gain/(loss)

Total comprehensive income/(loss)

Comprehensive income attributable to Series A preferred stockholders

Total comprehensive income/(loss) available to common stockholders

See the accompanying notes to the consolidated financial statements.

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( 1,642,140 )

Cumulative effect of adopting the pronouncement related to revenue recognition, net of tax

Cumulative effect of adopting the pronouncement related to lease accounting, net of tax

Balance, January 1, 2019, as adjusted

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Treasury stock purchases

Balance, January 1, 2019

( 1,642,140 )

Cumulative effect of adopting the pronouncement related to lease accounting, net of tax

Balance, January 1, 2019, as adjusted

Balance, December 31, 2019

( 1,693,122 )

Foreign currency translation adjustment

Change in derivative, net of tax

Cash dividends declared Common stock, $ 0.36 per share

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Treasury stock purchases

Series A preferred stock issuance

Series A preferred stock direct costs

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

Balance, December 29, 2020

( 1,696,743 )

Cumulative effect of adopting ASU 2020-06

Balance, December 29, 2020, as adjusted

( 1,696,743 )

Foreign currency translation adjustment

Change in derivative, net of tax

Cash dividends declared Common stock, $ 0.36 per share

Cash dividends declared Common stock, net of forfeitures

Stock-based compensation

Common stock issued under stock-based compensation plans

Common stock issuance

Treasury stock purchases

Series A preferred stock issuance

Series A preferred stock direct costs

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

Series A preferred stock cash-settled conversion

Series A preferred stock conversion to common stock

Deemed dividends on Series A preferred stock

Cash dividends declared Series A preferred stock, $ 25.35 per share

Balance, December 28, 2021

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Cash flows from operating activities:

Net (loss)/income

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

Net income/(loss)

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

Depreciation and amortization expenses

Deferred income taxes

Impairment of assets and lease termination expenses

Deferred income taxes

Stock-based compensation

(Gain)/loss from investments in unconsolidated affiliates

Gain from investments in unconsolidated affiliates

Changes in assets and liabilities, net of acquired amounts:

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Loans made to unconsolidated affiliates

Proceeds from variable life insurance contract

Cash used in investing activities

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Acquisition-related deferred consideration

Deemed landlord financing proceeds

Deemed landlord financing payments

Borrowings on credit facility

Repayments on credit facility

Proceeds from exercise of stock options

Convertible debt issuance

Convertible debt direct and incremental costs

Series A preferred stock issuance

Series A preferred stock direct costs

Cash dividends paid

Series A preferred stock direct and incremental costs

Series A preferred stock cash-settled conversion

Series A preferred stock conversion direct and incremental costs

Series A preferred stock dividend paid

Common stock issuance

Common stock issuance direct and incremental costs

Proceeds from exercise of stock options

Common stock dividends paid

Treasury stock purchases

Cash provided by/(used in) financing activities

Cash (used in)/provided by financing activities

Foreign currency translation adjustment

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Construction payable

Non-cash operating:

Settlement of sale-leaseback accounting

Non-cash investing:

Settlement of landlord sale-leaseback accounting

Acquisition-related deferred consideration and compensation

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Non-cash financing:

Settlement of landlord financing obligation for sale-leaseback leases

Deemed landlord financing proceeds

Series A preferred stock conversion to common stock

See the accompanying notes to the consolidated financial statements.

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We are culinary forward and relentlessly focused on hospitality.

We currently own and operate 294 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® , North Italia ® and a collection within our Fox Restaurant Concepts ("FRC") business.

We currently own and operate 306 restaurants throughout the United States and Canada, including 208 The Cheesecake Factory ® restaurants, 29 North Italia ® restaurants and a collection within our Fox Restaurant Concepts (“FRC”) business.

Internationally, 29 The Cheesecake Factory ® restaurants operate under licensing agreements.

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All intercompany accounts and transactions for the periods presented have been eliminated in consolidation.

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

On October 2, 2019, we completed the acquisition of North Italia and the remaining business of FRC, including Flower Child and all other FRC brands (the “Acquisition”).

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.

See Note 2 for further discussion of the Acquisition.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes.

Fiscal years 2020, 2019 and 2018 each consisted of 52 weeks.

In fiscal 2019, we separately disclosed accounts receivable and other receivable on the consolidated balance sheet and statement of cash flow.

In addition, rent related deferred tax assets and liabilities were consolidated and presented as accrued rent in the notes to consolidated financial statements.

Corresponding prior year balance were reclassified to conform to the current year presentation.

Fiscal years 2021, 2020 and 2019 each consisted of 52 weeks and fiscal year 2022 will consist of 53 weeks.

Use of Estimates

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Actual results could differ from these estimates.

Business Combination

On October 2, 2019, we completed the acquisition of North Italia and the remaining business of FRC.

In accordance with the acquisition method of accounting for business combinations, we allocated the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based on preliminary estimated fair values.

We estimated the fair value of assets and liabilities based upon widely-accepted valuation techniques, including discounted cash flow, relief from royalty and Monte Carlo methods, depending on the nature of the assets acquired or liabilities assumed.

We made minor adjustments to our purchase accounting in the first quarter of fiscal 2020 as we finalized our valuation of the acquired intangible assets.

(See Note 2 for further discussion of the Acquisition.)

COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic which was declared a National Public Health Emergency on March 13, 2020.

We experienced significant disruptions to our business due to suggested and mandated social distancing and shelter-in-place orders, which resulted in the temporary closure of a number of restaurants across our portfolio while the remaining locations shifted to an off-premise only operating model on an interim basis.

In our initial response to the COVID-19 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;

● Suspended new unit development;

● Reduced board, executive and corporate support staff compensation;

● Furloughed approximately 41,000 hourly staff members;

● Engaged in discussions with our landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of the COVID-19 pandemic related closure;

● Increased borrowings under our revolving credit facility;

● Raised additional equity capital;

● Suspended the dividend on our common stock and share repurchases.

In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms, and we began to reopen dining rooms across our concepts the second week of May.

During the third quarter of fiscal 2020, we called back to work a majority of our staff members who were previously furloughed, and restored Board, executive and corporate support staff compensation.

In addition, we resumed new unit development on a limited basis and will continue to evaluate the pace and quantity of new unit development.

Restrictions on the type of operating model and occupancy capacity continue to change, and these restrictions increased in many of our markets during the fourth quarter of fiscal 2020 with the surge in COVID-19 cases.

We cannot predict how long the COVID-19 pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent we can maintain off-premise sales volumes or if individuals will be comfortable returning to our dining rooms during or following social distancing protocols and what long-lasting effects the COVID-19 pandemic may have on the restaurant industry as a whole.

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.

These considerable developments triggered the need to perform interim impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of FRC in addition to our annual impairment testing.

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

(See Notes 7 and 8 for further discussion of impairment of long-lived and intangible assets, respectively.

See Note 9 for further discussion of the revaluation of contingent consideration.)

Beginning in March 2020, COVID-19 and measures to prevent its spread led to significant disruptions to our business as suggested and mandated social distancing and shelter-in-place orders led to the temporary closure of a number of restaurants across our portfolio while our remaining locations shifted to an off-premise only operating model on an interim basis.

Reopening of restaurant dining rooms resumed, generally at reduced capacity, at various points since May 2020.

While restrictions on the type of permitted operating model and occupancy capacity may continue to change, currently nearly all of our restaurants are operating with no capacity restrictions on indoor dining.

The ongoing effects of COVID-19 and its variants, including, but not limited to, consumer behavior, capacity restrictions, mask and vaccination mandates, wage inflation, our ability to continue to staff our restaurants and disruptions in the supply chain, will determine the impact to our operating results and financial position.

