J. Alexanders (JAX) 10-Q2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 28, 2020

or

For the transition period from ________ to ________.

Commission file number: 1-37473

J. Alexander’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☑

As of August 6, 2020, 15,011,676 shares of the registrant’s common stock, $0.001 par value, were outstanding.  

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited in thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

Per share amounts may not sum due to rounding.

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J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited in thousands, except share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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J. Alexander’s Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited, dollars in thousands except per share data)

Note 1 – Organization and Business

J. Alexander’s Holdings, Inc. (the “Company”) was incorporated on August 15, 2014 in the state of Tennessee and is a holding company which is the sole managing member of and owns all of the outstanding Class A Units of J. Alexander’s Holdings, LLC, the parent company of all of the Company’s operating subsidiaries. The Company is a publicly-traded company, with its stock listed on the New York Stock Exchange under the symbol “JAX.”

The Company, through J. Alexander’s Holdings, LLC and its subsidiaries, owns and operates full service, upscale restaurants including J. Alexander’s, Redlands Grill, Overland Park Grill, Merus Grill and Stoney River Steakhouse and Grill (“Stoney River”).  At June 28, 2020 and December 29, 2019, the Company operated 46 and 47 restaurants, respectively, in 16 states. The Company’s restaurants are concentrated primarily in the East, Southeast, and Midwest regions of the United States. The Company does not have any restaurants operating under franchise agreements.

Note 2 – Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and rules of the United States Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the quarter and six-month period ended June 28, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2021.  For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, and amended on April 17, 2020 (the “2019 Annual Report”).

Total comprehensive (loss) income is comprised solely of net (loss) income for all periods presented.  There have been no material changes in our significant accounting policies, other than those described in Note 2(k) – Inventory Method Change, Note 4 – Income Taxes and Note 7 – Recent Accounting Pronouncements, as compared to the significant accounting policies described in our 2019 Annual Report.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due to the global spread of a new strain of coronavirus ("COVID-19") and the related risks to the international community. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, and on March 13, 2020 the United States declared the pandemic a National Public Health Emergency.  In response, many states and jurisdictions in which the Company operates restaurants issued stay-at-home orders and other measures, including the closure of all in-restaurant dining, aimed at slowing the spread of the virus beginning in March 2020. These measures resulted in the closure of the Company’s dining rooms beginning in mid-March 2020 and a shift to an off-premise operations platform only until late April 2020 when certain states began to allow for partial reopening of dining rooms.  Dining room capacity restrictions remain in place at varying degrees through the date of this report.  As a result of the government-mandated restrictions and related public concerns, the Company’s net sales, results of operations and cash flows were negatively impacted in the second quarter and first half of 2020 due to significant reductions in guest counts. The Company has taken measures to increase its off-premise sales during the COVID-19 pandemic, including implementing its online ordering platform utilizing the services of ChowNow, introducing curbside service, menu innovation which includes family-style meals and butcher-shop sales of cook-at-home, hand-cut steaks and whole loins, and increasing digital marketing and email campaigns to drive guest awareness.

In addition to the decline in restaurant sales, the Company has also incurred approximately $3,275 of costs directly related to the COVID-19 pandemic in the six-month period ended June 28, 2020, which consists primarily of benefits and payments to furloughed restaurant employees for emergency sick leave, vacation and other sick leave benefits and related payroll taxes as well as inventory waste. Additionally, the Company has continued to incur expenses related to the ongoing operations of the restaurants as well as monthly rent and occupancy-related costs during the period that its restaurants were temporarily closed,

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or operating on an off-premise basis only or with limited capacity. The Company has implemented measures to reduce its costs and limit its cash outflows during the COVID-19 pandemic, including temporary reductions in staffing levels and related furloughs of restaurant-level hourly employees, elimination of certain positions at the Company’s corporate office, deferral or cancellation of significant capital expenditure projects, engaging in ongoing negotiations with vendors and landlords regarding deferral or abatement of rental and other contractual obligations and the deferral of tax payments where allowed.

The disruption in operations and reduction in restaurant sales also led the Company to consider the impact of the COVID-19 pandemic on the recoverability of its assets, including property and equipment, right-of-use assets for operating leases, goodwill and intangible assets, and others. Such impairment analyses resulted in the Company recording impairment charges totaling $16,426 for the six-month period ended June 28, 2020 and are discussed further in Note 2(m) below. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that additional impairments could be identified in future periods, and such amounts could be material.

To preserve financial flexibility, the Company drew the remaining $17,000 of available capacity (at the time of the draw) under its revolving credit facilities in March 2020. During April 2020, the Company also entered into deferral letter agreements with its lender to postpone principal and interest payments on its outstanding indebtedness for a period of 90 days and, in June 2020, an additional deferral letter was entered into to defer principal payments for an additional 90-day period. Additionally, the Company entered into a modification agreement in April 2020 to defer the maturity of, and interest payments under one of its term loans to September 2021. In June 2020, the Company entered into an amendment with its lender to increase the borrowing capacity under its revolving line of credit by an additional $15,000. Further, in May 2020, the Company obtained a waiver letter from its lender that waived existing financial covenants and instituted new financial covenants, which the Company expects to be in compliance with, through the period ending July 4, 2021. See Note 2(l) below for further information.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. Given the uncertainty surrounding the global economy and governmental restrictions on our operations, the Company cannot reasonably predict when its restaurants will be able to return to normal dining room operations. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity and future results of operations, and therefore any prediction as to the ultimate material adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain. The Company does expect that its results of operations, cash flows and liquidity will be negatively affected by the pandemic, in some form, for the remainder of fiscal year 2020.

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company as well as the accounts of its subsidiaries.  All intercompany profits, transactions, and balances between the Company and its subsidiaries have been eliminated.  It is the Company’s policy to reclassify prior year amounts to conform to the current year’s presentation for comparative purposes, if such a reclassification is warranted.

The Company is a holding company with no direct operations and that holds as its sole asset an equity interest in J. Alexander’s Holdings, LLC and, as a result, relies on J. Alexander’s Holdings, LLC to provide it with funds necessary to meet its financial obligations.

The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks.  The quarters and six-month periods ended June 28, 2020 and June 30, 2019 each included 13 and 26 weeks of operations, respectively.  Fiscal years 2020 and 2019 include 53 and 52 weeks of operations, respectively.

During the second quarter of 2020, the Company made the decision to permanently close the Lyndhurst Grill location in Cleveland, Ohio, on May 1, 2020 after a review of its projected and historical financial performance. This location was also required to be temporarily closed in mid‑March due to COVID-19-related traffic limitations unique to that specific restaurant which further impacted operating results.  Restaurant closing costs recorded during the second quarter of 2020 totaled $178 and included labor expenses incurred subsequent to closure, severance and other miscellaneous costs. Expenses

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associated with the closure of the Lyndhurst Grill restaurant have not been included in discontinued operations as its closure does not represent a strategic shift that will have a major effect on our operations and financial results.  As such, these restaurant closing costs have been included as a component of “Long-lived asset impairment charges and restaurant closing costs” in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company entered into an agreement to sell this property in the second quarter of 2020. The sale is expected to close in the third quarter of 2020, subject to customary closing conditions.  As such, the Company has reclassified $1,242 of restaurant property and equipment to “Prepaid expenses and other current assets” from “Property and equipment, at cost, less accumulated depreciation and amortization” in the Condensed Consolidated Balance Sheets as of June 28, 2020.  The assets held for sale consist of land and building at their carrying amounts subsequent to the related long-lived asset impairment charge recorded during the first quarter of 2020 discussed in Note 2(m) below.

In addition, the Company remains party to a lease agreement for a location that was closed in 2013 and is accounted for as a discontinued operation.  The $55 and $58 losses from discontinued operations included in the quarters ended June 28, 2020 and June 30, 2019, respectively, and losses for the six-month periods ended June 28, 2020 and June 30, 2019 of $107 and $117, respectively, consist solely of exit and disposal costs for this location.

Transaction, contested proxy and other related expenses totaled $(66) and $623 for the quarter and six-month period ended June 28, 2020, respectively. In the first quarter of 2020, the Company incurred legal fees, other professional fees and consulting fees related to the ongoing evaluation of strategic alternatives. The Company received a discount for legal services rendered during that period resulting in income for the second quarter of the year. During the first quarter of 2020, the Company announced that given the uncertainties in the business community, the restaurant industry and the financial markets as a result of COVID-19, the ongoing review of strategic alternatives by the Company’s Board of Directors (the “Board”) will not be completed until these uncertainties are resolved. Transaction, contested proxy and other related expenses for the second quarter and six-month period ended June 30, 2019 totaled $651. Expenses in 2019 include costs associated with both soliciting shareholder proxies for the Company’s 2019 annual meeting of shareholders as well as costs related to the evaluation of strategic alternatives.

Basic (loss) earnings per share of common stock is computed by dividing net (loss) income by the weighted average number of shares outstanding for the reporting period.  Diluted (loss) earnings per share of common stock is computed similarly to basic (loss) earnings per share except the weighted average shares outstanding are increased to include potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. In periods of net loss, 0 potential common shares are included in the diluted shares outstanding as the effect is anti-dilutive. J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents for this purpose. The number of additional shares of common stock related to these common stock equivalents is calculated using the if-converted method, if dilutive. The number of additional shares of common stock related to stock option awards and unvested restricted share awards subject to only a service condition is calculated using the treasury stock method, if dilutive. Unvested restricted share awards that are subject to a performance condition are regarded as contingently issuable common shares and are included in the denominator of the diluted (loss) earnings per share calculation using the treasury stock method as of the beginning of the period in which the performance condition has been satisfied, if dilutive.  Refer to Note 3 – (Loss) Earnings per Share for the basic and diluted (loss) earnings per share calculations and additional discussion.

Non-controlling interests presented on the Condensed Consolidated Balance Sheets represent the portion of net assets of the Company attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders.  As of each June 28, 2020 and December 29, 2019, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $1,558.  On February 28, 2019, in conjunction with the termination agreement (“Termination Agreement”) entered into in November 2018 between J. Alexander’s Holdings, LLC and Black Knight Advisory Services, LLC (“Black Knight”), the 1,500,024 Class B Units held by Black Knight were cancelled and forfeited for no consideration. Therefore, the Black Knight non‑controlling interest associated with their Class B Unit share-based compensation expense was reclassified to additional paid-in capital in the first quarter of 2019, and as of June 28, 2020 and December 29, 2019, non-controlling interests consist solely of the previously recognized non-cash compensation expense relative to the Class B Units held by management.  The Hypothetical Liquidation at Book Value method was used as of each of June 28, 2020 and June 30, 2019 to determine

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allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, 0 allocation of net (loss) income was made to non-controlling interests for either of the quarters or six-month periods ended June 28, 2020 or June 30, 2019.

Management has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods presented to prepare these unaudited Condensed Consolidated Financial Statements in conformity with GAAP.  Significant items subject to such estimates and assumptions include those related to the accounting for gift card breakage, determination of uncertain tax positions and the valuation allowance relative to deferred tax assets, if any, estimates of useful lives of property and equipment and leasehold improvements, the carrying amount of goodwill and intangible assets, fair market valuations, determination of lease terms, and accounting for impairment losses, contingencies, and litigation. Actual results could differ from these estimates.

The Company recently completed the implementation of a new inventory management system. In connection with this implementation, the Company changed its method of accounting for inventory from the lower of cost (first-in, first-out) or net realizable value method utilized by its legacy system to the lower of cost or net realizable value method, with cost being determined using an average cost method, effective December 30, 2019 (the first day of the current fiscal year). The Company believes this change in accounting principle is preferable, as it will result in greater precision in the costing of inventories. In addition, the average cost method better aligns with the functionality of the new inventory management system. The Company determined that the effects of adopting the average cost method were not material to its Condensed Consolidated Financial Statements. Prior to the conversion to the new inventory management system, the Company was not able to determine the impact of the change to the average cost method. Therefore, it did not retroactively apply the change to periods prior to fiscal year 2020.

(l)   Debt

The Company is party to the Third Amended and Restated Loan Agreement, dated June 5, 2020, by and between J. Alexander’s, LLC and Pinnacle Bank, as amended (the “Loan Agreement”). As of June 28, 2020, the Loan Agreement consists of the following loans: (i) a $5,000 term loan that matures on September 3, 2021 (the “Mortgage Loan”), (ii) a $20,000 development line of credit that matures on September 3, 2021 (the “Development Line of Credit”), (iii) a $10,000 term loan that matures on September 3, 2021 (the “Term Loan”), and (iv) a $16,000 revolving line of credit that matures on September 3, 2021 (the “Revolving Line of Credit”).  At June 28, 2020, the amounts outstanding under the Development Line of Credit and the Revolving Line of Credit were $20,000 and $1,000, respectively. At June 28, 2020, $4,167 was outstanding under the Mortgage Loan and an additional $555 was outstanding under the Term Loan. The Loan Agreement includes the agreed terms of the April and May modifications discussed below.

During the first quarter of 2020, the Company announced it drew down the remaining $17,000 of available capacity (at the time of the draw) under the Development Line of Credit and the Revolving Line of Credit (the “Credit Draw”). Following the Credit Draw, debt outstanding under the Development Line of Credit and the Revolving Line of Credit totaled $21,000. Pursuant to the terms of the Second Amended and Restated Loan Agreement (the “Second Loan Agreement”), the borrowings under the Second Loan Agreement bore interest at 30-day LIBOR plus a sliding interest rate scale determined by a maximum adjusted debt to EBITDAR ratio (following the Credit Draw, set at 30-day LIBOR plus 2.10% as of June 28,

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2020).  Interest rate terms with respect to the Development Line of Credit under the Loan Agreement are consistent with those stated in the Second Loan Agreement.  The new interest rate terms under the Revolving Line of Credit are discussed below. The Credit Draw was undertaken as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of current disruption and uncertainty resulting from the COVID-19 pandemic. The proceeds from the Credit Draw are available to be used for general corporate purposes, including working capital.

On April 15, 2020, the Company entered into a modification of the Second Loan Agreement impacting the Term Loan, which deferred the two remaining principal payments totaling $555 until the Term Loan’s new maturity date which was modified to be September 3, 2021. On September 3, 2021, this principal amount will be payable in full in addition to interest accrued during the relevant period.  With respect to interest payments in the interim, the Term Loan was modified to defer such payments until July 3, 2020 at which point monthly interest payments will resume through the September 3, 2021 maturity date.  Similar to the Term Loan, the Company also negotiated for the deferral of principal and interest payments related to the Mortgage Loan and executed deferral letters in both April 2020 and June 2020 to cause such deferrals. The principal payments otherwise due in April through September 2020 totaling $834 will now be payable when the loan matures on September 3, 2021 and interest payments will resume on July 3, 2020. The Company also reached an agreement with its lender in April 2020 to defer interest payments on its Development Line of Credit and Revolving Line of Credit for the months of April, May and June 2020, and interest payments will resume on July 3, 2020.

On June 5, 2020, the Company entered into the Loan Agreement with Pinnacle Bank which amended its Revolving Line of Credit to expand its capacity from $1,000 to a total of $16,000 by adding an accordion feature for the additional $15,000, with the additional capacity being available for general corporate purposes, including working capital and letters of credit. This amendment also required the Company to pledge the previously unencumbered five owned properties as collateral to the lender. The additional capacity is available for borrowing by the Company in amounts up to and including $5,000 per fiscal month beginning in the eighth fiscal month of 2020, with any amounts not borrowed during any particular period to be available for borrowing in subsequent periods. Any advances on the expanded Revolving Line of Credit are contingent on the Company achieving certain levels of revenue on a trailing three-fiscal-month basis. The Loan Agreement was included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on June 9, 2020. Borrowings under the Revolving Line of Credit under the Loan Agreement bear interest at a rate of LIBOR plus 2.5%, with a floor for LIBOR of 1.5%, and will be payable quarterly beginning on September 3, 2020. All outstanding principal and interest under the Revolving Line of Credit will be due and payable on the maturity date of September 3, 2021.

Effective May 6, 2020, the Company entered into a waiver with Pinnacle Bank, which waived financial covenant compliance for existing financial covenants under the Second Loan Agreement beginning May 7, 2020 through the period ending July 4, 2021 (the “Waiver Period”), and implemented two new financial covenants now included in the Loan Agreement (the “New Financial Covenants”). The New Financial Covenants require (i) minimum revenue of (a) at least $99,800 for the Company’s fiscal year ending January 3, 2021, (b) at least $118,400 on a four-quarter trailing basis by April 4, 2021, and (c) at least $166,800 on a four-quarter trailing basis by July 4, 2021, and (ii) a maximum adjusted debt to tangible net worth ratio of 0.80 or less, measured quarterly beginning September 27, 2020. In accordance with the Loan Agreement, upon the expiration of the Waiver Period, the New Financial Covenants will terminate and the financial covenants revert back to (i) a fixed coverage charge ratio of not less than 1.25 to 1.0 and (ii) a maximum adjusted debt to EBITDAR ratio of not more than 4.0 to 1.0, consistent with the historical financial covenants in the Second Loan Agreement prior to the Company obtaining the waiver. The Company projects to be in compliance with these New Financial Covenants through the Waiver Period. For additional information on the former financial covenants under the terms and conditions of the Second Loan Agreement, please see “Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 10 – Debt” in the Company’s 2019 Annual Report.

On April 10, 2020 and April 15, 2020, respectively, J. Alexander’s, LLC and Stoney River Management Company, LLC each an indirect subsidiary of the Company, were each granted loans from Pinnacle Bank in the aggregate amounts of $10,000 and $5,100 pursuant to the Paycheck Protection Program under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”), which was enacted March 27, 2020.  The Company believed its subsidiary operating companies were eligible for the loans in accordance with the special eligibility provisions for larger companies under provisions included in the CARES Act and the applicable implementing guidance issued by the U.S. Small Business Administration under the Paycheck Protection Program that was available at the time loan applications were submitted. The loans had been obtained to support the goal in the legislation of providing financial assistance to restaurant-level employees, including approximately 3,400 furloughed hourly employees that were not assisting with the Company’s carry-out programs at the time, and to restore the Company’s workforce as quickly as possible once dine-in operations could be safely resumed in accordance with applicable state and local government guidelines. However, as a result of additional guidance issued by the United States

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Treasury Department and the U.S. Small Business Administration on April 23, 2020, the Company repaid both the $10,000 and $5,100 loans in full on April 29, 2020.

(m)  Goodwill Impairment and Long-lived Asset Impairment Charges

In light of the recent decline in the market price of the Company’s common stock, the impact of mandated dining room closures on financial results, the expected reduction in economic activity in the near term, and the general economic and market volatility, the Company determined that these factors constituted an interim triggering event as of the end of the Company’s first and second quarters of 2020, and performed impairment analyses with regard to its indefinite-lived intangible assets, property and equipment (including its right-of-use assets for operating leases) and goodwill. As a result, the Company recorded asset impairment charges totaling $16,426 in the first half of 2020.

The Company performed a quantitative goodwill impairment test as of March 29, 2020 utilizing a market approach which included observable market prices associated with the Company’s common stock price in determining a fair value for the Company and its reporting units. As a result of this test, the Company determined that the J. Alexander’s reporting unit’s carrying value exceeded its fair value to such an extent that the full impairment of goodwill in the first quarter of 2020 in the amount of $15,737 was appropriate. The effect of this conclusion is presented as a component of “Goodwill impairment charge” on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.

Additionally, the Company recorded a long-lived asset impairment charge of $689 to state the assets at its Lyndhurst Grill location in Cleveland, Ohio, at their fair value as of March 29, 2020, which is presented as “Long-lived asset impairment charges and restaurant closing costs” on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. During the second quarter of 2020, the Company made the decision to permanently close this location after a review of its projected and historical financial performance. This location was also required to be temporarily closed in mid‑March due to COVID-19-related traffic limitations unique to that specific restaurant which further impacted operating results. The Company assessed its other restaurant locations for indicators of impairment as of the quarter ended June 28, 2020 and assessed recoverability of certain fixed assets as warranted.  NaN additional impairment was identified as of June 28, 2020.

The Company also performed a quantitative impairment analysis in the first and second quarters of 2020 relative to its indefinite-lived intangible assets and determined that the fair value of these assets substantially exceeded their carrying values and 0 impairment existed as of June 28, 2020.

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Note 3 – Earnings (Loss) per Share

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

Basic (loss) earnings per share of common stock is computed by dividing net (loss) income by the weighted average number of shares outstanding for the reporting period.  Diluted (loss) earnings per share of common stock gives effect during the reporting period to all dilutive potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive.  We incurred a net loss for the quarter and six-month period ended June 28, 2020, and therefore, diluted shares outstanding equaled basic shares outstanding for each of these periods.

The J. Alexander’s Holdings, LLC Class B Units are considered common stock equivalents, and the number of additional shares of common stock related to these Class B Units is calculated using the if-converted method.  The 833,346 Class B Units associated with management’s profits interest awards are considered to be antidilutive as of and for the quarter and six-month period ended June 30, 2019, and, therefore, have been excluded from the diluted (loss) earnings per share calculations.

The number of additional shares of common stock related to stock option awards is calculated using the treasury stock method, if dilutive.  There were 1,495,750 stock option awards outstanding as of June 28, 2020 and June 30, 2019.  The dilutive impact of these awards on the number of weighted average shares in the diluted earnings per share calculation was 39,848 and 19,924 for the quarter and six-month periods ended June 30, 2019, respectively.

As of June 28, 2020, there were 264,000 and 52,500 restricted share awards and performance share awards outstanding, respectively. The performance condition associated with the performance share awards had not been met as of June 28, 2020. As noted above, the Company recorded a net loss for the quarter and six-month period ended June 28, 2020. As such, NaN of these outstanding awards were considered dilutive in either of these periods.  NaN such awards were outstanding as of June 30, 2019.

Note 4 – Income Taxes

On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant income and other business tax provisions that, among other things, eliminates the taxable income limit for certain net operating losses (“NOLs”) and

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allows businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior tax years, loosens the business interest limitation under Internal Revenue Code Section 163(j) and fixes the qualified improvement property (“QIP”) regulations in the 2017 Tax Cuts and Jobs Act.   Additionally, the CARES Act provides for non-income tax-related relief such as refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes. As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund from the carryback of NOLs expected to be generated in fiscal 2020, and it is currently in the process of quantifying the estimated total amount of that carryback. The Company also intends to take full advantage of the deferral offered for the employer-paid portion of social security taxes and the refundable employee retention tax credits. As of June 28, 2020, the Company has deferred the payment of $897 of social security taxes which are accrued as “Other long-term liabilities” in the Consolidated Balance Sheets. The Company continues to evaluate the various provisions of the CARES Act and their impact on its effective tax rate and its consolidated financial statements as a whole, but the Company does anticipate the impact for the full fiscal year 2020 could be significant.

The interim tax provision for the quarter and six-month period ended June 28, 2020 was prepared on an actual effective tax rate basis rather than on an estimated annual effective rate basis due to the fact that the Company has determined that a reliable estimate of the annual effective tax rate cannot be made. The Company recognized an income tax benefit of $4,419 and $5,806 for the quarter and six-month period ended June 28, 2020, respectively, which includes $1,477 and $1,583, respectively, of current benefit related to the carryback of calculated NOLs for the second quarter and first half of 2020 to prior years as allowed under the CARES Act.  The actual net effective tax rate for the first half of 2020 was 19.1% compared to 4.1% for the same period in 2019. The factors that caused the net effective tax rate to vary from the federal statutory rate of 21% for the six-month period ended June 28, 2020 primarily related to the impact of the nondeductible book goodwill impairment charge recorded during 2020, partially offset by the Federal Insurance Contribution Act (“FICA”) tip credit, state income taxes, the anticipated carryback of the NOLs generated during 2020 to prior years, including the impact of the correction of the QIP regulations on the anticipated carryback, and other items. For the six-month period ended June 30, 2019, the factors that caused the net effective tax rate to vary from the federal statutory rate included the impact of the FICA tip credit and other credits, partially offset by state income taxes and certain non-deductible expenses.

The Company regularly assesses the need for a valuation allowance related to its deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized.  In its assessment, the Company considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies.  The Company has evaluated the need for valuation allowances as of the six-month period ended June 28, 2020 and has determined that a valuation allowance of $307 was necessary relative to certain state net operating losses and other deferred tax assets which are not expected to be realized.  Management also determined at June 28, 2020 that it is more likely than not that the results of future operations and reversal of deferred tax liabilities will generate sufficient taxable income to realize the remaining deferred tax assets not covered by this valuation allowance. The Company will continue to assess the likelihood of the realization of its deferred tax assets, especially in light of the COVID-19 pandemic and related economic uncertainty, and the valuation allowance will be adjusted accordingly in future periods, if required.

Note 5 – Commitments and Contingencies

As a result of the disposition of the Company’s predecessor’s Wendy’s operations in 1996, subsidiaries of the Company may remain secondarily liable for certain real property leases with remaining terms of one to five years.  The total estimated amount of lease payments remaining on these 5 leases at June 28, 2020 was approximately $875.  In connection with the sale of the Company’s predecessor’s Mrs. Winner’s Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, subsidiaries of the Company also may remain secondarily liable for 1 real property lease.  The total estimated amount of lease payments remaining on this lease at June 28, 2020 was approximately $303.  There have been 0 payments by subsidiaries of the Company of such contingent liabilities in the history of the Company.  Management believes any significant loss is remote.

The Company and its subsidiaries are subject to real property, personal property, business, franchise, income, withholding, unemployment, unclaimed property, sales and use taxes in various jurisdictions within the United States and are regularly under audit by tax authorities.  This is believed to be common for the restaurant industry.  Management believes the ultimate disposition of these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

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The Company and its subsidiaries are defendants from time to time in various claims or legal proceedings arising in the ordinary course of business, including claims relating to workers’ compensation matters, labor-related claims, discrimination and similar matters, claims resulting from guest accidents while visiting a restaurant, claims relating to lease and contractual obligations, federal and state tax matters, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns, and injury or wrongful death under “dram shop” laws that allow a person to sue the Company and its subsidiaries based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of the Company’s restaurants.

Management does not believe that any of the legal proceedings pending against the Company and its subsidiaries as of the date of this report will have a material adverse effect on the Company’s liquidity, consolidated results of operations or financial condition.  The Company may incur liabilities, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal year, which may adversely affect its consolidated results of operations, or on occasion, receive settlements that favorably affect its consolidated results of operations.

Note 6 – Fair Value Measurements

As of June 28, 2020 and December 29, 2019, the fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximated their carrying value due to their short-term nature.  The carrying amounts of long-term debt approximate fair value as interest rates and negotiated terms and conditions are consistent with current market rates because of the close proximity of recent refinancing transactions to the dates of these unaudited Condensed Consolidated Financial Statements (Level 2).

The Company utilizes the following fair value hierarchy, which prioritizes the inputs into valuation techniques used to measure fair value.  Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value.  The three levels of the hierarchy are as follows:

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As discussed in Note 2(m) above, during the first quarter of fiscal year 2020, primarily due to the impacts of the COVID-19 pandemic, the Company determined that a triggering event had occurred requiring an impairment evaluation of its long-lived assets, indefinite‑lived intangible assets and goodwill. As a result of these analyses, the Company recorded a $689 impairment charge related to the long-lived assets at 1 restaurant location that management determined would be permanently closed (the Lyndhurst Grill location) and a $15,737 impairment charge related to the Company’s recorded goodwill. The impairment charges were measured based on the amounts by which the carrying values of the assets exceeded their relative fair values. NaN impairment was recorded for indefinite‑lived intangible assets as their fair values were determined to substantially exceed their carrying values. Fair values for goodwill and long-lived assets that were impaired during the first six-months of 2020 were estimated utilizing a market approach, and fair value estimates for indefinite-lived intangibles were determined based on an income approach. Fair value estimates utilized market participant assumptions reflecting all available information as of the impairment date. The fair value as of the impairment date associated with the impaired long‑lived assets at the Company’s Lyndhurst Grill location is approximately $1,245 (Level 2), and the fair value of goodwill is $0 (Level 3). No changes to these fair values were warranted at June 28, 2020. There were 0 non-financial assets measured at fair value on a non‑recurring basis as of December 29, 2019.

The Company updated its impairment analyses for its long-lived and indefinite-lived intangible assets as of June 28, 2020 as the Company continued to be impacted by the COVID-19 pandemic during the second quarter.  NaN additional impairment was recorded for long-lived or indefinite-lived intangible assets for the quarter ended June 28, 2020.

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The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that additional impairments could be identified in future periods, and such amounts could be material.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the Company’s financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:

Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in a rabbi trust established under a retirement benefit arrangement with certain of our current and former officers (the “Trust”).  Cash held in the Trust is invested through an overnight repurchase agreement the investments of which may include U.S. Treasury securities, such as bonds or Treasury bills, and other agencies of the U.S. government.  Such investments are valued using quoted market prices in active markets.

U.S. government obligations held in the Trust include U.S. Treasury Bonds.  These bonds as well as the corporate bonds listed above are classified as Level 1 of the fair value hierarchy given their readily available quoted prices in active markets.

At June 28, 2020 and December 29, 2019, the Company held investments in mutual and money market funds classified as trading securities that were also held in a rabbi trust as of June 28, 2020 (the “409a Trust”) to support its future obligations to participants of its nonqualified deferred compensation plan, which are carried at fair value based on quoted market prices in active markets for identical assets (Level 1).

Cash surrender value - life insurance is classified as Level 2 in the fair value hierarchy.  The value of each policy was determined by MassMutual Financial Group, an A-rated insurance company, which provides the value of these policies to the Company on a regular basis.

There were no transfers between the levels listed above during either of the reporting periods.

Unrealized gains or losses on investments held in either the Trust or the 409a Trust are presented as a component of “Other, net” on the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income.  The assets of both the Trust and the 409a Trust disclosed above are presented as a component of “Other assets” on the Condensed Consolidated Balance Sheets.

Note 7 – Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”).  ASU No. 2016-13 was issued to update the methodology used to measure current expected credit losses (“CECL”). The update applies

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to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates.  ASU No. 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings in the period of adoption. The effective date relative to smaller reporting companies is for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2016-13 to have a material impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU No. 2017-04”).  This update simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step quantitative goodwill impairment test.  An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment.  Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit, not to exceed the carrying value of the reporting unit goodwill.  The option remains for an entity to perform a qualitative assessment of a reporting unit to determine if the quantitative impairment test is necessary.  ASU No. 2017-04 requires prospective adoption and is effective commencing in fiscal years beginning after December 15, 2022, with early adoption permitted.  The Company adopted this guidance at the beginning of fiscal year 2020, which it followed in assessing goodwill for impairment as of March 29, 2020 as discussed in Note 2(m) above.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”).  This update eliminates, modifies and adds a number of disclosure requirements related to fair value measurements in connection with the FASB’s disclosure framework project, the objective of which is to improve the effectiveness of disclosures in the notes to financial statements.  ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. The Company adopted this guidance at the beginning of fiscal year 2020, and it did not have a significant impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). ASU No. 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This standard is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption permitted. The Company is currently assessing the potential impact of ASU No. 2019-12 on its unaudited Condensed Consolidated Financial Statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU No. 2020-04”).  This update provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.  The amendments in ASU No. 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.  An entity may elect to apply the amendments for contract modifications by the impacted Accounting Standards Codification (“ASC”) topic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued through December 31, 2022. Once elected for an ASC topic, the amendments in ASU No. 2020-04 must be applied prospectively for all eligible contract modifications for that ASC topic.  The Company continues to assess the potential impact of ASU No. 2020-04 on its unaudited Condensed Consolidated Financial Statements and related disclosures.

In April 2020, the staff of the FASB issued a question-and-answer document that stated that entities may elect to account for lease concessions related to the effects of the COVID-19 pandemic as though the rights and obligations for those concessions existed as of the commencement of the contract rather than as a lease modification. Lessees may make the election for any lessor-provided lease concession related to the impact of the COVID-19 pandemic as long as the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. The Company has made such election. See Note 10 – Leases below for additional discussion regarding rent concessions granted during the second quarter of 2020. While the impact to the Company’s Condensed Consolidated Financial Statements and related disclosures for the second quarter of 2020 was not material, the Company continues to have discussions and negotiations are ongoing with its landlords regarding future rent concessions which could become material.

Note 8 – Related Party Transactions

On September 28, 2015, J. Alexander’s Holdings, LLC entered into a management consulting agreement (“Management Consulting Agreement”) with Black Knight, pursuant to which Black Knight provided corporate and strategic advisory services to J. Alexander’s

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Holdings, LLC.  On November 30, 2018 (“Termination Date”), the Company terminated the Management Consulting Agreement by entering into the Termination Agreement.

Under the Management Consulting Agreement, J. Alexander’s Holdings, LLC issued Black Knight 1,500,024 non-voting Class B Units and was required to pay Black Knight an annual fee equal to 3% of the Company’s Adjusted EBITDA for each fiscal year during the term of the Management Consulting Agreement and to reimburse Black Knight for its direct out-of-pocket costs incurred for management services provided to J. Alexander’s Holdings, LLC.  Under the Management Consulting Agreement, “Adjusted EBITDA” meant the Company’s net income before interest expense, income tax (expense) benefit, depreciation and amortization, and adding asset impairment charges and restaurant closing costs, loss on disposals of fixed assets, transaction and integration costs, non-cash compensation, loss from discontinued operations, gain on debt extinguishment, pre-opening costs and certain unusual items.  As a result of the Termination Agreement, in the first quarter of 2019, the Company paid approximately $705 to Black Knight which represented the pro-rata portion of its consulting fees earned during 2018 through the Termination Date.  Additionally, the early termination of the Management Consulting Agreement by J. Alexander’s Holdings, LLC required the cash payment of $4,560 to Black Knight as a termination fee which the Company paid on January 31, 2019 using cash on hand.

Under the terms of the Termination Agreement, Black Knight had 90 days from the Termination Date to exercise its right to convert the value of the Class B units it was granted under the Management Consulting Agreement above the applicable hurdle rate to the Company’s common stock.  Since Black Knight did not exercise its conversion rights within the 90-day period, the Class B Units were cancelled and forfeited for no consideration on February 28, 2019.

Note 9 – Revenue

The following table presents the Company’s revenues disaggregated by revenue source for the periods presented:

The Company recognized revenue associated with gift cards redeemed by guests of $379 and $914 during the quarters ended June 28, 2020 and June 30, 2019, respectively, and $1,813 and $2,429 during the six-month periods ended June 28, 2020 and June 30, 2019, respectively. Further, of the amounts that were redeemed during the six-month periods ended June 28, 2020 and June 30, 2019, $1,484 and $1,842, respectively, were recorded within unearned revenue at the beginning of each of the respective fiscal years.  Unearned revenue increased by $412 and $735 during the quarters ended June 28, 2020 and June 30, 2019, respectively, and by $953 and $1,347 during the six-month periods ended June 28, 2020 and June 30, 2019, respectively, as a result of gift cards sold.

Note 10 – Leases

The Company adopted ASC Topic 842, Leases, as of the first day of fiscal year 2019, December 31, 2018, electing the optional transition method to apply the standard as of the effective date. Accordingly, the Company recorded a cumulative-effect adjustment to opening retained earnings for the impairment of an abandoned right-of-use (“ROU”) asset at the effective date for a restaurant that was previously impaired and the remaining lease payments were accounted for under ASC Topic 420, Exit or Disposal Obligations, as shown in the Condensed Consolidated Statement of Shareholders’ Equity.  Additionally, the adoption of Topic 842 had a material impact on the Company’s assets and liabilities as a result of the recognition of operating lease ROU assets and lease liabilities on its Condensed Consolidated Balance Sheets. The adoption of Topic 842 did not have a material effect on the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income and Condensed Consolidated Statements of Cash Flows.

During the first half of 2020, the Company took possession of the new restaurant location in San Antonio, Texas, the construction of which is scheduled to be completed during the fourth quarter of 2020. However, due to the current restrictions associated with the COVID-19 pandemic in Texas, coupled with the lead time associated with preparing a new location for opening, the Company has scheduled this restaurant to open in the first quarter of fiscal year 2021. The Company recorded a ROU asset in exchange for a new lease liability of $4,515. Further, the Company entered into a lease for a new restaurant location in Madison, Alabama, which it anticipates will also open during fiscal year 2021 but for which it has not yet taken possession.  Each of these leases include a lease term, including option periods, of 30 years.

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The Company modified an existing lease related to its Stoney River Annapolis location during the first quarter of 2020, which included changes to the length of the lease’s option periods.  However, the total number of years between the two option periods remained the same, and the modification did not extend the total lease period beyond that which was agreed upon in the original lease.  While base rental payments remained unchanged, the breakpoint and percentages applicable to percentage rental payments were modified should the restaurant’s sales exceed such thresholds.  The amendment also provided for a lease incentive payment of $527 contingent upon certain conditions which were met by the Company. The lease incentive payment was recorded as a reduction to the ROU asset during the first quarter of 2020 and received in the second quarter of 2020.  As a result of the modification, the Company updated the incremental borrowing rate associated with the lease as of the date of the modification.

Additionally, in the second quarter of 2020, the Company modified the lease for its Redlands Grill location in Nashville to extend the upcoming renewal term of the lease to 10 years as well as adjust the rent payments that would have been made under the original lease agreement.  Pursuant to this modification, the Company also adjusted the incremental borrowing rate associated with the lease.

In the second quarter of 2020, the Company was granted COVID-19-related rent concessions for one of its locations in the form of rent abatement. Because the lease term of this location was also extended, the Company has elected to treat this concession as a lease modification, including updating the incremental borrowing rate, taking into consideration the recent guidance issued by the FASB in its Staff question-and-answer document regarding rent concessions related to the effects of the COVID-19 pandemic. The Company continues to have discussions and negotiations are ongoing with its landlords regarding future rent concessions.

The cash paid during the second quarter and first half of 2020 for amounts included in the measurement of lease liabilities totaled $2,208 and $4,427, respectively.

Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows:

(1)  Excluding the 26 weeks ended June 28, 2020

(2) Amount necessary to reduce net minimum lease payments to present value calculated using our incremental borrowing rates, which are consistent with the lease terms at adoption date (for those leases in existence as of the adoption date of Topic 842) or lease inception or modification date (for those leases entered into or modified after the adoption date).

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

Cautionary Statement Regarding Forward-Looking Statements

J. Alexander’s Holdings, Inc. (also referred to herein as the “Company”, “we”, “us” or “our”) cautions that certain information contained or incorporated by reference in this report and our other filings with the United States Securities and Exchange Commission (the “SEC”), in our press releases and in statements made by or with the approval of authorized personnel is forward-looking information that involves risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements contained herein. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business.  Forward-looking statements are typically identified by words or phrases such as “may,” “will,” “would,” “can,” “should,” “likely,” “anticipate,” “potential,” “estimate,” “pro forma,” “continue,” “expect,” “project,” “intend,” “seek,” “plan,” “believe,” “target,” “outlook,” “forecast,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.  Forward-looking statements include all statements that do not relate solely to historical or current facts, including statements regarding our expectations, intentions or strategies and regarding the future, including the impact of the novel coronavirus (“COVID-19”) pandemic, reopening of the Company’s restaurants, the Company’s cash burn rate, cost containment efforts, new restaurant openings and the Company’s plans to continue its review of strategic alternatives.  We expressly disclaim any intent or obligation to update these forward-looking statements.  Other risks, uncertainties and factors which could affect actual results include, but are not limited to:

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These factors should not be construed as exhaustive and should be read with the other cautionary statements in the 2019 Annual Report and this report.  While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results including the economic impact of the ongoing COVID-19 pandemic.  Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in the 2019 Annual Report, in subsequent filings and in Part II, Item 1A. Risk Factors of this report.  All forward-looking statements are expressly qualified in their entirety by these cautionary statements.  You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.  Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. We expressly disclaim any intent or obligation to update these forward-looking statements.

Dollar amounts within this Management’s Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands except for average weekly sales per restaurant, average weekly same store sales per restaurant and average check per guest.

Overview

The Company, as the sole managing member of its subsidiary J. Alexander’s Holdings, LLC, owns and operates complementary upscale dining restaurants including: J. Alexander’s, Redlands Grill, Overland Park Grill, Merus Grill and Stoney River Steakhouse and Grill (“Stoney River”).  For more than 29 years, J. Alexander’s guests have enjoyed a contemporary American menu, polished service and an attractive ambiance. In February 2013, our team brought our quality and professionalism to the steakhouse category with the addition of the Stoney River concept.  Stoney River provides “white tablecloth” service and food quality in a casual atmosphere at a competitive price. Our Redlands Grill concept offers guests a different version of our contemporary American menu and a distinct architectural design and feel. In 2018, we successfully converted one of our previous J. Alexander’s locations in Kansas to the Overland Park Grill.  In 2019, we opened Merus Grill in Houston, Texas.  Each of these locations offers a contemporary American menu.

During the second quarter of 2020, the Company made the decision not to reopen the Lyndhurst Grill location in Cleveland, Ohio, after a review of its projected and historical financial performance. This location was required to be closed in mid-March 2020 due to COVID-19 related traffic limitations unique to that specific restaurant and remained closed.  

Our business plan has evolved over time to include a collection of restaurants dedicated to providing guests with what we believe to be the highest quality food, high levels of professional service and a comfortable ambiance.  By offering multiple restaurant concepts and utilizing unique non-standardized architecture and specialized menus, we believe we are positioned to continue to scale and grow our overall restaurant business in an efficient manner in urban and affluent suburban areas.  We want each of our restaurants to be perceived by our guests as a locally managed, stand-alone dining experience.  This differentiation permits us to successfully operate multiple restaurants in the same geographic market.  If this strategy continues to prove successful, we may expand beyond our current existing concepts in the future. While each restaurant concept operates under a unique trade name, each of our restaurants is identified as a “J. Alexander’s Holdings Restaurant.”

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We believe our restaurants deliver on our guests’ desire for freshly-prepared, high-quality food and exemplary service in a restaurant with architecture and design that varies from location to location.  Through our combination with Stoney River and opening new restaurants, we have grown from 33 restaurants across 13 states in 2012 to 46 restaurants across 16 states as of August 6, 2020.  Our financial performance has allowed us to invest significant amounts of capital to drive growth through the continuous improvement of existing locations, the development of plans to open new restaurants, and the hiring of personnel to support our growth plans.  

We plan to execute the following strategies to continue to enhance the awareness of our restaurants, grow our sales and improve our profitability by:

The most recent restaurant openings include a Merus Grill in Houston, Texas, during November 2019 and a Stoney River restaurant in Troy, Michigan, during October 2018.  Additionally, the Company announced the signing of two leases to open a new Redlands Grill in San Antonio, Texas, and a new J. Alexander’s restaurant in Madison, Alabama.  The Company is currently constructing the new Redlands Grill which is scheduled to be completed before the holiday season of 2020.  However, due to the current restrictions associated with the COVID-19 pandemic in Texas, coupled with the lead time associated with preparing a new location for opening, the Company has scheduled this restaurant to open in the first quarter of fiscal year 2021. The J. Alexander’s restaurant in Madison, Alabama, is also slated to begin operations in 2021.  The opening of the Madison, Alabama, location has been delayed from its previously anticipated opening in 2020 due to the Company’s decision to limit capital expenditures in response to COVID-19.  Our restaurants often have a slower ramp up than many other restaurant groups due to our reliance on repeat business from a relatively small group of guests within each market.  Having opened seven restaurants since the beginning of 2016, all of which are at different stages of maturity, our near-term focus will be on building guest traffic and sales at certain of the newer locations while we continue to evaluate promising opportunities for new restaurant development as well as react to the impact of COVID-19 on our liquidity and restaurant performance in the near‑term.

The locations that have been transitioned from a J. Alexander’s restaurant to a Redlands Grill, Lyndhurst Grill (now closed) or Overland Park Grill restaurant or opened as a Merus Grill restaurant have been included in the J. Alexander’s results of operations, average weekly same store sales calculations and all other applicable disclosures, and are collectively referred to herein as “J. Alexander’s / Grill” restaurants.

Recent Developments and Trends Impacting our Business

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the United States declared it a national public health emergency.  Since March 2020, we have experienced substantial disruptions in our operations including, but not limited to, temporary restaurant closings, reopening of restaurants at limited capacity, suggested and mandated social distancing and stay-at-home orders, limited staffing and to-go only service in our restaurants. Despite the fact that all of our locations’ dining rooms have been allowed to reopen during the second quarter, the Company continues to be impacted by governmental orders that restrict capacity in its restaurants.  Each of these factors have limited our ability to generate revenue impacting results from operations and cash flows during the first half of 2020, and may continue to do so for an extended period of time depending on the length of the pandemic and how significantly it affects the economy. There is significant uncertainty concerning consumer behavior, including guests’ propensity to spend disposable income or changes in consumer habits due to fear of contracting the virus in public or as a result of unemployment. Governmental mandates required the Company to keep its dining rooms closed for a significant portion of the second quarter with reopening dates varying by state or local municipality. Further, we expect that most, if not all, of our restaurants will operate on a limited-capacity basis for the balance of the third quarter in response to orders issued by government officials in an effort to limit the spread of COVID-19. The Company is also closely monitoring the impact of the pandemic on all aspects of its business, including on guests, employees, suppliers, vendors, landlords, distribution channels and other business partners.

As a result of factors noted above, the Company has taken steps to modify its operations, where necessary, for a limited period of time, including pivoting to a carry-out model as a means of generating revenue and cash flow and reopening dining rooms at a limited capacity in compliance with state and local government guidelines. We have made employee and guest health and safety our first priority as we serve our guests during these uncertain times.  We have provided personal protective equipment, such as masks, gloves and hand sanitizer to our team members, and we are checking employee temperatures daily. We are also observing social

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distancing requirements and routinely sanitizing high-touch surface areas in our restaurants. We have sought to develop menus that are friendly to an off-premise model providing guests with appetizers, salads, entrées, sides, wine, family meal kits that can be prepared at home and “butcher shop” style beef offerings at select restaurants. We have also implemented an online ordering platform to allow for ease of ordering and increase off-premises sales.  We have implemented contactless menus in all of our dining rooms and will be piloting contactless payments at certain locations in 2020. Restaurant and corporate management have evaluated, and continue to evaluate, ways to curtail spending including an ongoing review of operations to maximize efficiency, adjusting restaurant-level labor and reducing purchases of inventory to align with new levels of demand, limiting discretionary operating expenses including business travel, suspending all non-essential capital expenditures, and negotiating the deferral of new restaurant capital expenditures with contractors in addition to certain rent, insurance, tax and debt payments where possible. We have also eliminated certain positions at the Company’s corporate office during the second quarter of 2020. During the first quarter of 2020, we made the difficult decision to furlough restaurant employees that were not able to assist with the Company’s carry-out program, but have brought some of these employees back to their restaurant during the reopening process at a volume warranted by the allowed dine-in capacity, as applicable, until normal staffing levels can resume. Additionally, the Company has held, and will continue to engage in, discussions with its lender to further enhance its liquidity including the full draw down on its available lines of credit in March 2020 as well as negotiating for modifications of these credit facilities during the second quarter of 2020 in order to make additional funds available for operations. See the discussion contained in “Liquidity and Capital Resources – Credit Facility” below for additional information. Similarly, we have been in discussions with many of our landlords to pursue rent concessions for the remainder of the fiscal year in order to defer or abate rent payments in order to conserve cash. The remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses a number of ways our business has been impacted by COVID-19.

Performance Indicators

We use the following key metrics in evaluating our performance:

Same Store Sales.  We include a restaurant in the same store restaurant group starting in the first full accounting period following the 18^th month of operations.  Our same store restaurant base consisted of 45 restaurants at June 28, 2020.  Changes in same store restaurant sales reflect changes in sales for the same store group of restaurants over a specified period of time.  This measure highlights the performance of existing restaurants, as the impact of new restaurant openings and closed locations is excluded.

Measuring our same store restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact same store sales including:

Average Weekly Sales.  Average weekly sales per restaurant is computed by dividing total restaurant sales for the period by the total number of days all restaurants were open for the period to obtain a daily sales average.  The daily sales average is then multiplied by seven to arrive at average weekly sales per restaurant.  Days on which restaurants are closed for business for any reason other than scheduled closures on Thanksgiving and Christmas are excluded from this calculation.  Revenue associated with reduction in liabilities for gift cards which are not redeemed, commonly referred to as gift card breakage, is not included in the calculation of average weekly sales per restaurant.

Average Weekly Same Store Sales.  Average weekly same store sales per restaurant is computed by dividing total restaurant same store sales for the period by the total number of days all same store restaurants were open for the period to obtain a daily sales average.  The daily same store sales average is then multiplied by seven to arrive at average weekly same store sales per restaurant.  Days on which restaurants are closed for business for any reason other than scheduled closures on Thanksgiving and Christmas are excluded from this calculation.  Sales and sales days used in this calculation include only those for restaurants in operation at the end of the period which have been open for more than 18 months.  Gift card breakage is not included in the calculation of average weekly same store sales per restaurant.

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Average Check.  Average check is calculated by dividing total restaurant sales by guest counts for a given time period.  Total restaurant sales include food, alcohol and beverage sales. Average check is influenced by menu prices and menu mix.  Management uses this indicator to analyze trends in guests’ preferences, the effectiveness of menu changes and price increases on per guest expenditures.

Average Unit Volume.  Average unit volume consists of the average sales of our restaurants over a certain period of time.  This measure is calculated by multiplying average weekly sales by the relevant number of weeks for the period presented.  This indicator assists management in measuring changes in guest traffic, guest spending patterns, pricing and development of our concepts.

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

Key Financial Definitions

Net Sales.  Net sales consist primarily of food and beverage sales at our restaurants, net of any discounts, such as management meals and employee meals, associated with each sale.  Net sales are directly influenced by the number of operating weeks in the relevant period, the number of restaurants we operate and same store sales growth.  Gift card breakage is also included in net sales.

Cost of Sales.  Cost of sales is comprised primarily of food and beverage expenses and is presented net of earned vendor rebates.  Food and beverage expenses are generally influenced by the cost of food and beverage items, distribution costs and menu mix.  The components of cost of sales are variable in nature, increase with revenues, are subject to increases or decreases based on fluctuations in commodity costs, including beef prices, and depend in part on the controls we have in place to manage cost of sales at our restaurants.

Restaurant Labor and Related Costs.  Restaurant labor and related costs includes restaurant management salaries, hourly staff payroll and other payroll-related expenses, including management bonus expenses, vacation pay, payroll taxes, emergency sick leave pay, fringe benefits and health insurance expenses.

Depreciation and Amortization.  Depreciation and amortization principally includes depreciation on restaurant fixed assets, including equipment and leasehold improvements, and amortization of certain intangible assets for restaurants.  We depreciate capitalized leasehold improvements over the shorter of the total expected lease term or their estimated useful life.  As we open additional restaurants, depreciation and amortization is expected to increase as a result of our increased capital expenditures.

Other Operating Expenses.  Other operating expenses includes china and supplies, laundry and linens, repairs and maintenance, credit card fees, rent, property taxes, insurance, utilities, operating supplies and other restaurant-level related operating expenses.

Pre-opening Expense.  Pre-opening expense consists of expenses incurred prior to opening a new restaurant and include principally manager salaries and relocation costs, payroll and related costs for training new employees, travel and lodging expenses for employees who assist with training new employees, and the cost of food and other expenses associated with practice of food preparation and service activities.  Pre-opening expense also includes rent expense for leased properties for the period of time between taking control of the property and the opening of the restaurant.  

General and Administrative Expenses.  General and administrative expenses consist of costs related to certain corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future company growth.  These expenses reflect management, supervisory and staff salaries and employee benefits, non-cash share-based compensation. travel, information systems, training, corporate rent, depreciation of corporate assets, professional and consulting fees, technology and market research.  These expenses have increased as a result of costs associated with being a public company, and we believe such expenses will continue to increase related to our anticipated growth. However, as we are able to leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of net sales over time.

Interest Expense.  Interest expense consists primarily of interest on our outstanding indebtedness.  Our debt issuance costs are recorded at cost and are amortized over the lives of the related debt.

Income Tax (Expense) Benefit.  This represents tax expense or benefit related to the taxable income at the federal, state and local level.

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Discontinued Operations.  We remain a party to a lease for a restaurant that closed in 2013 which we determined met the criteria for classification as discontinued operations.  Expenses related to continuing obligations under this lease agreement are recognized as discontinued operations, net.

Seasonality

Our business is subject to seasonal fluctuations.  Historically, the percentage of our annual revenues earned during the first and fourth quarters has been higher due, in part, to increased gift card redemptions, guest traffic and private dining during the year-end holiday season.  In addition, we operate on a 52-week or 53-week fiscal year that ends on the Sunday closest to December 31^st. Each quarterly period includes 13 weeks of operations, except for a 53-week year when the fourth quarter has 14 weeks of operations.  Fiscal year 2020 is a 53-week year. As many of our operating expenses have a fixed component, our operating income and operating income margins have historically varied from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter, or for the full fiscal year.

Results of Operations

The following tables set forth, for the periods indicated, (i) the items in the Company’s Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, including our results expressed as a percentage of net sales, and (ii) other selected operating data: