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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 4, 2021

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

For the transition period from ________ to ________.

Commission file number: 1-37473

J. Alexander’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

Tennessee		47-1608715
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3401 West End Avenue, Suite 260 P.O. Box 24300
Nashville, Tennessee		37202
(Address of principal executive offices)		(Zip Code)

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

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


Title of each class	Trading Symbol	Name of exchange on which registered
Common Stock, par value $0.001 per share	JAX	New York Stock Exchange

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.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☑	Smaller reporting company	☑

Emerging growth company	☐

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

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

As of August 17, 2021, 15,079,893 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements (Unaudited)		3

Condensed Consolidated Balance Sheets		3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)		4

Condensed Consolidated Statements of Stockholders’ Equity		5

Condensed Consolidated Statements of Cash Flows		6

Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		30

Item 4. Controls and Procedures		31

PART II. OTHER INFORMATION		32

Item 1. Legal Proceedings		32

Item 1A. Risk Factors		32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32

Item 3. Defaults Upon Senior Securities		33

Item 4. Mine Safety Disclosures		33

Item 5. Other Information		33

Item 6. Exhibits		34

SIGNATURES		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share and per share amounts)

	July 4,		January 3,
	2021		2021
Assets
Current assets:
Cash and cash equivalents	$	22,611	$	12,363
Accounts and other receivables		9,094		8,756
Inventories		3,017		2,538
Prepaid expenses and other current assets		2,563		2,105
Total current assets		37,285		25,762
Other assets		6,583		6,195
Property and equipment, at cost, less accumulated depreciation and amortization of $80,970 and $75,327 as of July 4, 2021 and January 3, 2021, respectively		99,422		102,188
Right-of-use lease assets, net		73,030		72,515
Tradename and other indefinite-lived assets		25,648		25,648
Deferred income taxes, net		5,738		4,627
Deferred charges, less accumulated amortization of $413 and $392 as of July 4, 2021 and January 3, 2021, respectively		163		184
Total assets	$	247,869	$	237,119

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	7,631	$	5,147
Accrued expenses and other current liabilities		13,981		9,422
Unearned revenue		2,905		3,761
Current portion of long-term debt		1,667		1,667
Current portion of lease liabilities		5,000		5,428
Total current liabilities		31,184		25,425
Long-term debt, net of portion classified as current and deferred loan costs		11,000		12,746
Long-term lease liabilities		78,960		78,968
Deferred compensation obligations		8,255		7,973
Other long-term liabilities		1,892		1,902
Total liabilities		131,291		127,014
Stockholders' equity:
Common stock, par value $0.001 per share: authorized 30,000,000 shares; issued and outstanding of 15,090,077 and 15,070,077 shares as of July 4, 2021 and January 3, 2021, respectively		15		15
Preferred stock, par value $0.001 per share: authorized 10,000,000 shares; no shares issued and outstanding as of July 4, 2021 or January 3, 2021		-		-
Additional paid-in capital		106,745		105,915
Retained earnings		8,260		2,617
Total stockholders' equity attributable to J. Alexander's Holdings, Inc.		115,020		108,547
Non-controlling interests		1,558		1,558
Total stockholders' equity		116,578		110,105
Commitments and contingencies
Total liabilities and stockholders' equity	$	247,869	$	237,119

See accompanying Notes to Condensed Consolidated Financial Statements.

J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited in thousands, except per share amounts)

	Quarter Ended						Six Months Ended
	July 4,			June 28,			July 4,			June 28,
	2021			2020			2021			2020
Net sales	$	68,101		$	27,602		$	125,476		$	84,574
Costs and expenses:
Food and beverage costs		22,899			10,471			39,986			29,038
Restaurant labor and related costs		19,046			12,554			35,721			32,892
Depreciation and amortization of restaurant property and equipment		2,988			3,060			5,871			6,154
Other operating expenses		13,479			8,536			25,201			20,490
Total restaurant operating expenses		58,412			34,621			106,779			88,574
Transaction and other related expenses		1,888			(66	)		1,934			623
General and administrative expenses		5,442			4,095			10,595			8,835
Goodwill impairment		-			-			-			15,737
Long-lived asset impairment charges and restaurant closing costs		(1	)		178			2			867
Pre-opening expenses		71			72			516			91
Total operating expenses		65,812			38,900			119,826			114,727
Operating income (loss)		2,289			(11,298	)		5,650			(30,153	)
Other (expense) income:
Interest expense		(141	)		(189	)		(294	)		(305	)
Other, net		84			135			38			127
Total other expense		(57	)		(54	)		(256	)		(178	)
Income (loss) from continuing operations before income taxes		2,232			(11,352	)		5,394			(30,331	)
Income tax benefit (expense)		24			4,419			(343	)		5,806
(Loss) income from discontinued operations, net		(3	)		(55	)		592			(107	)
Net income (loss)	$	2,253		$	(6,988	)	$	5,643		$	(24,632	)

Basic earnings (loss) per share:
Income (loss) from continuing operations, net of tax	$	0.15		$	(0.47	)	$	0.34		$	(1.67	)
(Loss) income from discontinued operations, net		(0.00	)		(0.00	)		0.04			(0.01	)
Basic earnings (loss) per share	$	0.15		$	(0.48	)	$	0.38		$	(1.68	)

Diluted earnings (loss) per share:
Income (loss) from continuing operations, net of tax	$	0.15		$	(0.47	)	$	0.34		$	(1.67	)
(Loss) income from discontinued operations, net		(0.00	)		(0.00	)		0.04			(0.01	)
Diluted earnings (loss) per share	$	0.15		$	(0.48	)	$	0.37		$	(1.68	)

Weighted-average common shares outstanding:
Basic		14,757			14,695			14,757			14,695
Diluted		15,285			14,695			15,073			14,695

Comprehensive income (loss)	$	2,253		$	(6,988	)	$	5,643		$	(24,632	)

See accompanying Notes to Condensed Consolidated Financial Statements.

Per share amounts may not sum due to rounding.

J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited in thousands, except share amounts)

	Outstanding shares		Common stock		Additional paid-in capital		Retained earnings		Non-controlling interests		Total
Balances at January 3, 2021		15,070,077	$	15	$	105,915	$	2,617	$	1,558	$	110,105
Issuance of restricted stock awards		20,000		-		-		-		-		-
Share-based compensation		-		-		412		-		-		412
Net income		-		-		-		3,390		-		3,390
Balances at April 4, 2021		15,090,077		15		106,327		6,007		1,558		113,907
Share-based compensation		-		-		418		-		-		418
Net income		-		-		-		2,253		-		2,253
Balances at July 4, 2021		15,090,077	$	15	$	106,745	$	8,260	$	1,558	$	116,578

	Outstanding shares		Common stock		Additional paid-in capital		Retained earnings			Non-controlling interests		Total
Balances at December 29, 2019		15,011,676	$	15	$	104,056	$	25,088		$	1,558	$	130,717
Share-based compensation		-		-		455		-			-		455
Net loss		-		-		-		(17,644	)		-		(17,644	)
Balances at March 29, 2020		15,011,676		15		104,511		7,444			1,558		113,528
Share-based compensation		-		-		453		-			-		453
Net loss		-		-		-		(6,988	)		-		(6,988	)
Balances at June 28, 2020		15,011,676	$	15	$	104,964	$	456		$	1,558	$	106,993

See accompanying Notes to Condensed Consolidated Financial Statements.

J. Alexander’s Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

	Six Months Ended
	July 4,			June 28,
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	5,643		$	(24,632	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		5,952			6,256
Share-based compensation expense		830			908
Asset impairment charges		-			16,426
Deferred income taxes		(1,111	)		(4,239	)
Other, net		143			122
Changes in assets and liabilities:
Accounts and other receivables		(338	)		(469	)
Prepaid expenses and other current assets		(458	)		1,524
Accounts payable		2,085			1,074
Accrued expenses and other current liabilities		4,559			(1,424	)
Lease right-of-use assets and liabilities		(951	)		714
Other assets and liabilities, net		(1,074	)		(24	)
Net cash provided by (used in) operating activities		15,280			(3,764	)

Cash flows from investing activities:
Purchase of property and equipment		(2,827	)		(3,030	)
Other investing activities		(378	)		(236	)
Net cash used in investing activities		(3,205	)		(3,266	)

Cash flows from financing activities:
Proceeds from borrowing under debt agreement		5,000			32,100
Payments on long-term debt		(6,833	)		(16,350	)
Other financing activities		6			(208	)
Net cash (used in) provided by financing activities		(1,827	)		15,542
Increase in cash and cash equivalents		10,248			8,512
Cash and cash equivalents at beginning of period		12,363			8,803
Cash and cash equivalents at end of period	$	22,611		$	17,315

Supplemental disclosures:
Property and equipment obligations accrued at beginning of period	$	879		$	1,116
Property and equipment obligations accrued at end of period		1,278			860
Cash paid for interest		277			109
Cash paid for income taxes		1,272			83

See accompanying Notes to Condensed Consolidated Financial Statements.

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 July 4, 2021 and January 3, 2021, the Company operated 47 and 46 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

(a)

Interim Financial Statements

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and the rules and regulations 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 July 4, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2022. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 18, 2021, and amended on April 29, 2021 (the “2020 Annual Report”).

Total comprehensive income (loss) is comprised solely of net income (loss) for all periods presented. There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s 2020 Annual Report.

(b)

Effects of COVID-19

The onset of the novel coronavirus (“COVID-19”) pandemic in the first quarter of 2020 resulted in significant disruption to the restaurant industry and adversely affected the Company’s business. In response to the COVID-19 pandemic, many states and local 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 COVID-19 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 entirely off-premise operations platform until late April 2020 when certain states began to allow for partial reopening of dining rooms. As a result of the government-mandated restrictions and related public health concerns, the Company’s net sales, results of operations and cash flows were negatively impacted in fiscal 2020, and the impact continued throughout the first half of 2021 due to reductions in guest counts from capacity restrictions, particularly during January and early February of 2021. Each of the Company’s 47 locations were open for in‑restaurant dining at full capacity as of the end of the second quarter of 2021 and remain fully open as of the date of this report in accordance with their state’s or local government’s guidelines. This capacity status was only reached in the final weeks of the second quarter at certain locations due to restrictions imposed by their respective state and local governments.

During the first half of 2020, the Company incurred approximately $3,275 of additional costs related primarily to the continuing benefits and payments to furloughed restaurant employees under the Company’s Emergency Sick Leave Policy (“ESLP”), vacation and other sick leave benefits and related payroll taxes as well as write-offs of inventory. During the same period of 2021, the Company incurred approximately $103 related to payments made to employees pursuant to the ESLP and other sick leave benefits and related payroll taxes. Additionally, during the first half of 2020, the Company recorded certain impairment charges which are discussed in Note 2(k) below.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. Despite the fact that vaccines are now widely available across the country, there are widespread increases in diagnosed cases reported since the end of the second quarter largely due to the spread of COVID-19 variants. There can be no assurance that state or local authorities will allow dining rooms to remain open even at reduced capacity if there is a surge in cases or variants of COVID-19 in their respective areas. The extent of the impact of the COVID-19 pandemic on our operations and financial results depends on future developments, and the Company cannot reasonably predict if all of its restaurants will be allowed to continue to operate their dining rooms at full or limited capacities. 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 these performance measures is uncertain. The Company does expect that its results of operations, cash flows and liquidity will continue to be negatively affected to some extent by the COVID-19 pandemic, either by potential future governmental restrictions or lingering impacts on the economy and the labor market, during at least a portion of the remainder of fiscal 2021.

(c)

Principles of Consolidation

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.

(d)

Fiscal Year

The Company’s fiscal year ends on the Sunday closest to December 31, and each quarter typically consists of 13 weeks. The quarters and six-month periods ended July 4, 2021 and June 28, 2020 each included 13 and 26 weeks of operations, respectively. Fiscal year 2021 will include 52 weeks of operations while fiscal year 2020 included 53 weeks of operations.

(e)

Discontinued Operations and Restaurant Closures

Losses from discontinued operations totaled $3 and $55 for the quarters ended July 4, 2021 and June 28, 2020, respectively. For the six-month periods ended July 4, 2021 and June 28, 2020, the income and loss from discontinued operations totaled $592 and $107, respectively. During the first half of 2021, the Company entered into a termination agreement related to a lease agreement for a location that was closed in 2013, which has been accounted for as a discontinued operation since that time. As a result of the termination agreement, the Company recorded a gain of approximately $630, representing the difference between recorded lease liabilities and the termination fee paid to the landlord by the Company during the first quarter of 2021. The gain was partially offset by ongoing lease and other exit costs incurred during fiscal 2021. The loss from discontinued operations recorded in the second quarter and first half of 2020 consisted solely of exit and disposal costs related to the Company’s obligations under this same lease agreement.

(f)

Transaction and other Related Expenses

Transaction and other related expenses totaled $1,888 and $(66) for the quarters ended July 4, 2021 and June 28, 2020, respectively, and $1,934 and $623 for six-month periods ended July 4, 2021 and June 28, 2020, respectively. During the second quarter of 2021, the Company incurred consulting, investment banking and legal fees related to the Company’s evaluation of strategic alternatives. In the first quarter of 2020, the Company incurred legal fees, other professional fees and consulting fees related to the same project. The Company received a discount for legal services rendered during that period resulting in income for the second quarter of fiscal 2020.

As noted below, on July 2, 2021, the Company announced that it entered into a merger agreement under which SPB Hospitality LLC (“SPB Hospitality”) will acquire the Company in an all-cash transaction valued at approximately $220,000. If the merger is consummated, the Company’s shareholders will receive $14.00 in cash per share of common stock of the Company. The merger is expected to be completed in the fourth quarter of 2021, subject to approval by the Company’s

shareholders, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as other customary closing conditions. See “Note 10 – Merger Agreement with SPB Hospitality” below for additional discussion of the merger.

(g)

Earnings (Loss) per Share

Basic earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted average number of shares outstanding for the reporting period. Diluted earnings (loss) per share of common stock is computed similarly to basic earnings (loss) per share except the weighted average shares outstanding are increased to include potential shares outstanding resulting from share-based compensation awards and additional shares from the assumed exercise of any common stock equivalents, if dilutive. In periods of net loss, no 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 earnings (loss) 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 – Earnings (Loss) per Share for the basic and diluted earnings (loss) per share calculations and additional discussion.

(h)

Non-controlling Interests

Non-controlling interests presented on the Condensed Consolidated Balance Sheets represent the portion of net assets of the Company attributable to the non-controlling J. Alexander’s Holdings, LLC Class B Unit holders. As of each of July 4, 2021 and January 3, 2021, the non-controlling interests presented on the Condensed Consolidated Balance Sheets were $1,558 and consist 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 July 4, 2021 and June 28, 2020 to determine allocations of non-controlling interests in respect of vested grants consistent with the terms of the Second Amended and Restated LLC Agreement of J. Alexander’s Holdings, LLC, and pursuant to those calculations, no allocation of net income (loss) was made to non-controlling interests for either of the quarters or six months ended July 4, 2021 or June 28, 2020.

(i)

Use of Estimates

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

(j)

Share Repurchase Program

On November 1, 2018, the Company’s Board of Directors authorized a share repurchase program which replaced the previous share repurchase program that expired on October 29, 2018, and allows for the repurchase of shares up to an aggregate purchase price of $15,000 over the three-year period ending November 1, 2021. Any share repurchases under the current program are expected to be made solely from cash on hand and available operating cash flow. Repurchases will be made in accordance with applicable securities laws and may be made from time to time in the open market. The timing, prices and amount of repurchases will depend upon prevailing market prices, general economic and market conditions and other considerations. The repurchase program does not obligate the Company to acquire any particular amount of stock. There was no common stock repurchase activity under the program during the second quarters or first halves of 2021 or 2020.

(k)

Goodwill Impairment and Long-lived Asset Impairment Charges

As a result of the decline in the market price of the Company’s common stock that occurred during the first quarter of 2020, the impact of mandated dining room closures on financial results last year, the severe reduction in economic activity that followed, and the general economic and market volatility at the time, the Company determined that these factors constituted an interim triggering event as of the end of the Company’s first quarter 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, which included $15,737 related to the full impairment of the carrying amount of goodwill. The goodwill impairment charge is presented as a separate line on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Additionally, during the first half of 2020, the Company recorded a long-lived asset impairment charge of $689 related to one location which was subsequently closed and sold during fiscal 2020. This impairment charge is presented as “Long-lived asset impairment charges and restaurant closing costs” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company assessed its remaining intangible and fixed assets for indicators of impairment as of quarter-end, for both July 4, 2021 and June 28, 2020, and assessed recoverability of certain fixed assets as warranted. No impairment was recorded for either of these periods.

Note 3 – Earnings (Loss) per Share

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

	Quarter Ended						Six Months Ended
(Dollars and shares in thousands, except per share amounts)	July 4,			June 28,			July 4,		June 28,
	2021			2020			2021		2020
Numerator:
Income (loss) from continuing operations, net of tax	$	2,256		$	(6,933	)	$	5,051	$	(24,525	)
Income (loss) from discontinued operations, net		(3	)		(55	)		592		(107	)
Net income (loss)	$	2,253		$	(6,988	)	$	5,643	$	(24,632	)
Denominator:
Weighted average shares (denominator for basic earnings (loss) per share)		14,757			14,695			14,757		14,695
Effect of dilutive securities		528			-			316		-
Adjusted weighted average shares and assumed conversions (denominator for diluted earnings (loss) per share)		15,285			14,695			15,073		14,695

Basic earnings (loss) per share:
Income (loss) from continuing operations, net of tax	$	0.15		$	(0.47	)	$	0.34	$	(1.67	)
Income (loss) from discontinued operations, net		(0.00	)		(0.00	)		0.04		(0.01	)
Basic earnings (loss) per share	$	0.15		$	(0.48	)	$	0.38	$	(1.68	)
Diluted earnings (loss) per share:
Income (loss) from continuing operations, net of tax	$	0.15		$	(0.47	)	$	0.34	$	(1.67	)
Income (loss) from discontinued operations, net		(0.00	)		(0.00	)		0.04		(0.01	)
Diluted earnings (loss) per share	$	0.15		$	(0.48	)	$	0.37	$	(1.68	)

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

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

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 dilutive for the quarter and six-month period ended July 4, 2021, and the impact on the number of weighted average shares in the diluted earnings per share calculation was 127,664 and 63,832, respectively.

The number of additional shares of common stock related to stock option awards is calculated using the treasury stock method, if dilutive. There were 1,739,250 and 1,495,750 stock option awards outstanding as of July 4, 2021 and June 28, 2020, respectively. The dilutive impact of the awards outstanding as of July 4, 2021 on the number of weighted average shares in the diluted earnings per share calculation was 282,200 and 169,164 for the quarter and six-month period ended July 4, 2021, respectively.

As of July 4, 2021 and June 28, 2020, there were 281,003 and 264,000 unvested restricted share awards outstanding, respectively, which were subject to only a service condition. All unvested restricted share awards outstanding as of July 4, 2021 were considered dilutive for the second quarter and six-month period then ended, and the impact on the number of weighted average shares in the diluted earnings per share calculation was 118,601 and 83,038, respectively.

As of July 4, 2021 and June 28, 2020, there were 52,500 performance share awards outstanding. The performance condition associated with such awards had not been met at either July 4, 2021 or June 28, 2020, and, therefore, the portion of the awards that had satisfied the applicable service condition as of these dates was excluded from the weighted average shares outstanding for basic earnings (loss) per share calculations. These awards also did not impact the diluted earnings per share calculation since the performance condition has not yet been satisfied.

Note 4 – Income Taxes

The interim tax provision for the quarter and six-month period ended July 4, 2021 was prepared on an estimated annual effective rate basis while the interim tax provision for the quarter and six-month period ended June 28, 2020 was prepared on an actual effective tax rate basis. The Company recognized income tax expense of $343 and income tax benefit of $5,806 for the six-month periods ended July 4, 2021 and June 28, 2020, respectively. The net effective tax rate (including the impact of discrete items) for the first six months of 2021 was 5.7%. The factors that caused the net effective tax rate to vary from the federal statutory rate of 21% for the six-month period ended July 4, 2021 primarily related to the impact of the Federal Insurance Contribution Act (“FICA”) tip credit offset by state income taxes and discrete items primarily related to return to provision adjustments. The net effective tax rate for the first half of 2020 was 19.1%. 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 FICA tip credit, state income taxes, the anticipated carryback of the net operating losses (“NOLs”) generated during 2020 to prior years, including the impact of the correction of the qualified improvement property (“QIP”) regulations on the anticipated carryback and other items.

Note 5 – Commitments and Contingencies

(a)

Contingent Leases

As a result of the disposition of the Company’s predecessor’s Wendy’s operations in 1996, subsidiaries of the Company may remain secondarily liable for certain real property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these four leases at July 4, 2021 was approximately $859. 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 one real property lease. The total estimated amount of lease payments remaining on this lease at July 4, 2021 was approximately $215. There have been no payments by subsidiaries of the Company of such contingent liabilities in the history of the Company. Management believes the likelihood of any significant loss is remote.

(b)

Tax Contingencies

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.

(c)

Litigation Contingencies

The Company and its subsidiaries are defendants from time to time in various claims or legal proceedings arising in the ordinary course of business, including claims relating to workers’ compensation matters, labor-related claims, discrimination and similar matters, claims resulting from guest accidents while visiting a restaurant, claims relating to lease and contractual obligations, federal and state tax matters, and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns, and injury or wrongful death under “dram shop” laws that allow a person to sue the Company 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 July 4, 2021 and January 3, 2021, 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).

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As discussed in Note 2(k) 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 one restaurant location (Level 3) that management determined would be permanently closed 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. No 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 quarter 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 of goodwill was $0 (Level 3) and the impaired restaurant location was sold during the third quarter of 2020. There were no non-financial assets measured at fair value on a non‑recurring basis as of July 4, 2021 or January 3, 2021.

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:

	July 4, 2021
	Level 1		Level 2		Level 3
Cash and cash equivalents *	$	110	$	-	$	-
U.S. government obligations *		189		-		-
Corporate bonds *		2,226		-		-
Mutual and money market funds **		1,672		-		-
Total	$	4,197	$	-	$	-

	January 3, 2021
	Level 1		Level 2		Level 3
Cash and cash equivalents *	$	81	$	-	$	-
U.S. government obligations *		276		-		-
Corporate bonds *		2,241		-		-
Mutual and money market funds **		1,222		-		-
Total	$	3,820	$	-	$	-

* - As held in the Trust (as defined below).
** - As held in the 409a Trust (as defined below).

Cash and cash equivalents are classified as Level 1 of the fair value hierarchy as they represent cash held in a rabbi trust established under a retirement benefit arrangement with certain of the Company’s 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 considered to be trading securities and are classified as Level 1 of the fair value hierarchy given their readily available quoted prices in active markets.

At July 4, 2021 and January 3, 2021, the Company held investments in mutual and money market funds classified as trading securities that were also held in a rabbi trust (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).

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 Income (Loss). 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 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 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, amending the interim-period accounting for enacted changes in tax law and amending the requirements related to the accounting for “hybrid” tax regimes. 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 adopted this guidance at the beginning of fiscal year 2021, and it did not have a significant impact on its unaudited Condensed Consolidated Financial Statements and related disclosures.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarified the guidance issued in March 2020, ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These updates provide 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 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 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 must be applied prospectively for all eligible contract modifications for that ASC topic. The Company continues to assess the potential impact of the amendments on its unaudited Condensed Consolidated Financial Statements and related disclosures and has not adopted any of the transition relief available under the new guidance as of July 4, 2021.

Note 8 – Net Sales

The following table presents the Company’s net sales disaggregated by source for the periods presented:

	Quarter Ended				Six Months Ended
	July 4,		June 28,		July 4,		June 28,
	2021		2020		2021		2020
Restaurant	$	67,998	$	27,544	$	125,126	$	84,288
Gift card breakage		103		58		350		286
Net sales	$	68,101	$	27,602	$	125,476	$	84,574

The Company recognized revenue associated with gift cards redeemed by guests of $865 and $379 during the quarters ended July 4, 2021 and June 28, 2020, respectively, and $1,924 and $1,813 during the six-month periods ended July 4, 2021 and June 28, 2020, respectively. Further, of the amounts that were redeemed during the six-month periods ended July 4, 2021 and June 28, 2020, $1,340 and $1,484, respectively, were recorded within unearned revenue at the beginning of each respective fiscal year. Unearned revenue increased by $847 and $412 during the quarters ended July 4, 2021 and June 28, 2020, respectively, and by $1,418 and $953 during the six-month periods ended July 4, 2021 and June 28, 2020, respectively, as a result of gift cards sold.

Note 9 – Leases

As of July 4, 2021, the Company was party to 30 separate operating leases for real estate under which it currently operates its restaurants and has its corporate office space. The Company commenced operations at its new Redlands Grill location in San Antonio, Texas, on March 29, 2021. Additionally, the Company took possession of a new restaurant property during the first half of 2021, which is currently under construction in Madison, Alabama, and the J. Alexander’s location is slated to open in early 2022. As a result, the Company recorded a ROU asset in exchange for a new lease liability of $2,683 in the first half of 2021. Further, in the first half of 2021, the Company entered into a termination agreement for a lease to which it remained a party for a previously closed location. This lease was originally set to expire in August 2023, and, as a result of the termination agreement, the Company derecognized the remaining liability associated with this lease totaling $1,196. The Company is also party to one equipment operating lease.

The Company modified certain of its leases during fiscal year 2020 for matters unrelated to the COVID-19 pandemic and updated the ROU assets, lease liabilities and related incremental borrowing rates as required.

During fiscal year 2020, the Company was granted COVID-19 related rent concessions for certain of its restaurant locations and for its corporate office. The Company elected to account for lease concessions resulting directly from COVID-19 as though the enforceable rights and obligations to the concessions existed in the respective agreements at lease inception and did not account for the

concessions as lease modifications, unless the concession resulted in a substantial increase in the Company’s obligations, taking into consideration the 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 cash paid during the first half of 2021 for amounts included in the measurement of lease liabilities totaled $5,458.

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

	July 4,
	2021
2021 ⁽¹⁾	$	4,850
2022		9,391
2023		9,560
2024		9,547
2025		8,863
2026 and thereafter		92,958
Total minimum lease payments		135,169
Less: Imputed interest ⁽²⁾		51,209
Present value of lease liabilities	$	83,960

(1) Excluding the 26 weeks ended July 4, 2021.

(2) Amount necessary to reduce net minimum lease payments to present value calculated using the Company’s 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).

Note 10 – Merger Agreement with SPB Hospitality

On July 2, 2021, the Company announced that it entered into a merger agreement under which SPB Hospitality will acquire the Company in an all-cash transaction valued at approximately $220,000. If the merger is consummated, the Company’s shareholders will receive $14.00 in cash per share of common stock of the Company.

Certain of the Company’s officers, directors and shareholders including Newport Global Opportunities Fund I-A LP and Ancora Holdings LLC, holding, in the aggregate, as of July 1, 2021, over 20% of the outstanding shares of Company common stock, entered into voting agreements with SPB Hospitality pursuant to which they agreed, among other things, to vote their respective shares of Company common stock in favor of the merger.

The merger was approved by the Company’s Board of Directors following a review of a wide range of strategic alternatives, which was first announced in August 2019, and continued in 2020 (until the onset of the COVID-19 pandemic) and 2021. The merger is expected to be completed in the fourth quarter of 2021, subject to approval by the Company’s shareholders, expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as other customary closing conditions.

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 (including variant strains of COVID-19) on our operations, operating the Company’s restaurants at increased capacities, consumer demand, the Company’s sales, off-premise sales, cash position, cost containment efforts, liquidity, input costs, results of operations, new restaurant openings and the proposed merger (the “Merger”) with SPB Hospitality LLC (“SPB Hospitality”). 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:

•

the health and financial effects of the COVID-19 pandemic (including variant strains of COVID-19);

•

our ability to keep our restaurants open for in-person dining, and to reestablish and maintain satisfactory guest count levels and maintain or increase sales and operating margins in our restaurants under varying economic conditions;

•

the impact of surges in positive COVID-19 cases and new variant strains of COVID-19 on our operations, including potential future governmental mandates that could result in restaurant closures or suspension of or capacity restrictions on dine-in services and our ability to staff our restaurants while adhering to health guidelines;

•

the effect of higher commodity prices, unemployment and other economic factors on consumer demand as a result of COVID-19 or otherwise;

•

increases in food input costs or product/supply shortages and our response to them, including those related to COVID-19;

•

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

•

our ability to comply with financial covenants under our loan agreement and to borrow available amounts under our lines of credit;

•

the timing and likelihood of, and any conditions or requirements imposed in connection with, obtaining required shareholder or regulatory approval of the Merger;

•

delay in closing the Merger or the possibility of non-consummation of the Merger, including due to litigation related to the Merger, or the occurrence of any event that could give rise to termination of the Merger Agreement;

•

the risk that the Company will be unable to retain or hire key personnel due to the pendency of the Merger;

•

the risk that disruption from the Merger may adversely affect the Company’s business and its relationships with customers, suppliers or employees;

•

the impact of pandemics, such as outbreaks of viruses, foodborne illnesses or other diseases;

•

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

•

our ability to open new restaurants and operate them profitably, including our ability to locate and secure appropriate sites for restaurant locations, obtain favorable lease terms, attract guests to our restaurants or hire and retain personnel;

•

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

•

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

•

our ability to increase sales and improve operating margins at our existing restaurants;

•

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

•

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

•

the impact of economic downturns, volatile retail area traffic patterns or other disruptions in markets in which we have revenue or geographic concentrations within our restaurant base;

•

our expectations regarding the seasonality of our business;

•

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

•

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

•

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

•

the impact of changes in new information and attitudes regarding health and diets;

•

the impact of increases in the price of, and/or reductions in the availability of, commodities, particularly beef and other supply chain items such as carry-out packaging;

•

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

•

our ability to utilize and manage social media;

•

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

•

our expectations regarding litigation or other legal proceedings or claims;

•

our ability to enforce our intellectual property rights;

•

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

•

operating and financial restrictions and borrowing available under our loan agreement, our level of indebtedness and any future indebtedness;

•

the impact of any future impairment of our long-lived assets, including tradenames;

•

the impact of store closures, decreased business levels and property damage related to civil disturbances;

•

factors that are under the control of third parties, including governmental agencies; and

•

the other matters found under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” discussed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021 filed with the SEC on March 18, 2021, as amended on April 29, 2021 (the “2020 Annual Report”) and in subsequent filings.

These factors should not be construed as exhaustive and should be read with the other cautionary statements in the 2020 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 2020 Annual Report and in subsequent filings. 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 30 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, and, in March 2021, we opened a second location in San Antonio, Texas, under the Redlands Grill concept. Each of these locations offers a contemporary American menu. As of August 17, 2021, we operate 47 restaurants across 16 states. Additionally, we plan to open a J. Alexander’s restaurant in Madison, Alabama, in the first quarter of 2022, which is currently under construction.

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. The Company completed the sale of the remaining long-lived assets at this location, including the land and building, during the third quarter of 2020.

Our business plan has evolved over time to include a collection of restaurants dedicated to providing guests with what we believe to be high quality food and beverages, 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 currently existing concepts in the future. Additionally, by further developing our carry-out program in each of our restaurant locations with the same attention to detail taken in our dining rooms, we believe we can both increase frequency of usage by our existing loyal guests and reach a wider array of guests who may prefer this level of service when selecting their dining options. While each restaurant concept operates under a unique trade name, each of our restaurants is identified as a “J. Alexander’s Holdings Restaurant.”

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. 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:

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pursuing new restaurant development;

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

•

leveraging our new carry-out platform to drive off-premise sales on a long-term incremental basis;

•

potentially expanding beyond our current existing restaurant concepts; and

•

improving our margins and leveraging infrastructure.

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 the COVID-19 pandemic on our liquidity and restaurant performance in the near‑term.

The locations operating as a Redlands Grill, Lyndhurst Grill (now permanently closed), Overland Park Grill or Merus Grill restaurant have been included with the J. Alexander’s restaurants’ results of operations, average weekly same store sales calculations and all other applicable disclosures, and, with the J. Alexander’s restaurants, 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. Throughout the first half of 2021, we were impacted by capacity restrictions at varying levels and only reached 100% dining room capacity in the final weeks of the second quarter. While vaccines are now widely available across the country resulting in further easing of restrictions, there are widespread increases in diagnosed cases reported since the end of the second quarter largely due to the spread of COVID-19 variants. There can be no assurance that state or local authorities will continue to allow dining rooms to operate at full capacity in the near-term should existing or future variants of COVID-19 result in increased transmission and diagnosis rates. Each of these factors has limited our ability to generate revenue, impacting results from operations and cash flows during fiscal 2020 and into the first half of 2021, and may continue to do so for an extended period of time depending on the length of the COVID-19 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 COVID-19 in public or as a result of unemployment or reduced income. The Company is also closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, including on guests, existing and potential 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, including implementing a carry-out program and online ordering platform 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. The Company intends to continue to actively monitor the evolving situation and may take further actions that alter its business operations that may be required by federal, state or local authorities or that it determines are in the best interests of its employees, guests and shareholders. While we do not know the full future impact COVID-19 will have on our business, we expect to see a continued impact on our results of operations, cash flows and liquidity during at least a portion of the rest of 2021. 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 46 restaurants at July 4, 2021. 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:

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COVID-19-related capacity restrictions and other effects of the COVID-19 pandemic;

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

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overall economic trends, particularly those related to consumer spending;

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

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off-premise sales volume;

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pricing;

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guest traffic;

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spending per guest and average check amounts;

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local competition;

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trade area dynamics; and

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introduction of new menu items.

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

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

Average Check. Average check is calculated by dividing total restaurant sales by guest counts for a given time period. Total restaurant sales include food, alcohol and beverage sales. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in 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 entrees sold either for in-restaurant dining or for off-premise dining over a given time period. For purposes of guest count calculations, family pack meals sales are counted as an average of three guests.

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.

Food and beverage costs. Food and beverage costs are presented net of earned vendor rebates. Food and beverage costs are generally influenced by the input cost of food and beverage items, distribution costs and menu mix. The components of food and beverage costs are variable in nature, increase with sales, 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 costs 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 includes 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 include costs associated with being a public company, and we believe such expenses will increase over time in response to our anticipated growth. 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. During periods of restaurant construction, interest expense is capitalized at a rate commensurate with the cost incurred to construct the restaurant. 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 (loss) at the federal, state and local level.

Discontinued Operations. During a portion of fiscal 2021, we remained 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. In March 2021, a termination agreement related to this lease was executed resulting in the recognition of a gain for the first half of 2021. The Company does not expect to incur any significant expense related to this property going forward.

Seasonality

Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth quarters has typically 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 2021 is a 52-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 Income (Loss), including our results expressed as a percentage of net sales, and (ii) other selected operating data:

	Quarter Ended									Six Months Ended
	July 4,			June 28,			Percent Change			July 4,			June 28,			Percent Change
(Unaudited)	2021			2020			2021 vs. 2020			2021			2020			2021 vs. 2020

Net sales	$	68,101		$	27,602			146.7	%	$	125,476		$	84,574			48.4	%
Costs and expenses:
Food and beverage costs		22,899			10,471			118.7			39,986			29,038			37.7
Restaurant labor and related costs		19,046			12,554			51.7			35,721			32,892			8.6
Depreciation and amortization of restaurant property and equipment		2,988			3,060			(2.4	)		5,871			6,154			(4.6	)
Other operating expenses		13,479			8,536			57.9			25,201			20,490			23.0
Total restaurant operating expenses		58,412			34,621			68.7			106,779			88,574			20.6
Transaction and other related expenses		1,888			(66	)		NCM			1,934			623			210.4
General and administrative expenses		5,442			4,095			32.9			10,595			8,835			19.9
Goodwill impairment		-			-			-			-			15,737			(100.0)
Long-lived asset impairment charges and restaurant closing costs		(1	)		178			100.6			2			867			(99.8	)
Pre-opening expenses		71			72			(1.4	)		516			91			NCM
Total operating expenses		65,812			38,900			69.2			119,826			114,727			4.4
Operating income (loss)		2,289			(11,298	)		NCM			5,650			(30,153	)		NCM
Other (expense) income:
Interest expense		(141	)		(189	)		(25.4	)		(294	)		(305	)		(3.6	)
Other, net		84			135			(37.8	)		38			127			(70.1	)
Total other expense		(57	)		(54	)		5.6			(256	)		(178	)		43.8
Income (loss) from continuing operations before income taxes		2,232			(11,352	)		NCM			5,394			(30,331	)		NCM
Income tax benefit (expense)		24			4,419			(99.5	)		(343	)		5,806			(105.9	)
(Loss) income from discontinued operations, net		(3	)		(55	)		94.5			592			(107	)		NCM
Net income (loss)	$	2,253		$	(6,988	)		NCM		$	5,643		$	(24,632	)		NCM

Note: NCM means not considered meaningful.

As a Percentage of Net Sales	Quarter Ended						Six Months Ended
	July 4,			June 28,			July 4,			June 28,
	2021			2020			2021			2020
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Food and beverage costs		33.6			37.9			31.9			34.3
Restaurant labor and related costs		28.0			45.5			28.5			38.9
Depreciation and amortization of restaurant property and equipment		4.4			11.1			4.7			7.3
Other operating expenses		19.8			30.9			20.1			24.2
Total restaurant operating expenses		85.8			125.4			85.1			104.7
Transaction and other related expenses		2.8			(0.2	)		1.5			0.7
General and administrative expenses		8.0			14.8			8.4			10.4
Goodwill impairment		-			-			-			18.6
Long-lived asset impairment charges and restaurant closing costs		(0.0	)		0.6			0.0			1.0
Pre-opening expenses		0.1			0.3			0.4			0.1
Total operating expenses		96.6			140.9			95.5			135.7
Operating income (loss)		3.4			(40.9	)		4.5

J. Alexander's Holdings, Inc. 10-Q