The impact to our operations has been most notable during the periods of greatest accelerating COVID-19 case counts.

We have incurred and will continue to incur additional costs to address government regulations and the safety of our staff members and customers.

Cash and Cash Equivalents

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During the last week of fiscal 2020, almost all of our restaurants were operating under capacity restrictions or in an off-premise-only model.

Therefore, we processed less sales through credit cards causing a decrease in this receivable from the prior year.

Therefore, we processed less sales through credit cards causing a lower receivable in fiscal 2020.

Our cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment.

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Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair value, which is determined based on discounted future net cash flows expected to be generated by the assets.

In fiscal 2021, we recorded $ 16.3 million of expense primarily related to the impairment of long-lived assets for three The Cheesecake Factory and two Other restaurants.

In fiscal 2020, we recorded $ 36.2 million of expense primarily related to the impairment of one The Cheesecake Factory, one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for one The Cheesecake Factory and seven Other restaurants.

In fiscal 2019, we recorded $ 18.2 million of expense related to the impairment of two The Cheesecake Factory and two Other restaurants, as well as lease termination costs and accelerated depreciation for two Other restaurants.

In fiscal 2018, we recorded $ 17.9 million of expense related to the impairment of one The Cheesecake Factory and two Other restaurants, as well as lease termination costs and accelerated depreciation for two The Cheesecake Factory restaurants.

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

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Investments in Unconsolidated Affiliates

From fiscal year 2016 until the Acquisition on October 2, 2019, we held minority equity investments in two restaurant concepts, North Italia and Flower Child, with our percentage of ownership growing to 49 % in each concept immediately prior to the Acquisition.

From fiscal 2016 until the Acquisition on October 2, 2019, we held minority equity investments in two restaurant concepts, North Italia and Flower Child, with our percentage of ownership growing to 49 % in each concept immediately prior to the Acquisition.

Since we held a number of rights with regard to participation in policy-making processes, but did not control these entities prior to the Acquisition, we accounted for these investments under the equity method.

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We assessed the potential impairment of these equity investments whenever events or changes in circumstances indicated that a decrease in value of the investment had occurred that was other than temporary, in which case we would have recognized the decrease even though it was in excess of what would otherwise be recognized by application of the equity method.

No impairment losses were recorded for these assets during fiscal years 2019 and 2018.

No impairment losses were recorded for these assets during fiscal 2019.

Revenue Recognition

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

We deferred rent payments of $ 7.6 million, the majority of which is due in fiscal 2021.

During fiscal 2020, we deferred rent payments of $ 7.6 million, of which $ 7.3 million was paid in fiscal 2021.

Self-Insurance Liabilities

We retain the financial responsibility for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, staff member health benefits, employment practices and other insurable risks.

We retain financial responsibility for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, staff member health benefits, employment practices and other insurable risks.

The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to us (“IBNR”) as of the balance sheet date and are recorded in other accrued expenses.

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We record a liability for any portion of the tax benefit that does not meet these recognition and measurement criteria and we adjust this liability through income tax expense in the period in which the uncertain tax position is effectively settled, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available.

We recognize interest related to uncertain tax positions in income tax expense.

Penalties related to uncertain tax positions are recorded in general and administrative expenses.

Net (Loss)/Income per Share

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

At December 29, 2020, December 31, 2019 and January 1, 2019, 2.0 million shares, 1.8 million shares and 1.7 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 years ended on those dates.

Holders of our Series A Convertible Preferred Stock, par value $ 0.01 per share (the "Series A preferred stock") participate in dividends on an as-converted basis when declared on common stock.

As a result, our Series A 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.

We recognize interest and penalties related to uncertain tax positions in income tax expense.

Net Income/(Loss) per Share

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

At December 28, 2021, December 29, 2020 and December 31, 2019, 2.1 million shares, 2.0 million shares and 1.8 million shares, respectively, of restricted stock issued were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal years ended on those dates.

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

Common stock equivalents for our convertible senior notes due 2026 (“Notes”)are determined by application of the if-converted method, and common stock equivalents for outstanding stock options and restricted stock are determined by the application of the treasury stock method.

Holders of our Series A Convertible Preferred Stock, par value $ 0.01 per share (the “Series A preferred stock”) participated in dividends on an as-converted basis when declared on common stock.

As a result, our Series A preferred stock met 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 Series A 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 stockholders is performed as the holders of our Series A preferred stock are not contractually obligated to participate in our losses.

In addition, as our Series A preferred stock was 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 stockholders was performed as the holders of our Series A preferred stock were not contractually obligated to participate in our losses.

(In thousands, except per share data)

Basic net (loss)/income per common share:

Net (loss)/income

Basic net income/(loss) per common share:

Net income/(loss)

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

Net (loss)/income available to common stockholders

Undistributed earnings allocated to Series A preferred stock

Net income/(loss) 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 net income/(loss) per common share

Diluted net income/(loss) per common share:

Net income/(loss) available to common stockholders

Reallocation of undistributed earnings to Series A preferred stock

Net income/(loss) available to common stockholders for diluted EPS

Basic weighted-average shares outstanding

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Diluted weighted-average shares outstanding (2)

Diluted net (loss)/income per common share

Diluted net income/(loss) per common share

(1) Shares of common stock equivalents of 1.9 million, 4.0 million and 2.3 million for fiscal 2021, 2020 and 2019, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

Comprehensive (Loss)/Income

Comprehensive (loss)/income includes all changes in equity during a period except those resulting from investment by and distribution to owners.

Our comprehensive income consists of net (loss)/income, unrealized losses on our interest rate swap and translation gains and losses related to our Canadian restaurant operations.

(2) Our Notes of $ 345 million were excluded from the diluted calculation due to their anti-dilutive effect.

Comprehensive Income/(Loss)

Comprehensive income/(loss) includes all changes in equity during a period except those resulting from investment by and distribution to owners.

Our comprehensive income consists of net income/(loss), unrealized losses on our interest rate swap and translation gains and losses related to our Canadian restaurant operations.

Foreign Currency

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Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

The update eliminates, adds and modifies certain disclosure requirements for fair value measurements.

We adopted this standard as of the beginning of fiscal 2020 and such adoption did not have a significant impact on our consolidated financial statements.

We adopted FASB ASC Topic 842, Leases, as of January 2, 2019, using the alternative transition method and recorded a cumulative effect adjustment to beginning retained earnings without restating prior periods.

We elected the package of practical expedients which allowed us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that existed prior to adoption of the new standard.

In addition, we elected the short-term lease exclusion and the hindsight practical expedient, which lengthened the lease term for certain of our leases to include renewal options.

Adoption of the new standard resulted in the recognition of operating lease assets and liabilities of $ 975.1 million and $ 1,045.4 million, respectively, and a reduction to retained earnings of $ 41.5 million, net of tax.

All prior lease-related balances of $ 39.2 million of prepaid rent, $ 140.2 million in property and equipment, net, $ 6.2 million of intangible assets, net, $ 82.1 million of deferred rent liabilities and $ 118.7 million of deemed landlord financing were reclassified into operating lease assets or eliminated upon ASC 842 adoption.

Recently Issued Accounting Standards

In August 2020, the FASB issued Accounting Standards Update ("ASU") 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which is intended to simplify the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity.

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity.

This pronouncement is effective for fiscal years beginning after December 15, 2021 and early adoption is permitted.

The guidance allows for either full retrospective adoption or modified retrospective adoption.

We plan to adopt this pronouncement for our fiscal year beginning December 30, 2020 utilizing the modified retrospective method.

Depending on the future value of our stock price, the adoption of this standard could have a material impact on our additional paid-in capital and retained earnings balances due to the elimination of the beneficial conversion feature provision.

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

North Italia is a restaurant company that operated 21 locations across ten states and Washington D.C.

as of the Closing Date.

FRC is a multi-concept restaurant company that operated 10 concepts with 47 locations across eight states and Washington D.C.

as of the Closing Date.

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.

We have concluded that the Acquisition represents a single business combination of related businesses under common control within the scope of ASC Topic 805, Business Combinations.

The acquisition date was determined to be the Closing Date, which was the date we obtained control by legally transferring the consideration for the remaining ownership interests, acquiring the assets and assuming the liabilities of North Italia and the remaining FRC business.

The Acquisition, which we expect will accelerate and diversify our revenue growth, was completed for consideration consisting of the following components:

$ 288.1 million in cash at Closing, which was primarily funded by drawing on our credit facility;

assumption of $ 10.0 million in debt previously owed by FRC to us;

a $ 12.0 million indemnity escrow amount specifically related to North Italia due ratably over two years ;

and $ 45.0 million of deferred consideration due ratably over four years (including a $ 13.0 million indemnity escrow amount specifically related to the remaining FRC businesses).

The assumption of debt previously owed by North Italia to us represents the effective settlement of a preexisting relationship.

Since we determined the loans were at market terms, the debt assumed was treated as purchase consideration, and no gain or loss was recorded.

The acquisition agreement also included a contingent consideration provision, a portion of which was considered part of the acquisition consideration, and the remainder of which was considered future compensation expense.

The acquisition-date fair values for the acquisition consideration and future compensation expense were $ 12.8 million and $ 7.3 million, respectively, determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates.

The contingent consideration, which has no maximum payment, is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after Closing.

We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.

Since the Acquisition represents a business combination achieved in stages, we remeasured our previously-held equity interests in North Italia and Flower Child immediately before the acquisition to acquisition-date fair value of $ 122.0 million and recognized a resulting gain of $ 52.7 million which is included in gain/(loss) on investments in unconsolidated affiliates in our consolidated statements of operations.

The fair value of the previously-held interests was determined using a discounted cash flow model based on estimated future revenues, margins and discount rates, among other variables and estimates.

The following table summarizes the calculation of goodwill, as finalized in the first quarter of fiscal 2020, based on the excess of consideration transferred and the fair value of the previously held equity interests over the fair value of the assets acquired and liabilities assumed (in thousands).

Purchase consideration:

Cash at closing

Assumption of debt previously owed by FRC

Deferred payments

Contingent consideration

Consideration transferred

Fair value of previously-held equity interests

Less net assets acquired:

Current assets

Property and equipment

Intangible assets

Operating lease assets

Current liabilities

Operating lease liabilities

Other noncurrent liabilities

Total net assets acquired

Goodwill is related to the benefits expected as result of the Acquisition, including acceleration and diversification of our revenue growth.

$ 29.2 million of the goodwill recorded as part of our purchase accounting entries related to North Italia.

During fiscal 2020, we recorded goodwill impairment expense of $ 79.4 million.

(See Note 8 for further discussion of our goodwill assessment and resulting impairment charge.) $ 74.2 million of goodwill is expected to be deductible for tax purposes.

Property and equipment will be depreciated over useful lives of 3 years to 30 years .

The fair value of acquired property and equipment was determined under a trended original cost approach utilizing variables and estimates such as useful lives, hold factors and economic obsolescence.

Intangible assets acquired primarily consist of trade names and trademarks that were assigned indefinite lives based on the expected use of the assets and the regulatory and economic environment within which they are being used.

The fair value of the acquired intangible assets was determined utilizing the relief from royalty method based on estimated future revenues, royalty rates and discount rates, among other variables and estimates.

During fiscal 2020, we recorded impairment expense of $ 103.3 million related to the acquired intangible assets.

(See Note 8 for further discussion of our intangible asset assessment and resulting impairment charge.)

Operating lease assets include values associated with favorable and unfavorable market leases that will amortize over a weighted-average period of 15.2 years.

The fair value of the operating lease assets was derived using an income approach based on market transaction data and estimated discount rates, among other variables and estimates.

During fiscal 2020 and 2019, we incurred $ 2.7 million and $ 5.3 million of costs, respectively, to effect and integrate the Acquisition.

These costs were expensed in accordance with ASC 805 and are included in acquisition-related costs in our consolidated statements of operations.

Pro Forma Results of Operations (unaudited)

The following pro forma results of operations for fiscal 2019 and 2018 give effect to the Acquisition as if it had occurred on January 2, 2018 (in thousands):

We adopted this guidance in the first quarter of fiscal 2021 utilizing the modified retrospective method and, accordingly, recorded a $ 4.8 million cumulative adjustment to retained earnings to reverse previously recorded beneficial conversion features.

As further discussed in Note 12, we issued certain Notes during the second quarter of fiscal 2021, and the accounting for these instruments was based on the guidance in ASU 2020-06.

Additionally, the impact on diluted earnings per share of the Notes was calculated based on the if-converted method, as further described in Note 1.

Acquisition Pro Forma Results of Operations (unaudited)

The following pro forma results of operations for fiscal 2019 give effect to the Acquisition as if it had occurred on January 1, 2019 (in thousands):

Net income per share:

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Acquisition-related contingent consideration and compensation liabilities

Interest rate swap

December 29, 2020

2 unchanged sentences

Non-qualified deferred compensation liabilities

Interest rate swap

Acquisition-related deferred consideration

1 unchanged sentence

Changes in the fair value of non-qualified deferred compensation assets and liabilities are recognized in interest and other expense, net in our consolidated statements of income.

Changes in the fair value of the acquisition-related deferred and contingent consideration and compensation liabilities are recognized in acquisition-related contingent consideration, compensation and amortization (benefit)/expenses in our consolidated statements of income.

Changes in the fair value of the acquisition-related deferred and contingent consideration and compensation liabilities are recognized in acquisition-related contingent consideration, compensation and amortization expense/(benefit) in our consolidated statements of income.

See Note 14 for information regarding the financial statement classification of fair value changes in our interest rate swap.

The following table presents a reconciliation of the beginning and ending amounts of the fair value of the acquisition-related contingent consideration and compensation liabilities categorized as Level 3 (in thousands):

Fiscal year ended

December 28, 2021

December 29, 2020

Beginning balance

Change in fair value

Ending balance

The fair value of the Acquisition-related contingent consideration and compensation liabilities was determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates and has no minimum or maximum payment.

1 unchanged sentence

Results could change materially if different estimates and assumptions were used.

Balance, January 1, 2019

Acquisition-date fair value

Change in fair value

Balance, December 31, 2019

Change in fair value

Balance, December 29, 2020

The change in the fair value of the contingent consideration during fiscal 2020 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 significant increase in the fair value of the contingent consideration and compensation liabilities during fiscal 2021 primarily related to the impact of an amendment to the Acquisition agreement that, among other things, extended the measurement period through fiscal 2026, as well as to an increase in fiscal 2021 revenues and estimated future revenues utilized in the fair value calculation.

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.

As of December 28, 2021, we had $ 345.0 million aggregate principal amount of Notes outstanding.

The estimated fair value of the Notes based on a market approach as of December 28, 2021 was approximately $ 309.8 million and determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on the last business day of the reporting period.

See Note 12 for further discussion of the Notes.

Accounts and Other Receivables

Accounts and other receivables consisted of (in thousands):

Fiscal year ended

December 28, 2021

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Delivery partner

(1) The decrease in receivables from gift card distributors stems from the impact of the COVID-19 pandemic on our business .

(1) The increase stems from the impact of the COVID-19 pandemic on our business in the prior year .

(2) The increase primarily relates to an Employee Retention Credit receivable associated with the CARES Act, as well as timing of tenant improvement and vendor rebate collections.

Inventories consisted of (in thousands):

Fiscal year ended

December 28, 2021

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Bakery raw materials and supplies

(1) The decrease in bakery finished goods and work in progress inventories is due to strong demand coupled with manufacturing disruptions resulting from the COVID-19 pandemic .

Prepaid Expenses

Prepaid expenses consisted of (in thousands):

Fiscal year ended

December 28, 2021

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Property and equipment consisted of (in thousands):

Fiscal year ended

December 28, 2021

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

Fiscal year ended

December 28, 2021

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Definite-lived intangible assets will be amortized over one to 54 years .

Due to the decrease in our stock price coupled with the dining room closures related to the COVID-19 pandemic and significant decline to the equity value of our peers and overall U.S.

stock market, we determined it was necessary to perform an interim assessment of our goodwill, trade names, trademarks and licensing agreements during the first quarter of fiscal 2020.

We performed our annual assessment of indefinite-lived intangible assets as of the first day of our fiscal fourth quarter of fiscal 2021 and concluded there was a $ 1.3 million impairment of our licensing agreements.

During the first quarter of fiscal 2020, we determined it was necessary to perform an interim assessment of our goodwill, trade names, trademarks and licensing agreements due to the decrease in our stock price coupled with the dining room closures related to the COVID-19 pandemic and significant decline to the equity value of our peers and overall U.S.

stock market.

For the goodwill impairment test, the estimated fair value of the reporting units was determined using a blend of the income approach using a discounted cash flow analysis and the market capitalization approach.

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The cash flow estimates assumed that average unit volumes and margins would substantially return to pre-COVID-19 levels by mid-fiscal 2021.

We performed our annual assessment of indefinite-lived intangible assets as of the first day of our fiscal fourth quarter and concluded as of the date of the test that there was no further impairment of these assets, other than $ 0.4 million of expense related to transferable alcoholic beverage licenses.

We performed our annual assessment of indefinite-lived intangible assets as of the first day of our fiscal fourth quarter of fiscal year 2020 and concluded there was no further impairment of these assets, other than $ 0.4 million of expense related to transferable alcoholic beverage licenses.

Other assets consisted of (in thousands):

Fiscal year ended

December 28, 2021

3 unchanged sentences

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

Fiscal year ended

December 28, 2021

4 unchanged sentences

Ending balance

Fiscal year ended

December 28, 2021

4 unchanged sentences

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

The significant declines in activations, redemptions and breakage during fiscal 2020 compared to fiscal 2019 stem from the impact of the COVID-19 pandemic on our business.

The significant increases in activations, redemptions and breakage during fiscal 2021 compared to fiscal 2020 stem from the impact of the COVID-19 pandemic on our business in the prior year.

Other Accrued Expenses

Other accrued expenses consisted of (in thousands):

Fiscal year ended

December 28, 2021

5 unchanged sentences

Deferred consideration (3)

(1) The decrease in accrued salaries and wages is due to lower labor expenses in the COVID-19 pandemic operating environment.

(2) The increase in accrued payroll and sales taxes represents the allowed deferral of certain payroll taxes under the CARES Act, partially offset by lower payroll taxes due to reduced salaries and wages.

(1) The increase in accrued salaries and wages is primarily due to lower labor expenses in the prior year due to impact of the COVID-19 pandemic.

(2) The decrease in accrued payroll and sales taxes represents the repayment of certain payroll taxes that were deferred in fiscal 2020 under the CARES Act, partially offset by increased payroll and sales tax accruals due to lower labor and revenues, respectively, in fiscal 2020 due to the impact of the COVID-19 pandemic.

(3) The decrease during fiscal 2021 represents payment of deferred consideration per the Acquisition agreement.

Long-Term Debt

On July 30, 2019, we entered into a Third Amended and Restated Loan Agreement (the “Facility”) which amended and restated in its entirety our prior Second Amended and Restated Loan Agreement dated as of December 22, 2015.

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 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 sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

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.

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:

Revolving Credit Facility

On March 30, 2021, we entered into a Second Amendment (the “Second Amendment”) to our existing Third Amended and Restated Loan Agreement, dated July 30, 2019 (as amended by that certain First Amendment, dated as of May 1, 2020 and by the Second Amendment, collectively, the “Amended Credit Agreement”).

The Amended Credit Agreement, which terminates on July 30, 2024, consists of a $ 400 million revolving loan facility (the “Revolving Facility”), including a $ 40 million sublimit for letters of credit.

The Amended Credit Agreement also provides the ability to increase the Revolving Facility in an amount not to exceed (a) during the Covenant Relief Period (as defined below) $ 125 million and (b) thereafter, $ 200 million.

The funding of any such increases are subject to receipt of lender commitments and satisfaction of customary conditions precedent.

Certain of our material subsidiaries have guaranteed our obligations under the Amended Credit Agreement.

The Second Amendment, among other things, (i) extended the prior covenant relief period during which the testing of the net adjusted debt to EBITDAR ratio covenant (the “Net Adjusted Leverage Ratio”) and the EBITDAR to interest and rent expense ratio covenant (the “EBITDAR Ratio”) was suspended until the quarter ending December 28, 2021 (the “Covenant Relief Period”), (ii) continued to impose a monthly Liquidity covenant of $ 100 million (with Liquidity being the sum of (a) unrestricted cash and cash equivalents and (b) the unused portion of the Revolving Facility) until the Company demonstrated compliance with the financial covenants as of the quarter ending December 28, 2021, (iii) provided that the obligations thereunder be secured by a first priority security interest in substantially all of our and any guarantor’s property, with such property to be released upon (a) the termination of the Covenant Relief Period, (b) the Company’s compliance with the Net Adjusted Leverage Ratio and the EBITDAR Ratio as of the quarter ending on March 29, 2022, (c) neither the Company nor any of the guarantors having incurred unsecured debt using certain debt baskets under the Revolving Facility unless such debt is convertible debt or subordinated on customary debt subordination terms reasonably acceptable to the administrative agent and (d) no default or event of default having occurred or continuing, (iv) amended certain negative covenants during the Covenant Relief Period, including certain restrictions on capital expenditures, restricted payments, investments and indebtedness, and (v) permitted the payment of cash dividends with respect to our Series A Convertible Preferred Stock, par value $ 0.01 per share (“Series A preferred stock”) for each fiscal quarter of 2021 in an amount not to exceed $ 5.25 million per quarter.

Subsequent to the Covenant Relief Period, we are required to maintain (i) a maximum Net Adjusted Leverage Ratio of 4.75 and (ii) a minimum EBITDAR Ratio of 1.9 .

Borrowings under the Amended Credit Agreement 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) 1.5 %.

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.

During the Covenant Relief Period, we also incurred a fee of 0.4 % on the daily amount of unused commitments.

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

(i) 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.

Subsequent to the Covenant Relief Period, we will also incur a fee of 0.1 % to 0.2 % on the daily amount of unused commitments.

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 Amended Facility.

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

During the fourth quarter of fiscal 2020, we repaid a portion of the outstanding balance on the Amended Facility such that at December 29, 2020, we had net availability for borrowings of $ 96.6 million, based on a $ 280.0 million outstanding debt balance and $ 23.4 million in standby letters of credit.

Our Liquidity balance was $ 249.5 million at December 29, 2020, and we were in compliance with all covenants under the Amended Facility in effect at that date.

We capitalized interest expense related to new restaurant openings and major remodels totaling $ 0.8 million, $ 0.6 million and $ 0.4 million in fiscal 2020, 2019 and 2018, respectively.

We paid certain customary loan origination fees in conjunction with the Amended Credit Agreement.

At December 28, 2021, we had net availability for borrowings of $ 240.1 million, based on a $ 130.0 million outstanding debt balance and $ 29.9 million in standby letters of credit.

Our Liquidity balance at December 28, 2021 was $ 443.7 million, and we were in compliance with all covenants under the Amended Credit Agreement in effect at that date.

The Amended Credit Agreement contains customary affirmative and negative covenants, including limits on cash dividends and share repurchases with respect to our equity interests, and restrictions on indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

The Amended Credit Agreement also contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgements, cross defaults to material indebtedness and events constituting a change of control.

The occurrence of an event of default could result in the termination of commitments under the Revolving Facility, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement of cash collateral deposits in respect of outstanding letters of credit.

Convertible Senior Notes

On June 15, 2021, we issued $ 345.0 million aggregate principal amount of convertible senior notes due 2026 (“Notes”).

The net proceeds from the sale of the Notes were approximately $ 334.9 million after deducting issuance costs related to the Notes.

The Notes are senior, unsecured obligations and are (i) equal in right of payment with our existing and future senior, unsecured indebtedness;

(ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes;

(iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness;

and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.

The Notes were issued pursuant to, and are governed by, an indenture (the “Base Indenture”) between us and a trustee (“Trustee”), dated as of June 15, 2021, as supplemented by a first supplemental indenture (the “Supplemental Indenture,” and the Base Indenture, as supplemented by the Supplemental Indenture, the “Indenture”), dated as of June 15, 2021, between the Company and the Trustee.

The Notes accrue interest at a rate of 0.375 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021.

The Notes will mature on June 15, 2026, unless earlier repurchased, redeemed or converted.

Before February 17, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events.

From and after February 17, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date.

We will have the right to elect to settle conversions either entirely in cash or in a combination of cash and shares of our common stock.

However, upon conversion of any Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted.

The initial conversion rate is 12.7551 shares of common stock per $ 1,000 principal amount of Notes, which represents an initial conversion price of approximately $ 78.40 per share of common stock.

The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events.

In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Notes are redeemable, in whole or in part (subject to certain limitations described below), at our option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice;

and (ii) the trading day immediately before the date we send such notice.

However, we may not redeem less than all of the outstanding Notes unless at least $ 150.0 million aggregate principal amount of Notes are outstanding and not called for redemption as of the time we send the related redemption notice.

In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

The definition of Fundamental Change includes certain business combination transactions involving us and certain de-listing events with respect to our common stock.

The Notes will have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following:

(i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period);

(ii) our failure to send certain notices under the Indenture within specified periods of time;

(iii) our failure to comply with certain covenants in the Indenture relating to our ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of our assets and our subsidiaries, taken as a whole, to another person;

(iv) a default by us in our other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture;

(v) certain defaults by us or any of our significant subsidiaries with respect to indebtedness for borrowed money of at least $ 20,000,000 ;

(vi) the rendering of certain judgments against us or any of our significant subsidiaries for the payment of at least $ 25,000,000 , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished;

and (vii) certain events of bankruptcy, insolvency and reorganization involving us or any of our significant subsidiaries.

If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to us (and not solely with respect to a significant subsidiary of ours) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person.

If any other Event of Default occurs and is continuing, then, the Trustee, by notice to us, or noteholders of at least 25 % of the aggregate principal amount of Notes then outstanding, by notice to us and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately.

However, notwithstanding the foregoing, we may elect, at our option, that the sole remedy for an Event of Default relating to certain failures by us to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50 % on the principal amount of the Notes.

As of December 28, 2021, the Notes had a gross principal balance of $ 345.0 million and a balance of $ 336.0 million, net of unamortized issuance costs of $ 9.0 million.

The unamortized balance of issuance costs was recorded as a contra-liability and netted with long-term debt on our condensed consolidated balance sheets.

Total amortization expense was $ 1.1 million fiscal 2021 and was included in interest expense in the consolidated statements of income/(loss).

The effective interest rate for the Notes was 0.96 % as of December 28, 2021.

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

Rent expense on all operating leases (under ASC 840) was as follows (in thousands):

Straight-lined minimum base rent

Contingent rent

Common area maintenance and taxes

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

4 unchanged sentences

Weighted-average discount rate — operating leases

(1) Includes $ 223.5 million in right-of-use assets related to the Acquisition.

(See Note 2 for further discussion of the Acquisition.)

As of December 28, 2021, the maturities of our operating lease liabilities were as follows (in thousands):

2 unchanged sentences

Operating lease liabilities include $ 816.0 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 151.6 million of legally binding minimum lease payments for leases signed but not yet commenced.

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

The agreement became effective on April 1, 2020 and matures on April 1, 2025.

The interest rate swap entitles us to receive a variable rate of interest based on the one-month LIBO rate in exchange for the payment of a fixed interest rate of 0.802 %.

The notional amount of the swap agreement is $ 280.0 million through March 31, 2023 and $ 140.0 million from April 1, 2023 through April 1, 2025.

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

We determined that at December 29, 2020, the interest rate swap agreement was an effective hedging agreement.

On June 22, 2021, we terminated our interest rate swap agreement at a cost of $ 2.4 million.

This interest rate swap, which would have matured on April 1, 2025, was established to manage our exposure to interest rate movements on our Revolving Facility.

The interest rate swap entitled us to receive a variable rate of interest based on the one-month LIBO rate in exchange for the payment of a fixed interest rate of 0.802 %.

The notional amount of the swap agreement was $ 280.0 million through March 31, 2023 and $ 140.0 million from April 1, 2023 through April 1, 2025.

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

Prior to termination, the interest rate swap was determined to be an effective hedging agreement.

Our only derivative is the aforementioned interest rate swap, which is designated as a cash flow hedge.

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

At December 29, 2020, the fair value of our interest rate swap was a liability of $ 4.6 million and was included in other noncurrent liabilities in the consolidated balance sheet.

We reclassified $ 1.1 million out of AOCL in fiscal 2020 for the monthly settlement of the interest rate swap.

No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings during fiscal 2020.

No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings in fiscal 2021 or fiscal 2020.

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

Balance, December 31, 2019

Fiscal year ended

December 28, 2021

December 29, 2020

Beginning balance

Other comprehensive loss before reclassifications

Amounts reclassified from AOCL

Amounts reclassified from AOCI

Other comprehensive loss, net of tax

Balance, December 29, 2020

Ending balance

We classified this interest rate swap within Level 2 of the valuation hierarchy described in Note 3.

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.

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

Other Noncurrent Liabilities

Other noncurrent liabilities consisted of (in thousands):

Fiscal year ended

December 28, 2021

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Payroll taxes (3)

(1) Represents the allowed deferral of certain payroll taxes under the CARES Act.

(1) The decrease during fiscal 2021 represents payment of deferred consideration per the Acquisition agreement.

(2) The increase during fiscal 2021 primarily relates to the impact of an amendment to the Acquisition agreement, as well as to an increase in revenues utilized in the fair value calculation.

(3) The decrease represents the repayment in fiscal 2021 of certain payroll taxes that were deferred in fiscal 2020 under the CARES Act.

Commitments and Contingencies

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Real estate obligations, which include construction commitments, net of up-front landlord construction contributions, and legally binding minimum lease payments for leases signed but not yet commenced, were $ 151.6 million and $ 130.5 million at December 28, 2021 and December 29, 2020, respectively.

The Acquisition purchase price included a $ 12 million indemnity escrow amount specifically related to North Italia due ratably over two years , $ 6.0 million of which was paid in fiscal 2020;

and $ 45 million of deferred consideration due ratably over four years (including a $ 13 million indemnity escrow amount specifically related to the remaining FRC businesses), $ 11.3 million of which was paid in fiscal 2020.

The acquisition agreement also included a contingent consideration provision which is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after Closing.

The Acquisition agreement included a deferred consideration provision, of which the remaining balance is due in two equal payments of $ 11.3 million during fiscal 2022 and 2023.

This balance includes an indemnity escrow amount of $ 13.0 million specifically related to the acquired businesses other than North Italia.

The Acquisition agreement also included a contingent consideration provision which is payable annually from 2022 through 2027 and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after Closing.

The liability for this contingent consideration provision was $ 23.9 million at December 28, 2021.

See Note 3 for discussion of the fair value measurement of this liability.

We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.

(See Note 2 for further discussion of the Acquisition.)

As credit guarantees to insurers, we had $ 29.9 million and $ 23.4 million at December 28, 2021 and December 29, 2020, respectively, in standby letters of credit related to our self-insurance liabilities.

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The tax court has assigned docket number 18150-18 to our case.

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.

On June 30, 2021, the judge issued a ruling on certain procedural motions filed by the parties and set a timeline to conclude discovery and determine if the matter will proceed to trial.

The parties have entered into discussions to resolve the matter without trial, and we have reserved an immaterial amount in anticipation of settlement.

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

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Stockholders’ Equity and Series A Convertible Preferred Stock

Common Stock Issuance

On June 15, 2021, we issued 3.125 million shares of our common stock for $ 175.0 million.

In connection with the issuance, we incurred direct and incremental costs of $ 8.0 million.

Common Stock - Dividends and Share Repurchases

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

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Credit Agreement, in March 2020, our Board suspended the quarterly dividend on our common stock, as well as share repurchases.

Prior to this suspension, our Board declared cash dividends of $ 0.36 per common share for the first quarter of fiscal 2020.

Cash dividends of $ 1.38 and $ 1.24 per common share were declared during fiscal 2019 and 2018, respectively.

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 Amended Facility and applicable law, and such other factors that the Board considers relevant.

Cash dividends of $ 1.38 per common share were declared during fiscal 2019.

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 Amended Credit Agreement and applicable law, and such other factors that the Board considers relevant.

(See Note 12 for further discussion of our long-term debt.)

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During fiscal 2021, 2020 and 2019, we repurchased 0.1 million, 0.1 million and 1.1 million shares of our common stock at a cost of $ 5.8 million, $ 3.6 million and $ 51.0 million, respectively.

The share repurchases in fiscal 2021 and 2020 were solely in conjunction with satisfying tax withholding obligations on vested restricted share awards.

Our objectives with regard to 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.

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Future decisions to repurchase shares are at the discretion of the Board and are based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the Acquisition, our share price and current market conditions.

(See Note 2 for further discussion of the Acquisition.) The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Amended Facility that limit share repurchases based on a defined ratio.

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

(See Note 12 for further discussion of our long-term debt.)

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, par value $0.01 per share (the “Series A preferred stock”) for an aggregate purchase price of $ 200 million, or $ 1,000 per share.

On April 20, 2020, we issued 200,000 shares of Series A Convertible Preferred Stock, par value $ 0.01 per share (the “Series A 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, a commitment fee and other offering-related expenses.

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

The Series A 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 Series A preferred stock will be entitled to receive an amount per share equal to the greater of (i) the purchase price (without giving effect to the commitment fee), plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the holder of the Series A preferred stock would have been entitled to receive at such time if the Series A preferred stock were converted into common stock.

At December 29, 2020, the Liquidation Preference was $ 1,042.66 per share.

Dividend Rights

The holders of Series A preferred stock 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.

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

We recorded in-kind dividends of $ 13.5 million during fiscal 2020.

Conversion Rights

Each holder has the right, at its option, to convert its Series A preferred stock, in whole or in part, into fully paid and non-assessable shares of our common stock at a conversion price equal to $ 22.23 per share, subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events and certain anti-dilutive offerings if they occur on or prior to April 19, 2021.

As of December 29, 2020, the number of common shares that would be required to be issued upon conversion of the outstanding shares of Series A preferred stock was 9.4 million.

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 Series A 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.

We have the right to settle any conversion in cash.

As of December 29, 2020, the Series A preferred stock was convertible into approximately 17.1 % of our outstanding common stock, on an as-converted basis.

After April 20, 2023 and subject to certain conditions, we may, at our option, require conversion of all of the outstanding shares of Series A 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 Series A preferred stock 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 Series A 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 Series A 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 Series A preferred stock.

As such, the conversion options were not required to be bifurcated from the host under FASB Accounting Standards Codification (“ASC 815”), Derivatives and Hedging.

We also determined that the Series A preferred stock did not contain a beneficial conversion feature (“BCF”) upon issuance.

However, the associated dividends for fiscal 2020 generated a BCF of $ 4.8 million based on the fair value of our stock price on the commitment date (the date the dividends were declared to be paid in-kind) as compared to the conversion price.

Any BCF determined to exist is recorded as a debit to retained earnings and an increase to preferred stock.

Redemption Rights

On and after October 20, 2027, holders of the Series A preferred stock have the right to require redemption of all or any part of the Series A 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 of Series A preferred stock, all of the outstanding shares of Series A 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 Series A preferred stock were converted into common stock.

We may redeem any or all of the Series A 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 Series A preferred stock immediately prior to and in lieu of such redemption.

To the extent such holder elects to convert the Series A 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 Series A preferred stock.

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

As the Series A 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 Series A preferred stock separately from stockholders’ equity in the consolidated balance sheets.

As noted above, we determined that the nature of the Series A 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 Series A 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 Series A preferred stock are generally entitled to vote with the holders of the common stock on an as-converted basis.

Holders of Series A 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 Series A preferred stock, issuances of securities that are senior to, or equal in priority with, the Series A preferred stock and certain business combinations and binding or statutory share exchanges or reclassification involving the Series A preferred stock unless such events do not adversely affect the rights, preferences or voting powers of such preferred stock.

In addition, for so long as the holders of Series A preferred stock hold record and beneficial ownership of 25 % of the Series A preferred stock issued to them, such holders will have the right to designate one member to our board of directors.

If the holders cease to have such designation right, for so long as the holders have record and beneficial ownership of shares of common stock issued upon conversion of the Series A preferred stock that constitute at least 5 % of the outstanding common stock, the holders will have the right to nominate one person for election to our board of directors.

Upon adoption of ASU 2020-06 in the first quarter of fiscal 2021, we recorded a $ 4.8 million cumulative adjustment to retained earnings to reverse beneficial conversion features recorded during fiscal 2020.

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

On June 15, 2021, we paid $ 443.8 million in connection with the cash-settled conversion of 150,000 shares of our outstanding Series A preferred stock (effected through a repurchase agreement), which was recognized through additional paid in capital.

We also share-settled the conversion of the remaining 50,000 shares of our outstanding Series A convertible preferred stock into 2,400,864 shares of our common stock.

These are both based on the then current Liquidation Preference per share of $ 1,067.42 and conversion price of $ 22.23 .

During the first quarter of fiscal 2021, we declared a cash dividend of $ 5.1 million, or $ 25.35 per share, on the Series A preferred stock.

During the second quarter of fiscal 2021, $ 13.6 million in payments were made in connection with the conversion of the Series A preferred stock, consisting of $ 3.9 million, or $ 19.72 per share of accrued dividends and $ 9.7 million of an inducement, which is also deemed to be a dividend.

Stock-Based Compensation

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Stock Options

We did not issue any stock options during fiscal 2021.

The weighted-average fair value at the grant date for options issued during fiscal 2020 and 2019 was $ 6.66 and $ 9.84 per share, respectively.

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Exercise Price

Intrinsic Value (1)

(In thousands)

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The provision for income taxes consisted of the following (in thousands):

(Loss)/Income before income taxes

Income/(Loss) before income taxes

Income tax (benefit)/provision:

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Equity compensation

Uncertain tax positions

Effective tax rate

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Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions allowing for the carryback of net operating losses generated in fiscal years 2018, 2019 and 2020 and technical amendments regarding the expensing of qualified improvement property (“QIP”).

We expect to carry back our fiscal 2020 net operating loss and claim accelerated depreciation on QIP placed in service during fiscal 2018 and 2019.

We expect to file carryback claims during fiscal 2021, and we estimate that these claims will generate cash refunds of approximately $ 36 million.

The effects of these claims were included in our provision for income taxes using estimates based on the best information available at the time we prepared our consolidated financial statements.

Legislative and judicial developments relating to these provisions may evolve and the actual effects of these claims may differ from our estimates, which, in turn, may result in adjustments to our effective tax rate.

During fiscal 2021, we filed a refund claim in the amount of $ 18.4 million for our fiscal 2020 net operating loss carryback and in January 2022, we filed amended returns for tax years 2018 and 2019 requesting total refunds of $ 21.3 million for credits released by our fiscal 2020 loss carryback.

The effects of these claims were primarily included in our fiscal 2020 provision for income taxes, using estimates based on the best information available at the time we prepared our fiscal 2020 consolidated financial statements, and were adjusted to as-filed actual amounts in our fiscal 2021 provision for income taxes.

Except for the increase to our loss carryback resulting from the remittance of all of our deferred FICA taxes as discussed below, these adjustments had a minor effect on our fiscal 2021 provision for income taxes.

The CARES Act also allowed eligible employers to defer the remittance of certain FICA taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022.

We deferred approximately $ 36.6 million of FICA tax remittances under this provision.

We plan to remit the first half of the deferred amount within 8.5 months of year-end 2020 (or by the date we file our 2020 tax return, if earlier) in order to secure a fiscal 2020 tax deduction.

The effects of this planned remittance have been included in our fiscal 2020 provision for income taxes.

We may, however, elect to remit the total amount of deferred FICA tax within 8.5 months of year-end 2020 (or by the date we file our 2020 tax return, if earlier), in which case the actual benefit of our net operating loss carryback will differ from our estimate.

This, in turn, would result in an adjustment to our fiscal 2021 effective tax rate.

We previously planned to remit the first half of the deferred FICA taxes within 8.5 months of year-end 2020 to secure a fiscal 2020 tax deduction and we recorded the effects of that planned remittance in our fiscal 2020 provision for income taxes.

Prior to filing our 2020 federal tax return and within 8.5 months of year-end 2020, we remitted all of the deferred FICA taxes, which increased the value of our fiscal 2020 loss carryback by $ 4.3 million.

We recorded the effects of this increased remittance in our fiscal 2021 provision for income taxes.

Following are the temporary differences that created our deferred tax assets and liabilities (in thousands):

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At December 28, 2021 and December 29, 2020, we had $ 33.6 million and $ 35.6 million, respectively of U.S.

federal credit carryforwards which begin to expire in 2038.

This increase was driven primarily by our fiscal 2020 net operating loss.

At December 29, 2020, we had $ 79.5 million of state net operating loss carryforwards, resulting primarily from our fiscal 2020 loss, with statutory carryforward periods ranging from 5 years to no expiration period.

The earliest year that a material state new operating loss will expire in 2030.

At both December 29, 2020 and December 31, 2019, we had $ 1.9 million of state hiring and investment credits which begin to expire in 2024.

At December 29, 2020 and December 31, 2019, we had $ 2.7 million and $ 2.9 million, respectively, of foreign net operating loss carryforwards which begin to expire in 2038.

federal credit carryforwards which begin to expire in 2038 and $ 64.6 million and $ 79.5 million, respectively, of state net operating loss carryforwards with statutory carryforward periods ranging from 5 years to no expiration period.

The earliest year that a material state net operating loss will expire is 2032.

At December 28, 2021 and December 29, 2020, we had $ 1.7 million and $ 1.9 million, respectively, of state hiring and investment credits which begin to expire in 2024.

At both December 28, 2021 and December 29, 2020, we had $ 2.7 million of foreign net operating loss carryforwards which begin to expire in 2038.

We assess the available evidence to estimate if these carryforwards and our other deferred tax assets will be realized.

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We did not need to consider tax planning strategies in this analysis.

Based on this evaluation, at December 29, 2020 and December 31, 2019 we recorded a valuation allowance of $ 1.0 million and $ 0.7 million, respectively, to reflect the amount that we will likely not realize.

Based on this evaluation, at both December 28, 2021 and December 29, 2020 we carried a valuation allowance of $ 1.0 million to reflect the amount that we will likely not realize.

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

The earliest tax year still subject to examination by a significant taxing jurisdiction is 2010.

At December 29, 2020, we had a reserve of $ 0.7 million for uncertain tax positions.

If recognized, this amount would impact our effective income tax rate.

At December 28, 2021, we had a reserve of $ 4.8 million for uncertain tax positions, all of which would favorably impact our effective income tax rate if resolved in our favor.

A reconciliation of the beginning and ending amount of our uncertain tax positions is as follows (in thousands):

Balance at beginning of year

Additions related to prior year tax positions

Additions related to current period tax positions

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At December 28, 2021 and December 29, 2020, we had $ 3.6 million and $ 0.3 million, respectively of accrued interest and penalties related to uncertain tax positions.

None of the balance of uncertain tax positions at December 29, 2020 relates to tax positions for which it is reasonably possible that the total amount could decrease during the next twelve months based on the lapses of statutes of limitations.

We believe it is reasonably possible that the balance of uncertain tax positions at December 28, 2021 will decrease by $ 1.8 million during the next twelve months as a result of an anticipated settlement of our litigation regarding Section 199 deductions.

Segment Information

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Based on quantitative thresholds set forth in 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 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.

In addition, gift card costs, which were previously classified in The Cheesecake Factory restaurants reportable segment, are combined in Other.

Corresponding prior year balances were reclassified to conform to the current year presentation.

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

Unallocated corporate expenses, capital expenditures and assets are also combined in Other.

Segment information is presented below (in thousands):

The Cheesecake Factory

(Loss)/income from operations:

The Cheesecake Factory

Fiscal Year (1)

The Cheesecake Factory restaurants

Income/(loss) from operations:

The Cheesecake Factory restaurants

Depreciation and amortization:

The Cheesecake Factory

Impairment of assets and lease termination:

The Cheesecake Factory

The Cheesecake Factory restaurants

Impairment of assets and lease termination expenses:

The Cheesecake Factory restaurants

Preopening costs:

The Cheesecake Factory

The Cheesecake Factory restaurants

Capital expenditures:

The Cheesecake Factory

The Cheesecake Factory restaurants

Total assets:

The Cheesecake Factory

(1) We completed the acquisition of North Italia and the remaining business of FRC on October 2, 2019.

The results of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

(See Note 2 for further discussion of the Acquisition.)

(2) Fiscal 2020 and fiscal 2019 include ($ 1.2 ) million and $ 6.3 million, respectively, of acquisition-related (benefit)/expenses.

These amounts were recorded in acquisition-related costs and acquisition-related contingent consideration, compensation and amortization (benefit)/expenses in the consolidated statements of income.

(See Note 2 for further discussion of the Acquisition.)

Quarterly Financial Data (unaudited)

Summarized unaudited quarterly financial data for fiscal 2020 and 2019 is as follows (in thousands, except per share data):

Quarter Ended:

March 31, 2020 (1)

June 30, 2020 (1)

September 29, 2020 (1)

December 29, 2020 (1)

Loss from operations (2)(3)

Net loss (2)(3)

Net loss available to common stockholders (2)(3)

Basic net loss per share (4)

Diluted net loss per share (4)

Cash dividends declared per common share

Quarter Ended:

April 2, 2019

October 1, 2019

December 31, 2019 (1)

Income from operations (2)(3)

Net income (2)(3)

Basic net income per share (4)

Diluted net income per share (4)

Cash dividends declared per common share

The Cheesecake Factory restaurants

(1) We completed the acquisition of North Italia and the remaining business of FRC on October 2, 2019.

The results of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

(See Note 2 for further discussion of the Acquisition.)

(2) In the first, second, third and fourth quarters of fiscal 2020, loss from operations included acquisition-related (benefit)/expenses of ($ 3.2 ) million, $ 0.1 million, $ 1.4 million and $ 0.5 million, with a corresponding impact to net loss of ($ 2.4 ) million, $ 0.1 million, $ 1.1 million and $ 0.4 million, respectively.

Income from operations for the third and fourth quarters of fiscal 2019 included $ 3.2 million and $ 3.1 million of acquisition-related expenses, respectively, with a corresponding impact to net income of $ 2.4 million and $ 2.3 million, respectively.

These amounts were recorded in acquisition-related costs and acquisition-related contingent consideration, compensation and amortization (benefit)/expenses in the consolidated statements of income.

(See Note 2 for further discussion of the Acquisition.)

(3) In the first, second, third and fourth quarters of fiscal 2020, loss from operations included impairment of assets and lease termination expenses of $ 191.9 million, $ 2.4 million, $ 10.4 million and $ 14.6 million, with a corresponding impact to net loss of $ 142.0 million, $ 1.8 million, $ 7.7 million and $ 10.8 million, respectively.

In the fourth quarter of fiscal 2019, income from operations included impairment of assets and lease termination expenses of $ 18.2 million, with a corresponding impact to net income of $ 13.5 million.

(See Note 1 for further discussion of these charges.)

(4) Net (loss)/income per share calculations for each quarter are based on the weighted-average diluted shares outstanding for that quarter and may not total to the full year amount.

While seasonal fluctuations generally do not have a material impact on our quarterly results, year-over-year comparisons can be significantly impacted by the number and timing of new restaurant openings and associated preopening costs, the timing of holidays, the impact from inclement weather, other variations in revenues and expenses, and for the fiscal 2020 versus fiscal 2019 comparisons, by the impact of the COVID-19 pandemic and results of the Acquisition.

Because of these and other factors, our financial results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

(2) Fiscal 2021, 2020 and fiscal 2019 include $ 19.5 million, ($ 1.2 ) million and $ 6.3 million, respectively, of acquisition-related expense/(benefit).

These amounts were recorded in acquisition-related costs and acquisition-related contingent consideration, compensation and amortization expense/(benefit) in the consolidated statements of income.

Subsequent Events

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First Amendment to Membership Interest Purchase Agreement, dated as of October 2, 2019, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative #

Second Amendment to Membership Interest Purchase Agreement, dated as of June 1, 2021, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative # †

Third Amendment to Membership Interest Purchase Agreement, dated as of January 7, 2022, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative # †

Filed herewith

Restated Certificate of Incorporation of The Cheesecake Factory Incorporated

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Certificate of Elimination of Series A Junior Participating Cumulative Preferred Stock of The Cheesecake Factory Incorporated

Certificate of Designations of The Cheesecake Factory Incorporated, dated April 20, 2020

Description of The Cheesecake Factory Incorporated’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act

Employment Agreement, effective as of April 1, 2017, between The Cheesecake Factory Incorporated and David M.

Incorporated by

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Exhibit Number

Certificate of Designations of The Cheesecake Factory Incorporated, dated April 20, 2020

Description of The Cheesecake Factory Incorporated’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act

Indenture, dated as of June 15, 2021, between The Cheesecake Factory Incorporated and U.S.

Bank National Association, as trustee

First Supplemental Indenture, dated as of June 15, 2021, between The Cheesecake Factory Incorporated and U.S.

Bank National Association, as trustee

Form of certificate representing the 0.375% Convertible Senior Notes due 2026 (included as Exhibit A to Exhibit 4.3)

Employment Agreement, effective as of April 1, 2017, between The Cheesecake Factory Incorporated and David M.

First Amendment to Employment Agreement, effective as of April 1, 2018, between The Cheesecake Factory Incorporated and David M.

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Indemnification Agreement, dates as of April 20, 2020, between The Cheesecake Factory Incorporated and Paul D.

Incorporated by

Reference from

Exhibit Number

Inducement Agreement dated as of July 27, 2005

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The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended April 5, 2017*

Incorporated by

Reference from

Exhibit Number

Form of Grant Agreement for Executive Officers under 2010 Stock Incentive Plan*

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Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP III under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*

Incorporated by

Reference from

Exhibit Number

Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP IV under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*

3 unchanged sentences

Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement under the 2010 Stock Incentive Plan, for equity grants made on or after February 13, 2019*

Incorporated by

Reference from

Exhibit Number

The Cheesecake Factory Incorporated Stock Incentive Plan*

8 unchanged sentences

Third Amended and Restated Loan Agreement with JPMorgan Chase Bank, National Association dated as of July 30, 2019

First Amendment, dates as of May 1, 2020, to the Third Amended and Restated Loan Agreement, dated as of July 30, 2019, between The Cheesecake Factory Incorporated, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time part thereto

Subscription Agreement, dated April 20, 2020, but and between The Cheesecake Factory Incorporated and RC Cake Holdings LLC

Incorporated by

Reference from

Exhibit Number

First Amendment, dated as of May 1, 2020, to the Third Amended and Restated Loan Agreement, dated as of July 30, 2019, between The Cheesecake Factory Incorporated, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time part thereto

Second Amendment to the Third Amended and Restated Loan Agreement, dated as of March 30, 2021, among The Cheesecake Factory Incorporated, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto

Registration Rights Agreement, dated April 20, 2020, by and between The Cheesecake Factory Incorporated and RC Cake Holdings LLC

Acknowledgement and Support Agreement, dated April 20, 2020, by and between David Overton and RC Cake Holdings LLC

Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for Executive Officers under The Cheesecake Factory Incorporated Stock Incentive Plan

Repurchase Agreement, dated as of June 10, 2021 among The Cheesecake Factory Incorporated and RC Cake 1 LLC, RC Cake 2 LLC and RC Cake 3 LLC

Conversion Agreement, dated as of June 10, 2021 among The Cheesecake Factory Incorporated and RC Cake Holdings LLC

List of Subsidiaries

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Filed herewith

Incorporated by

Reference from

Exhibit Number

Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer

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Filed herewith

Incorporated by

Reference from

Exhibit Number

The following materials from The Cheesecake Factory Incorporated’s Annual Report on Form 10-K for the year ended December 28, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL):

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(P) This exhibit has been paper filed and is not subject to the hyperlinking requirements of Item 601 of Regulation S-K.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of February, 2021.

THE CHEESECAKE FACTORY INCORPORATED

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February 22, 2022

/s/ KHANH COLLINS

February 22, 2022

Khanh Collins

February 22, 2022

/s/ JEROME I.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures