0000069733 NATHANS FAMOUS INC false --03-28 Q3 2021 10,283 9,468 3,342 3,860 0.01 0.01 30,000,000 30,000,000 9,369,015 9,368,792 4,114,934 4,141,387 5,254,081 5,227,405 0.33 0.29 0.33 0.29 0.35 0.35 1.05 1.05 1.05 1.05 1 1 1 1 1 0.25 0.33 0.29 0.33 0.29 2.19 2.19 2.43 10,000 10,000 10,000 0 0 0 0 29,000 87,000 8 5 3 6.625 10.000 4,968,750 106.625 The thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 include $502,000, net and $1,696,000, net and $470,000, net and $1,679,000, net, respectively, recorded to "Restaurant Operating Expenses" for leases for Company-operated restaurants; $160,000 and $492,000, and $153,000 and $474,000, respectively, recorded to "General and administrative expenses" for leases for corporate offices and equipment; and $9,000 and $31,000, and $22,000 and $63,000, respectively, recorded to "Other income, net" for leased properties that are leased to franchisees. Represents franchise fees expected to be recognized for the remainder of the 2021 fiscal year, which includes international development fees expected to be recognized over the duration of one year or less. Amount does not include $207,000 of franchise fee revenue recognized for the thirty-nine weeks ended December 27, 2020. Represents advertising fund revenue Represents future lease commitments to be paid and received by the Company for the remainder of the 2021 fiscal year. Amount does not include $956 of lease commitments paid and received by the Company for the thirty-nine week period ended December 27, 2020. Deferred franchise fees of $227,000 and $1,553,000 as of December 27, 2020 and $230,000 and $1,687,000 as of March 29, 2020 are included in Deferred franchise fees – current and long term, respectively. 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UNITED STATES

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2020.

OR

           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT of 1934

For the transition period from                        to                        .

 

Commission File No. 001-35962

 

NATHAN'S FAMOUS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

11-3166443

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

One Jericho Plaza, Second Floor Wing A, Jericho, New York 11753

(Address and Zip Code of principal executive offices)

 

(516) 338-8500

(Registrant's telephone number, including area code)

________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $.01 per share

 

NATH

 

The NASDAQ Global Market

 

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 (§232.405 of this chapter) 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 ☒

 

At February 5, 2021, an aggregate of 4,114,934 shares of the registrant's common stock, par value of $.01, were outstanding.

 
1

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

 

INDEX

 

   

Page

Number

     
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements. 3
     
  Consolidated Financial Statements  
  Consolidated Balance Sheets – December 27, 2020 (Unaudited) and March 29, 2020 3
     
  Consolidated Statements of Earnings (Unaudited) – Thirteen and Thirty-nine Weeks Ended December 27, 2020 and December 29, 2019 4
     
  Consolidated Statements of Stockholders’ Deficit (Unaudited) – Thirteen Weeks Ended December 27, 2020 and December 29, 2019 5
     
  Consolidated Statements of Stockholders’ Deficit (Unaudited) – Thirty-nine Weeks Ended December 27, 2020 and December 29, 2019 6
     
  Consolidated Statements of Cash Flows (Unaudited) – Thirty-nine Weeks Ended December 27, 2020 and December 29, 2019 7
     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 32
     
Item 4. Controls and Procedures. 33
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings. 34
     
Item 1A. Risk Factors. 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 34
     
Item 3. Defaults Upon Senior Securities. 34
     
Item 4. Mine Safety Disclosures. 34
     
Item 5. Other Information. 34
     
Item 6. Exhibits. 35
     
SIGNATURES   36

 

2

 

 

Nathans Famous, Inc. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

December 27, 2020 and March 29, 2020

(in thousands, except share and per share amounts)

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

  

December 27,

2020

(Unaudited)

  

March 29,

2020

 
ASSETS        

CURRENT ASSETS

        

Cash and cash equivalents (Note F)

 $76,602  $77,117 

Accounts and other receivables, net (Note H)

  12,338   11,108 

Inventories

  415   378 

Prepaid expenses and other current assets (Note I)

  931   1,181 

Total current assets

  90,286   89,784 
         

Property and equipment, net of accumulated depreciation of $10,283 and $9,468, respectively

  4,193   4,610 

Operating lease assets (Note R)

  8,471   9,181 

Goodwill

  95   95 

Intangible asset, net

  1,184   1,269 

Deferred income taxes

  5   - 

Other assets

  329   343 
         

Total assets

 $104,563  $105,282 
         

LIABILITIES AND STOCKHOLDERS’ DEFICIT

        
         

CURRENT LIABILITIES

        

Accounts payable

 $3,785  $3,509 

Accrued expenses and other current liabilities (Note L)

  5,169   9,297 

Current portion of operating lease liabilities (Note R)

  1,833   1,583 

Deferred franchise fees

  227   230 

Total current liabilities

  11,014   14,619 
         

Long-term debt, net of unamortized debt issuance costs of $3,342 and $3,860, respectively (Note Q)

  146,658   146,140 

Operating lease liabilities (Note R)

  7,722   8,532 

Other liabilities (Note L)

  743   696 

Deferred franchise fees

  1,553   1,687 

Deferred income taxes

  -   9 
         

Total liabilities

  167,690   171,683 
         

COMMITMENTS AND CONTINGENCIES (Note S)

          
         

STOCKHOLDERS’ DEFICIT

        

Common stock, $.01 par value; 30,000,000 shares authorized; 9,369,015 and 9,368,792 shares issued; and 4,114,934 and 4,141,387 shares outstanding at December 27, 2020 and March 29, 2020, respectively

  94   94 

Additional paid-in capital

  62,211   62,130 

(Accumulated deficit)

  (40,662)  (45,356)

Stockholders’ equity before treasury stock

  21,643   16,868 
         

Treasury stock, at cost, 5,254,081 and 5,227,405 shares at December 27, 2020 and March 29, 2020

  (84,770)  (83,269)

Total stockholders’ deficit

  (63,127)  (66,401)
         

Total liabilities and stockholders’ deficit

 $104,563  $105,282 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

 

Nathans Famous, Inc. and Subsidiaries

 

 

CONSOLIDATED STATEMENTS OF EARNINGS

Thirteen and Thirty-nine weeks ended December 27, 2020 and December 29, 2019

(in thousands, except per share amounts)

(Unaudited)

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 27,

2020

   

December 29,

2019

   

December 27,

2020

   

December 29,

2019

 
                                 

REVENUES

                               

Sales

  $ 11,322     $ 15,356     $ 30,697     $ 57,699  

License royalties

    5,898       4,412       24,689       18,559  

Franchise fees and royalties

    420       1,035       1,087       3,610  

Advertising fund revenue

    390       573       1,082       1,752  

Total revenues

    18,030       21,376       57,555       81,620  
                                 

COSTS AND EXPENSES

                               

Cost of sales

    8,937       12,262       24,161       43,973  

Restaurant operating expenses

    759       764       2,622       2,791  

Depreciation and amortization

    288       294       900       941  

General and administrative expenses

    3,253       3,620       8,709       11,116  

Advertising fund expense

    390       573       1,082       2,122  

Total costs and expenses

    13,627       17,513       37,474       60,943  
                                 

Income from operations

    4,403       3,863       20,081       20,677  
                                 

Interest expense

    (2,650 )     (2,650 )     (7,951 )     (7,951 )

Interest income

    89       338       309       1,074  

Other income, net

    9       22       31       61  
                                 

Income before provision for income taxes

    1,851       1,573       12,470       13,861  

Provision for income taxes

    492       360       3,456       3,621  

Net income

  $ 1,359     $ 1,213     $ 9,014     $ 10,240  
                                 

PER SHARE INFORMATION

                               

Weighted average shares used in computing income per share:

                               

Basic

    4,115       4,225       4,117       4,219  

Diluted

    4,115       4,225       4,117       4,219  
                                 

Income per share:

                               

Basic

  $ .33     $ .29     $ 2.19     $ 2.43  

Diluted

  $ .33     $ .29     $ 2.19     $ 2.43  
                                 

Dividends declared per share

  $ .35     $ .35     $ 1.05     $ 1.05  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4

 

 

Nathans Famous, Inc. and Subsidiaries

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

Thirteen weeks ended December 27, 2020 and December 29, 2019

(in thousands, except share amounts)

(Unaudited)

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

(Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit)

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, September 27, 2020

    9,369,015     $ 94     $ 62,182     $ (40,581 )     5,254,081     $ (84,770 )   $ (63,075 )
                                                         

Repurchase of common stock

    -       -       -       -       -       -       -  

Dividends on common stock

    -       -       -       (1,440 )     -       -       (1,440 )

Share-based compensation

    -       -       29       -       -       -       29  

Net income

    -       -       -       1,359       -       -       1,359  

Balance, December 27, 2020

    9,369,015     $ 94     $ 62,211     $ (40,662 )     5,254,081     $ (84,770 )   $ (63,127 )

 

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

(Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit)

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, September 29, 2019

    9,368,792     $ 94     $ 62,072     $ (46,810 )     5,141,763     $ (78,303 )   $ (62,947 )
                                                         

Repurchase of common stock

    -       -       -       -       13,709       (985 )     (985 )

Dividends on common stock

    -       -       -       (1,479 )     -       -       (1,479 )

Share-based compensation

    -       -       29       -       -       -       29  

Net income

    -       -       -       1,213       -       -       1,213  

Balance, December 29, 2019

    9,368,792     $ 94     $ 62,101     $ (47,076 )     5,155,472     $ (79,288 )   $ (64,169 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5

 

 

Nathans Famous, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

Thirty-nine weeks ended December 27, 2020 and December 29, 2019

(in thousands, except share amounts)

(Unaudited)

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

(Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit)

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, March 29, 2020

    9,368,792     $ 94     $ 62,130     $ (45,356 )     5,227,405     $ (83,269 )   $ (66,401 )
                                                         

Shares issued in connection with share-based compensation plans

    223       -       -       -       -       -       -  

Withholding tax on net share settlement of share-based compensation plans

    -       -       (6 )     -       -       -       (6 )

Repurchase of common stock

    -       -       -       -       26,676       (1,501 )     (1,501 )

Dividends on common stock

    -       -       -       (4,320 )     -       -       (4,320 )

Share-based compensation

    -       -       87       -       -       -       87  

Net income

    -       -       -       9,014       -       -       9,014  

Balance, December 27, 2020

    9,369,015     $ 94     $ 62,211     $ (40,662 )     5,254,081     $ (84,770 )   $ (63,127 )

 

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

(Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit)

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, March 31, 2019

    9,336,338     $ 93     $ 60,945     $ (52,879 )     5,141,763     $ (78,303 )   $ (70,144 )
                                                         

Shares issued in connection with share-based compensation plans

    32,454       1       1,077       -       -       -       1,078  

Withholding tax on net share settlement of share-based compensation plans

    -       -       (8 )     -       -       -       (8 )

Repurchase of common stock

    -       -       -       -       13,709       (985 )     (985 )

Dividends on common stock

    -       -       -       (4,437 )     -       -       (4,437 )

Share-based compensation

    -       -       87       -       -       -       87  

Net income

    -       -       -       10,240       -       -       10,240  

Balance, December 29, 2019

    9,368,792     $ 94     $ 62,101     $ (47,076 )     5,155,472     $ (79,288 )   $ (64,169 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6

 

Nathans Famous, Inc. and Subsidiaries

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thirty-nine weeks ended December 27, 2020 and December 29, 2019

(in thousands)

(Unaudited)

 

   

December 27,

2020

   

December 29,

2019

 

Cash flows from operating activities:

               

Net income

  $ 9,014     $ 10,240  

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

               

Depreciation and amortization

    900       941  

Non-cash rental expense

    150       100  

Amortization of debt issuance costs

    518       518  

Share-based compensation expense

    87       87  

Income tax benefit on stock option exercises

    -       228  

Provision for doubtful accounts

    70       7  

Deferred income taxes

    (14 )     291  

Changes in operating assets and liabilities:

               

Accounts and other receivables, net

    (1,300 )     (270 )

Inventories

    (37 )     (64 )

Prepaid expenses and other current assets

    250       45  

Other assets

    14       10  

Accounts payable, accrued expenses and other current liabilities

    (3,852 )     (4,930 )

Deferred franchise fees

    (137 )     (691 )

Other liabilities

    47       150  
                 

Net cash provided by operating activities

    5,710       6,662  
                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (398 )     (361 )
                 

Net cash used in investing activities

    (398 )     (361 )
                 

Cash flows from financing activities:

               

Dividends paid to stockholders

    (4,320 )     (4,437 )

Proceeds from exercise of stock options

    -       1,078  

Payments of withholding tax on net share settlement of share-based compensation plans

    (6 )     (8 )

Repurchase of treasury stock

    (1,501 )     (985 )
                 

Net cash used in financing activities

    (5,827 )     (4,352 )
                 

Net (decrease) increase in cash and cash equivalents

    (515 )     1,949  
                 

Cash and cash equivalents, beginning of period

    77,117       75,446  
                 

Cash and cash equivalents, end of period

  $ 76,602     $ 77,395  
                 

Cash paid during the period for:

               

Interest

  $ 9,938     $ 9,938  

Income taxes paid

  $ 3,643     $ 3,269  
                 

Non-cash financing activity:

               

Dividends declared per share

  $ 1.05     $ 1.05  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 27, 2020

(Unaudited)

 

NOTE A - BASIS OF PRESENTATION

 

The accompanying consolidated financial statements of Nathan's Famous, Inc. and subsidiaries (collectively “Nathan’s,” the “Company,” “we,” “us” or “our”) as of and for the thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 have been prepared in accordance with accounting principles generally accepted in the United States of America. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations and cash flows for the periods presented. However, our results of operations are seasonal in nature, and the results of any interim period are not necessarily indicative of results for any other interim period or the full fiscal year.

 

Certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission.

 

Management believes that the disclosures included in the accompanying consolidated interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Nathan’s Annual Report on Form 10-K for the fiscal year ended March 29, 2020.

 

A summary of the Company’s significant accounting policies is identified in Note B of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2020.

 

Covid-19 Pandemic

 

In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19), a global pandemic. The COVID-19 pandemic has had an impact on the Company’s business, financial condition, cash flows and results of operations for the thirteen and thirty-nine weeks ended December 27, 2020 (“fiscal 2021 period”) and continues into the fourth quarter of fiscal 2021. Governmental restrictions and public perceptions of the risks associated with COVID-19 have caused consumers to avoid or limit nonessential travel, gatherings in public places and other social interactions, which has adversely affected, and could continue to adversely affect, our business. The COVID-19 pandemic, has and may continue to impact customer traffic at our Company-owned restaurants and franchised restaurants, as well as sales to our Branded Product Program customers. We cannot predict whether, when or the manner in which the conditions surrounding the pandemic will change and cannot currently estimate the impact on our business in the short or long-term.

 

As of the date of this filing, three of our Company-owned restaurants continue to operate. Our seasonal location on the Coney Island Boardwalk closed for the season on September 13, 2020. Beginning in the second quarter fiscal 2021, the Company re-opened the dining rooms at our Company-owned restaurants located in Oceanside, New York and Yonkers, New York. Although these dining rooms are open, they are operating at reduced capacity, as stipulated under government orders, as well as due to social distancing protocols that are also mandated by the same government orders. Even without governmental restrictions, customers may continue to choose to reduce or to eliminate in-restaurant dining because of the rise in the number of COVID-19 cases.

 

A majority of our franchised locations have closed temporarily during the fiscal 2021 period due to their locations being in venues that have closed (such as movie theaters) or venues operating at reduced traffic levels (such as airports, highway travel plazas and shopping malls). As a result, franchise system sales have been significantly impacted. Even after these restrictions are lifted, customers may still be reluctant to return to in-restaurant dining. As of the date of this filing, approximately 60% of our franchised locations are open.

 

The sales and profits from our Branded Product Program have been adversely impacted as many of our customers operate in venues that are currently closed (such as movie theaters) or venues operating at significantly reduced traffic, such as professional sports arenas, amusement parks and shopping malls.

 

8

 
 

To help mitigate the impact of the COVID-19 pandemic, we have taken the following decisive actions which are on-going:

 

 

Reduced payroll costs, through salary reductions and the transition of certain Corporate personnel from a furloughed status to a permanent layoff

 

Reduced discretionary operating expenses, including marketing and travel

 

Postponed non-essential capital spending

 

Launched curbside delivery at three of our four Company-owned restaurants

 

Introduced “ghost kitchens” whereby well-known restaurants have the ability to market our products for pick-up or in the form of meal-kits for at home preparation

 

Implemented enhanced health and safety protocols across the Company

 

The Company also assessed the impact of the COVID-19 pandemic on the estimates and assumptions used in preparing these consolidated financial statements, including, but not limited to the carrying values of Goodwill, Intangible Assets, and other Long-lived Assets. See Note J for a further discussion related to Goodwill and Intangible Assets and Note K for a further discussion related to Long-lived Assets.

 

We continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our team members, customers, suppliers and shareholders.

 

 

NOTE B – ADOPTION OF NEW ACCOUNTING STANDARD

 

In January 2017, the FASB issued an update to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The Company adopted this guidance on March 30, 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

 

NOTE C – NEW ACCOUNTING STANDARDS NOT YET ADOPTED

 

In June 2016, the FASB issued new guidance on the measurement of credit losses, which significantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under the new standard, the Company will be required to use a current expected credit loss model (“CECL”) that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. In November 2019, the FASB deferred the effective date for smaller reporting companies for annual reporting periods beginning after December 15, 2022. This standard is required to take effect in Nathan’s first quarter ( June 2023) of our fiscal year ending March 31, 2024. The Company is currently evaluating the impact that the adoption of this guidance will have on its 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,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. This standard is required to take effect in Nathan’s first quarter ( June 2021) of our fiscal year ending March 27, 2022. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

The Company does not believe that any other recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

9

 
 
 

NOTE D – REVENUES

 

The Company’s disaggregated revenues for the thirteen and thirty-nine weeks ended December 27, 2020 and December 29, 2019 are as follows (in thousands):

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

December 27,

2020

  

December 29,

2019

  

December 27,

2020

  

December 29,

2019

 
                 

Branded Products

 $10,003  $13,694  $24,450  $45,989 

Company-operated restaurants

  1,319   1,662   6,247   11,710 

Total sales

  11,322   15,356   30,697   57,699 
                 

License royalties

  5,898   4,412   24,689   18,559 
                 

Franchise royalties

  361   802   880   2,829 

Franchise fees

  59   233   207   781 

Total franchise fees and royalties

  420   1,035   1,087   3,610 
                 

Advertising fund revenue

  390   573   1,082   1,752 
                 

Total revenues

 $18,030  $21,376  $57,555  $81,620 

 

The following table disaggregates revenues by primary geographical market (in thousands):

 

  

Thirteen weeks ended

  

Thirty-nine weeks ended

 
  

December 27,

2020

  

December 29,

2019

  

December 27,

2020

  

December 29,

2019

 
                 

United States

 $17,810  $20,308  $56,723  $77,930 

International

  220   1,068   832   3,690 

Total revenues

 $18,030  $21,376  $57,555  $81,620 

 

Contract balances

 

The following table provides information about contract liabilities (Deferred franchise fees) from contracts with customers (in thousands):

 

  

December 27,

2020

  

March 29,

2020

 

Deferred franchise fees (a)

 $1,780  $1,917 

 

 

(a)

Deferred franchise fees of $227,000 and $1,553,000 as of December 27, 2020 and $230,000 and $1,687,000 as of March 29, 2020 are included in Deferred franchise fees – current and long term, respectively.

 

Significant changes in Deferred franchise fees are as follows (in thousands):

 

  Thirty-nine weeks ended 
  

December 27,

2020

  

December 29,

2019

 

Deferred franchise fees at beginning of period

 $1,917  $3,005 

Revenue recognized during the period

  (207)  (781)

New deferrals due to cash received and other

  70   90 

Deferred franchise fees at end of period

 $1,780  $2,314 

 

10

 
 

Anticipated Future Recognition of Deferred Franchise Fees

 

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands):

 

  

Estimate for fiscal year

 

2021 (a)

 $58 

2022

  223 

2023

  200 

2024

  188 

2025

  181 

Thereafter

  930 

Total

 $1,780 

 

 

(a)

Represents franchise fees expected to be recognized for the remainder of the 2021 fiscal year, which includes international development fees expected to be recognized over the duration of one year or less. Amount does not include $207,000 of franchise fee revenue recognized for the thirty-nine weeks ended December 27, 2020.

 

We have applied the optional exemption, as provided for under Topic 606, which allows us not to disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.

 

 

NOTE E – INCOME PER SHARE                  

 

Basic income per common share is calculated by dividing income by the weighted-average number of common shares outstanding and excludes any dilutive effect of stock options. Diluted income per common share gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares used in the computation of diluted income per common share result from the assumed exercise of stock options and warrants, as determined using the treasury stock method.

 

The following chart provides a reconciliation of information used in calculating the per-share amounts for the thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019, respectively.

 

Thirteen weeks

                        
                  

Net Income

 
  

Net Income

  

Number of Shares

  

Per Share

 
  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

 
  

(in thousands)

  

(in thousands)

         

Basic EPS

                        

Basic calculation

 $1,359  $1,213   4,115   4,225  $0.33  $0.29 

Effect of dilutive employee stock options

  -   -   -   -   -   - 

Diluted EPS

                        

Diluted calculation

 $1,359  $1,213   4,115   4,225  $0.33  $0.29 

 

 

Thirty-nine weeks

                        
                  

Net Income

 
  

Net Income

  

Number of Shares

  

Per Share

 
  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

 
  

(in thousands)

  

(in thousands)

         

Basic EPS

                        

Basic calculation

 $9,014  $10,240   4,117   4,219  $2.19  $2.43 

Effect of dilutive employee stock options

  -   -   -   -   -   - 

Diluted EPS

                        

Diluted calculation

 $9,014  $10,240   4,117   4,219  $2.19  $2.43 

 

Options to purchase 10,000 shares of common stock in the thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 were not included in the computation of diluted EPS because the exercise price exceeded the average market price of common shares during the period.

 

11

 
 

NOTE F – CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at December 27, 2020 and March 29, 2020.

 

At December 27, 2020 and March 29, 2020, substantially all of the Company’s cash balances are in excess of Federal government insurance limits. The Company does not believe that it is exposed to any significant risk on these balances.

 

 

NOTE G – FAIR VALUE MEASUREMENTS

 

Nathan’s follows a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

 

●         Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market

 

●         Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability

 

●         Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability

 

The face value and fair value of long-term debt as of December 27, 2020 and March 29, 2020 were as follows (in thousands):

 

   

December 27, 2020

   

March 29, 2020

 
   

Face value

   

Fair value

   

Face Value

   

Fair value

 
                                 

Long-term debt

  $ 150,000     $ 153,909     $ 150,000     $ 138,000  

 

The Company estimates the fair value of its long-term debt based upon review of observable pricing in secondary markets as of the last trading day of the fiscal period. Accordingly, the Company classifies its long-term debt as Level 2.

 

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments.

 

Certain non-financial assets and liabilities are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when evidence of impairment exists. At December 27, 2020, no fair value adjustment or material fair value measurements were required for non-financial assets or liabilities.

 

 

NOTE H – ACCOUNTS AND OTHER RECEIVABLES, NET                  

 

Accounts and other receivables, net, consist of the following (in thousands):

 

   

December 27,

   

March 29,

 
   

2020

   

2020

 
                 

Branded product sales

  $ 7,479     $ 6,789  

Franchise and license royalties

    4,727       4,299  

Other

    428       257  
      12,634       11,345  
                 

Less: allowance for doubtful accounts

    296       237  

Accounts and other receivables, net

  $ 12,338     $ 11,108  

 

Accounts receivable are due within 30 days and are stated at amounts due from franchisees, retail licensees and Branded Product Program customers, net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are generally considered past due. The Company does not recognize franchise and license royalties that are not deemed to be realizable.

 

12

 
 

The Company individually reviews each past due account and determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current and expected future ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings. After the Company has used reasonable collection efforts, it writes off accounts receivable through a charge to the allowance for doubtful accounts.

 

Changes in the Company’s allowance for doubtful accounts for the thirty-nine week period ended December 27, 2020 and the fiscal year ended March 29, 2020 are as follows (in thousands):

         

   

December 27,

2020

   

March 29,

2020

 
                 

Beginning balance

  $ 237     $ 585  

Bad debt expense

    70       71  

Write-offs and other

    (11 )     (419 )

Ending balance

  $ 296     $ 237  

 

 

NOTE I – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

December 27,

   

March 29,

 
   

2020

   

2020

 
                 

Real estate taxes

  $ 168     $ 75  

Insurance

    350       263  

Marketing

    -       369  

Other

    413       474  

Total prepaid expenses and other current assets

  $ 931     $ 1,181  

 

 

NOTE J – GOODWILL AND INTANGIBLE ASSETS

 

The Company determined that the impact of COVID-19 was a triggering event that required the Company to perform a quantitative interim goodwill impairment test. The Company’s impairment assessment was performed in accordance with the accounting guidance adopted in the first quarter of fiscal 2021 that simplifies the testing for goodwill impairment, as discussed in Note B – Adoption of New Accounting Standard. Based on the quantitative assessment performed, management determined that the Company’s goodwill has not been impaired as of December 27, 2020 and, as a result, no impairment charge was recorded for the thirteen and thirty-nine week periods ended December 27, 2020.

 

The Company’s definite-lived intangible asset consists of trademarks, tradenames and other intellectual property in connection with its Arthur Treacher’s co-branding agreements. The Company reviews its definite-lived intangible asset for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company determined that the impact of COVID-19 on its business was a sufficient indicator that the carrying value may not be recoverable. The Company tested for recoverability of its definite-lived intangible asset based on the projected undiscounted cash flows to be derived from such co-branding agreements, which has a remaining useful life based upon the term of its agreements. Based on the quantitative test performed and other qualitative factors, the Company determined that the definite-lived intangible asset was recoverable and no impairment charge was recorded for the thirteen and thirty-nine week periods ended December 27, 2020.

 

 

NOTE K - LONG LIVED ASSETS

 

Long-lived assets on a restaurant-by-restaurant basis are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

As a result of the impact of the COVID-19 pandemic on its business, the Company determined that sufficient indicators existed to trigger the performance of an interim impairment analysis as of December 27, 2020.

 

13

 
 

The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such assets. If the projected undiscounted future cash flows are less than the carrying value of the asset, the Company will record an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair value by considering discounted estimated future cash flows from such assets. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such impairments could be material. The Company considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations. No long-lived assets were deemed to be permanently impaired during the thirteen and thirty-nine week periods ended December 27, 2020 based upon quantitative analysis.

 

 

NOTE L – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES

 

Accrued expenses and other current liabilities consist of the following (in thousands):         

 

   

December 27,

   

March 29,

 
   

2020

   

2020

 

Payroll and other benefits

  $ 2,246     $ 3,075  

Accrued rebates

    281       514  

Rent and occupancy costs

    230       84  

Deferred revenue

    97       797  

Construction costs

    58       105  

Interest

    1,579       4,084  

Professional fees

    168       194  

Sales, use and other taxes

    46       17  

Corporate income taxes

    -       176  

Other

    464       251  

Total accrued expenses and other current liabilities

  $ 5,169     $ 9,297  

 

Other liabilities consist of the following (in thousands):

 

   

December 27,

   

March 29,

 
   

2020

   

2020

 

Reserve for uncertain tax positions

  $ 614     $ 567  

Other

    129       129  

Total other liabilities

  $ 743     $ 696  

 

 

NOTE M – INCOME TAXES

 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted into law which among other provisions increases the limitation on the allowed business interest expense deduction from 30 percent to 50 percent of adjusted taxable income for tax years beginning January 1, 2019 and 2020. Additionally, the CARES Act allows businesses to immediately expense the full cost of Qualified Improvement Property, retroactive to tax years beginning on or after January 1, 2018.

 

The income tax provisions for the thirty-nine week periods ended December 27, 2020 and December 29, 2019 reflect effective tax rates of 27.7% and 26.1%, respectively.

 

Nathan’s effective tax rate for the thirty-nine week period ended December 29, 2019 was reduced by 1.6% as a result of the tax benefits associated with stock compensation. For the thirty-nine week period ended December 29, 2019 excess tax benefits of $228,000 were reflected in the Consolidated Statements of Earnings as a reduction in determining the provision for income taxes. Nathan’s effective tax rate without this adjustment would have been 27.8% for the fiscal 2020 period.

 

The amount of unrecognized tax benefits at December 27, 2020 was $336,000 all of which would impact Nathan’s effective tax rate, if recognized. As of December 27, 2020, Nathan’s had $292,000 of accrued interest and penalties in connection with unrecognized tax benefits.

 

In November 2019, the State of New Jersey notified Nathan’s that our tax returns for the fiscal years ended March 27, 2016, March 26, 2017 and March 25, 2018 will be audited. In November 2020, the audit was completed and no adjustments were noted.

 

14

 
 
 

NOTE N – SEGMENT INFORMATION

 

Nathan’s considers itself to be a brand marketer of the Nathan’s Famous signature products to the foodservice industry pursuant to its various business structures. Nathan’s sells its products directly to consumers through its restaurant operations segment consisting of Company-operated and franchised restaurants, to distributors that resell our products to the foodservice industry through the Branded Product Program (“BPP”) and by third party manufacturers pursuant to license agreements that sell our products to club stores and grocery stores nationwide. The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”) who evaluates performance and allocates resources for the Branded Product Program, Product Licensing and Restaurant Operations segments based upon a number of factors, the primary profit measure being income from operations. Certain administrative expenses are not allocated to the segments and are reported within the Corporate segment.

 

Branded Product Program – This segment derives revenue principally from the sale of hot dog products either directly to foodservice operators or to various foodservice distributors who resell the products to foodservice operators.

 

Product licensing – This segment derives revenue, primarily in the form of royalties, from licensing a broad variety of Nathan’s Famous branded products, including our hot dogs, sausage and corned beef products, frozen French fries and additional products through retail grocery channels and club stores throughout the United States.

 

Restaurant operations – This segment derives revenue from sale of our products at Company-owned restaurants and earns fees and royalties from its franchised restaurants.

 

Revenues from operating segments are from transactions with unaffiliated third parties and do not include any intersegment revenues.

 

Income from operations attributable to Corporate consists principally of administrative expenses not allocated to the operating segments such as executive management, finance, information technology, legal, insurance, corporate office costs, corporate incentive compensation and compliance costs and expenses of the advertising fund.

 

Interest expense, interest income, and other income, net, are managed centrally at the corporate level, and, accordingly, such items are not presented by segment since they are excluded from the measure of profitability reviewed by the CODM.

 

Operating segment information is as follows (in thousands):

 

    Thirteen weeks ended     Thirty-nine weeks ended  
   

December 27,

2020

   

December 29,

2019

   

December 27,

2020

   

December 29,

2019

 
                                 

Revenues

                               

Branded Product Program

  $ 10,003     $ 13,694     $ 24,450     $ 45,989  

Product licensing

    5,898       4,412       24,689       18,559  

Restaurant operations

    1,739       2,697       7,334       15,320  

Corporate (1)

    390       573       1,082       1,752  

Total revenues

  $ 18,030     $ 21,376     $ 57,555     $ 81,620  
                                 

Income from operations

                               

Branded Product Program

  $ 1,550     $ 1,917     $ 3,074     $ 6,244  

Product licensing

    5,852       4,367       24,552       18,423  

Restaurant operations

    (1,162 )     (599 )     (2,193 )     2,254  

Corporate

    (1,837 )     (1,822 )     (5,352 )     (6,244 )

Income from operations

  $ 4,403     $ 3,863     $ 20,081     $ 20,677  
                                 

Interest expense

    (2,650 )     (2,650 )     (7,951 )     (7,951 )

Interest income

    89       338       309       1,074  

Other income, net

    9       22       31       61  

Income before provision for income taxes

  $ 1,851     $ 1,573     $ 12,470     $ 13,861  

 

 

(1)

Represents advertising fund revenue

 

15

 
 

NOTE O – SHARE-BASED COMPENSATION

 

Total share-based compensation for each of the thirteen-week periods ended December 27, 2020 and December 29, 2019 was $29,000. Total share-based compensation for each of the thirty-nine week periods ended December 27, 2020 and December 29, 2019 was $87,000. Total share-based compensation is included in general and administrative expenses in our accompanying Consolidated Statements of Earnings. As of December 27, 2020, there was $83,000 of unamortized compensation expense related to share-based incentive awards. The Company expects to recognize this expense over approximately eight months, which represents the weighted average remaining requisite service periods for such awards.

 

The Company recognizes compensation cost for unvested stock-based incentive awards on a straight-line basis over the requisite service period. Compensation cost charged to expense under all stock-based incentive awards is as follows (in thousands):

 

  Thirteen weeks ended    Thirty-nine weeks ended 
  

December 27, 2020

  

December 29, 2019

  

December 27, 2020

  

December 29, 2019

 
                 

Stock options

 $21  $21  $64  $64 

Restricted stock

  8   8   23   23 

Total compensation cost

 $29  $29  $87  $87 

 

Stock options:

 

There were no new share-based awards granted during the thirty-nine week period December 27, 2020.

 

During the fiscal year ended March 31, 2019, the Company granted options to purchase 10,000 shares at an exercise price of $89.90 per share, all of which expire five years from the date of grant. All such stock options vest ratably over a three-year period commencing September 12, 2019.

 

Transactions with respect to stock options for the thirty-nine weeks ended December 27, 2020 are as follows:

 

    Shares  

Weighted-

Average

Exercise

Price

  

Weighted-

Average

Remaining

Contractual Life

  

Aggregate

Intrinsic

Value

(in thousands)

 
                 
                 

Options outstanding at March 29, 2020

  10,000  $89.90   3.45   - 

Granted

  -   -   -   - 

Exercised

  -   -   -   - 

Options outstanding at December 27, 2020

  10,000  $89.90   2.71   - 
                 

Options exercisable at December 27, 2020

  6,667  $89.90   2.71   - 

 

Restricted stock:

 

Transactions with respect to restricted stock for the thirty-nine weeks ended December 27, 2020 are as follows:

 

  

Shares

  

 

Weighted-

Average

Grant-date

Fair value

Per share

 

Unvested restricted stock at March 29, 2020

  667  $89.90 

Granted

  -   - 

Vested

  (334) $89.90 

Unvested restricted stock at December 27, 2020

  333  $89.90 

 

 

NOTE P – STOCKHOLDERS’ EQUITY

 

1. Dividends

 

Effective June 12, 2020, the Board declared its first quarterly cash dividend of $0.35 per share for fiscal year 2021, aggregating $1,440,000, which was paid on June 26, 2020 to stockholders of record as of the close of business on June 22, 2020.

 

16

 

Effective August 7, 2020, the Board declared its second quarterly cash dividend of $0.35 per share for fiscal year 2021, aggregating $1,440,000, which was paid on September 4, 2020 to stockholders of record as of the close of business on August 24, 2020.

 

Effective November 6, 2020 the Board declared its third quarterly cash dividend of $0.35 per share for fiscal year 2021, aggregating $1,440,000, which was paid on December 4, 2020 to stockholders of record as of the close of business on November 23, 2020.

 

Effective February 5, 2021 the Board declared its fourth quarterly cash dividend of $0.35 per share payable on March 5, 2021 to stockholders of record as of the close of business on February 22, 2021.

 

Our ability to pay future dividends is limited by the terms of the Indenture with U.S. Bank National Association, as trustee and collateral trustee (see Note Q). In addition to the terms of the Indenture, the declaration and payment of any cash dividends in the future are subject to final determination of the Board and will be dependent upon our earnings and financial requirements.

 

2. Stock Incentive Plans

 

On September 13, 2012, the Company amended the Nathan’s Famous, Inc. 2010 Stock Incentive Plan (the “2010 Plan”) increasing the number of shares available for issuance by 250,000 shares. Shares to be issued under the 2010 Plan may be made available from authorized but unissued stock, common stock held by the Company in its treasury, or common stock purchased by the Company on the open market or otherwise. The number of shares issuable and the grant, purchase or exercise price of outstanding awards are subject to adjustment in the amount that the Company’s Compensation Committee considers appropriate upon the occurrence of certain events, including stock dividends, stock splits, mergers, consolidations, reorganizations, recapitalizations, or other capital adjustments.

 

On September 18, 2019, the Company’s shareholders approved the Nathan’s Famous, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan became effective July 1, 2020 (the "Effective Date"). Following the Effective Date, (i) no additional stock awards were granted under the 2010 Plan and (ii) all outstanding stock awards previously granted under the 2010 Plan remained subject to the terms of the 2010 Plan. All awards granted on or after the Effective Date of the 2019 Plan shall be subject to the terms of the 2019 Plan.

 

As of the Effective Date, we were able to issue up to: (a) 369,584 shares of common stock under the 2019 Plan which includes: (i) shares that had been authorized but not issued pursuant to the 2010 Plan as of the Effective Date up to a maximum of an additional 208,584 shares and (ii) any shares subject to any outstanding options or restricted stock grants under any plan of the Company that were outstanding as of the Effective Date and that subsequently expire unexercised, or are otherwise forfeited, up to a maximum of an additional 11,000 shares. As of December 27, 2020, there were up to 208,584 shares available to be issued for future option grants or up to 184,808 shares of restricted stock to be granted under the 2019 Plan.

 

3. Stock Repurchase Program

 

During the period from October 2001 through December 27, 2020, Nathan’s purchased 5,254,081 shares of common stock at a cost of $84,770,000 pursuant to various stock repurchase plans previously authorized by the Board of Directors. During the thirty-nine week period ended December 27, 2020, we repurchased 26,676 shares of common stock at a cost of $1,501,000.

 

In 2016, the Company’s Board of Directors authorized increases to the sixth stock repurchase plan for the purchase of up to 1,200,000 shares of its common stock on behalf of the Company. As of December 27, 2020, Nathan’s had repurchased 1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan. At December 27, 2020 there were 133,550 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. The plan does not have a set expiration date. Purchases under the Company’s stock repurchase program may be made from time to time, depending on market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases.

 

On March 13, 2020, the Company’s Board of Directors approved a 10b5-1 stock plan (the “10b5-1 Plan”) which expired on August 12, 2020. During the fiscal 2021 period, the Company repurchased in open market transactions 26,676 shares of the Company’s common stock at an average share price of $56.26 for a total cost of $1,501,000 under the 10b5-1 Plan.

 

17

 
 
 

NOTE Q – LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

  

December 27,

  

March 29,

 
  

2020

  

2020

 
         

6.625% Senior Secured Notes due 2025

 $150,000  $150,000 

Less: unamortized debt issuance costs

  (3,342)  (3,860)

Long-term debt, net

 $146,658  $146,140 

 

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the "2025 Notes") in a private offering in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes were issued pursuant to an indenture dated as of November 1, 2017 by and among the Company, certain of its wholly-owned subsidiaries and U.S. Bank National Association (the “Indenture”). The Company used the net proceeds of the 2025 Notes offering to satisfy and discharge the Indenture relating to the $135,000,000 of 10.000% Senior Secured Notes due 2020 and redeem such notes (the "Redemption"), paid a portion of a special $5.00 per share cash dividend to Nathan's stockholders of record, with the remaining net proceeds for general corporate purposes, including working capital. The Company also funded the majority of the special dividend of $5.00 per share through its existing cash. The Redemption occurred on November 16, 2017.

 

The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1st and November 1st of each year. The Company made its required semi-annual interest payments of $4,968,750 on May 1, 2020 and November 1, 2020.

 

The 2025 Notes have no scheduled principal amortization payments prior to its final maturity on November 1, 2025.

 

A summary of certain terms and conditions of the 2025 Notes is as follows (terms not defined shall have the meanings set forth in the Indenture):

 

There are no financial maintenance covenants associated with the 2025 Notes. As of December 27, 2020, Nathan’s was in compliance with all covenants associated with the 2025 Notes.

 

The Indenture contains certain covenants limiting the Company’s ability and the ability of its restricted subsidiaries (as defined in the Indenture) to, subject to certain exceptions and qualifications: (i) incur additional indebtedness; (ii) pay dividends or make other distributions on, redeem or repurchase, capital stock; (iii) make investments or other restricted payments; (iv) create or incur certain liens; (v) incur restrictions on the payment of dividends or other distributions from its restricted subsidiaries; (vi) enter into certain transactions with affiliates; (vii) sell assets; or (viii) effect a consolidation or merger. Certain Restricted Payments which may be made or indebtedness incurred by Nathan’s or its Restricted Subsidiaries may require compliance with the following financial ratios:

 

Fixed Charge Coverage Ratio: the ratio of the Consolidated Cash Flow to the Fixed Charges for the relevant period, currently set at 2.0 to 1.0 in the Indenture. The Fixed Charge Coverage Ratio applies to determining whether additional Restricted Payments may be made, certain additional debt may be incurred and acquisitions may be made.

 

Priority Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Priority Lien to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate; currently set at 0.40 to 1.00 in the Indenture.

 

Secured Leverage Ratio: the ratio of (a) Consolidated Net Debt outstanding as of such date that is secured by a Lien on any property of Nathan’s or any Guarantor to (b) Consolidated Cash Flow of Nathan’s for the Test Period then most recently ended, in each case with such pro forma adjustments as are appropriate. The Secured Leverage Ratio under the Indenture is 3.75 to 1.00 and applies if Nathan’s wants to incur additional debt on the same terms as the 2025 Notes.

 

The Indenture also contains customary events of default, including, among other things, failure to pay interest, failure to comply with agreements related to the Indenture, failure to pay at maturity or acceleration of other indebtedness, failure to pay certain judgments, and certain events of insolvency or bankruptcy. Generally, if any event of default occurs, the Trustee or the holders of at least 25% in principal amount of the 2025 Notes may declare the 2025 Notes due and payable by providing notice to the Company. In case of default arising from certain events of bankruptcy or insolvency, the 2025 Notes will become immediately due and payable.

 

The 2025 Notes are general senior secured obligations, are fully and unconditionally guaranteed by substantially all of the Company’s wholly-owned subsidiaries and rank pari passu in right of payment with all of the Company’s existing and future indebtedness that is not subordinated, are senior in right of payment to any of the Company’s existing and future subordinated indebtedness, are structurally subordinated to any existing and future indebtedness and other liabilities of the Company’s subsidiaries that do not guarantee the 2025 Notes, and are effectively junior to all existing and future indebtedness that is secured by assets other than the collateral securing the 2025 Notes.

 

18

 

Pursuant to the terms of a collateral trust agreement, the liens securing the 2025 Notes and the guarantees will be contractually subordinated to the liens securing any future credit facility.

 

The 2025 Notes and the guarantees are the Company and the guarantors’ senior secured obligations and will rank:

 

 

senior in right of payment to all of the Company and the guarantors’ future subordinated indebtedness;

   
 

effectively senior to all unsecured senior indebtedness to the extent of the value of the collateral securing the 2025 Notes and the guarantees;

   
 

pari passu with all of the Company and the guarantors’ other senior indebtedness;

   
 

effectively junior to any future credit facility to the extent of the value of the collateral securing any future credit facility and the 2025 Notes and the guarantees and certain other assets;

   
 

effectively junior to any of the Company and the guarantors’ existing and future indebtedness that is secured by assets other than the collateral securing the 2025 Notes and the guarantees to the extent of the value of any such assets; and

   
 

structurally subordinated to the indebtedness of any of the Company’s current and future subsidiaries that do not guarantee the 2025 Notes.

 

The Company may redeem the 2025 Notes in whole or in part prior to November 1, 2020, at a redemption price of 100% of the principal amount of the 2025 Notes redeemed plus the Applicable Premium, plus accrued and unpaid interest. An Applicable Premium is the greater of 1% of the principal amount of the 2025 Notes; or the excess of the present value at such redemption date of (i) the redemption price of the 2025 Notes at November 1, 2020 plus (ii) all required interest payments due on the 2025 Notes through November 1, 2020 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over the then outstanding principal amount of the 2025 Notes.

 

Prior to November 1, 2020, if using the net cash proceeds of certain equity offerings, the Company had the option to redeem up to 35% of the aggregate principal amount of the 2025 Notes at a redemption price equal to 106.625% of the principal amount of the 2025 Notes redeemed, plus accrued and unpaid interest and any additional interest.

 

On or after November 1, 2020, the Company may redeem some or all of the 2025 Notes at a decreasing premium over time, plus accrued and unpaid interest as follows:

 

YEAR

 

PERCENTAGE

 

On or after November 1, 2020 and prior to November 1, 2021

  103.313%

On or after November 1, 2021 and prior to November 1, 2022

  101.656%

On or after November 1, 2022

  100.000%

 

In certain circumstances involving a change of control, the Company will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s 2025 Notes pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the aggregate principal amount of 2025 Notes repurchased plus accrued and unpaid interest, to the date of purchase.

 

If the Company sells certain assets and does not use the net proceeds as required, the Company will be required to use such net proceeds to repurchase the 2025 Notes at 100% of the principal amount thereof, plus accrued and unpaid interest and additional interest penalty, if any, to the date of repurchase.

 

The 2025 Notes may be traded between qualified institutional buyers pursuant to Rule 144A of the Securities Act. We have recorded the 2025 Notes at cost.

 

Effective June 1, 2020, Nathan’s Board of Directors authorized the repurchase of up to $10,000,000 of the 2025 Notes by the Company (at a price equal to or less than par) from time to time. There is no set time limit on the repurchases.

 

19

 
 
 

NOTE R – LEASES

 

The Company is party as lessee to various leases for its Company-operated restaurants and lessee/sublessor to one franchised location property, including land and buildings, as well as leases for its corporate office and certain office equipment.

 

Company as lessee

 

The components of the net lease cost for the thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 27,

2020

   

December 29,

2019

   

December 27,

2020

   

December 29,

2019

 

Statement of Earnings

                               

Operating lease cost

  $ 370     $ 339     $ 1,181     $ 899  

Short term lease cost

    -       4       -       14  

Variable lease cost

    292       280       1,007       1,240  

Less: Sublease income, net

    (9 )     (22 )     (31 )     (63 )
                                 

Total net lease cost (a)

  $ 653     $ 601     $ 2,157     $ 2,090  

 

 

(a)

The thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 include $502,000, net and $1,696,000, net and $470,000, net and $1,679,000, net, respectively, recorded to “Restaurant Operating Expenses” for leases for Company-operated restaurants; $160,000 and $492,000, and $153,000 and $474,000, respectively, recorded to “General and administrative expenses” for leases for corporate offices and equipment; and $9,000 and $31,000, and $22,000 and $63,000, respectively, recorded to “Other income, net” for leased properties that are leased to franchisees.

 

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 27, 2020

   

December 29, 2019

   

December 27, 2020

   

December 29, 2019

 
                                 

Operating cash flows from operating leases

  $ 153     $ 60     $ 560     $ 351  

 

The weighted average remaining lease term and weighted-average discount rate for operating leases as of December 27, 2020 were as follows:

 

Weighted average remaining lease term (years):

       

Operating leases

    7.4  
         

Weighted average discount rate:

       

Operating leases

    8.877 %

 

Future lease commitments to be paid and received by the Company as of December 27, 2020 were as follows (in thousands):

 

  

Payments

  

Receipts

     
  

Operating Leases

  

Subleases

  

Net Leases

 
             

Fiscal year:

            

2021 (a)

 $377  $38  $339 

2022

  1,837   247   1,590 

2023

  1,849   168   1,681 

2024

  1,774   169   1,605 

2025

  1,678   169   1,509 

Thereafter

  5,474   352   5,122 

Total lease commitments

 $12,989  $1,143  $11,846 

Less: Amount representing interest

  3,434         

Present value of lease liabilities (b)

 $9,555         

 

 

(a)

 

Represents future lease commitments to be paid and received by the Company for the remainder of the 2021 fiscal year. Amount does not include $956,000 of lease commitments paid and received by the Company for the thirty-nine week period ended December 27, 2020.

 

(b)

The present value of minimum operating lease payments of $1,833,000 and $7,722,000 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

 

20

 

Company as lessor

 

The components of lease income for the thirteen and thirty-nine week periods ended December 27, 2020 and December 29, 2019 were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 27, 2020

   

December 29, 2019

   

December 27, 2020

   

December 29, 2019

 
                                 

Operating lease income, net

  $ 9     $ 22     $ 31     $ 63  

 

 

NOTE S – COMMITMENTS AND CONTINGENCIES

 

1. Commitments

 

On February 27, 2017, a wholly-owned subsidiary of the Company executed a Guaranty of Lease (the “Brooklyn Guaranty”) in connection with its re-franchising of a restaurant located in Brooklyn, New York. The Company is obligated to make payments under the Brooklyn Guaranty in the event of a default by the tenant/franchisee. The Brooklyn Guaranty has an initial term of 10 years and one 5-year option and is limited to 24 months of rent for the first three years of the term. For the remainder of the term, the Brooklyn Guaranty is limited to 12 months of rent plus reasonable costs of collection and attorney’s fees. As of December 27, 2020, Nathan’s has recorded a liability of $110,000 in connection with the Brooklyn Guaranty which does not include potential percentage rent, real estate tax increases, attorney’s fees and other costs as these amounts are not reasonably determinable at this time. Nathan’s has received a personal guaranty from the franchisee for all obligations under the Brooklyn Guaranty.

 

2. Contingencies

 

The Company and its subsidiaries are from time to time involved in ordinary and routine litigation. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. Nevertheless, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include money damages and, in such event, could result in a material adverse impact on the Company’s results of operations for the period in which the ruling occurs.

 

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

 

Forward-Looking Statements

 

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1933, as amended, that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “projects”, “may”, “would”, “should”, “seeks”, “intends”, “plans”, “estimates”, “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this Form 10-Q are based upon information available to us on the date of this Form 10-Q.

 

Statements in this Form 10-Q quarterly report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties, many of which are not within our control, include but are not limited to: the impact of the COVID-19 pandemic; economic, weather (including the affects on the supply of cattle and the impact of weather on sales at our restaurants, particularly during the Summer months), and change in the price of beef trimmings; our ability to pass on the cost of any price increases in beef and beef trimmings, or labor costs; legislative, business conditions or tariffs; the collectibility of receivables; changes in consumer tastes; the status of our licensing and supply agreements, including our licensing revenue and overall profitability being substantially dependent on our agreement with John Morrell & Co., the impact of our debt service and repayment obligations under the 2025 Notes (as defined herein); the impact of the Tax Cuts and Jobs Act; the continued viability of Coney Island as a destination location for visitors; the ability to continue to attract franchisees; the impact of the new minimum wage legislation in New York State or other changes in labor laws, including court decisions which could render a franchisor as a “joint employee” or the impact of our new union contracts; our ability to attract competent restaurant and managerial personnel; the enforceability of international franchising agreements and the future effects of any food borne illness; such as bovine spongiform encephalopathy, BSE or e-coli; as well as those risks discussed from time to time in this Form 10-Q and our Form 10-K annual report for the year ended March 29, 2020, and in other documents we file with the Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements with the words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “will,” “should” and similar expressions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.

 

Introduction

 

As used in this Report, the terms “we”, “us”, “our”, “Nathan’s” or the “Company” mean Nathan’s Famous, Inc. and its subsidiaries (unless the context indicates a different meaning).

 

We are engaged primarily in the marketing of the “Nathan’s Famous” brand and the sale of products bearing the “Nathan’s Famous” trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan’s World Famous Beef Hot Dogs, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the name “Nathan’s Famous,” the name first used at our original Coney Island restaurant opened in 1916. Nathan’s product licensing program sells packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. Our Branded Product Program enables foodservice retailers and others to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan’s products are granted a limited use of the Nathan’s Famous trademark with respect to the sale of the purchased products, including Nathan’s World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. Our Branded Menu Program is a limited franchise program, under which foodservice operators may sell a greater variety of Nathan’s Famous menu items than under the Branded Product Program.

 

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Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, licensing agreements for the sale of Nathan’s products within supermarkets and club stores, the sale of Nathan’s products directly to other foodservice operators and the manufacture of certain proprietary spices by third parties and franchising the Nathan’s restaurant concept (including the Branded Menu Program).

 

At December 27, 2020, our restaurant system consisted of 215 Nathan’s franchised units, including 93 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 19 states, and 9 foreign countries. At December 29, 2019, our restaurant system consisted of 226 Nathan’s franchised units, including 96 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 22 states, and 10 foreign countries.

 

Over the past several years, our strategic emphasis has been to increase the number of distribution points for our products across all of our business platforms, including our Licensing Program for distribution of Nathan’s Famous branded consumer packaged goods, our Branded Products Program for distribution of Nathan’s Famous branded bulk products to the foodservice industry, and our namesake restaurant system comprised of both Company-owned and franchised units. The primary drivers of our recent growth have been our Licensing and Branded Product Programs, which are now the largest contributors to the Company’s revenues and profits.

 

We remain committed to these parts of our business and we continue to reinvigorate our restaurant system. The operating plan we have adopted in this regard is focused on surrounding our core items, Nathan’s World Famous beef hot dogs and crinkle-cut French fried potatoes, with other much higher quality menu items developed to deliver best-in-class customer experience and greater customer frequency. Menu development activities have been combined with concept positioning efforts, operational improvements and more effective digital and social marketing campaigns. The goal is to improve the performance of the existing restaurant system and to grow it through franchising efforts. Additionally, we have introduced ghost kitchens whereby well-known restaurants have the ability to market and to sell our products. At December 27, 2020, we have expanded into 75 ghost kitchens, including 37 domestically and 38 internationally. While we do not expect to significantly increase the number of Company-owned units, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system. We continue to seek opportunities to drive sales in a variety of ways as we adopt to the ever-changing consumer and environment.

 

As described in our Annual Report on Form 10-K for the year ended March 29, 2020, our future results could be materially impacted by many developments including the impact of the COVID-19 pandemic on our business, our dependence on John Morrell & Co. as our principal supplier and the dependence of our licensing revenue and overall profitability on our agreement with John Morrell & Co. In addition, our future operating results could be impacted by supply constraints on beef or by increased costs of beef compared to earlier periods in addition to the potential impact that any future tariffs may have on the business.

 

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the “2025 Notes”) and used the majority of the proceeds of this offering to redeem (the “Redemption”) the Company’s 10.000% Senior Secured Notes due 2020 (the “2020 Notes”), paid a portion of the special $5.00 cash dividend and used any remaining proceeds for general corporate purposes, including working capital. Our future results could also be impacted by our obligations under the 2025 Notes. As a result of the issuance of the 2025 Notes, Nathan’s incurs interest expense of $9,937,500 per annum, which reduced our cash interest expense by $3,562,500 per annum as compared to our annual interest requirements under the 2020 Notes. Nathan’s expects to incur annual amortization of debt issuance costs of approximately $691,000 through November 1, 2025.

 

As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in this Form 10-Q quarterly report. See “Reconciliation of GAAP and Non-GAAP Measures.”

 

Impact of COVID-19 pandemic on our business

 

The COVID-19 pandemic has had an impact on the Company’s business, financial condition, cash flows and results of operations for the thirty-nine weeks ended December 27, 2020 (“fiscal 2021 period”) and continues into the fourth quarter of fiscal 2021. Governmental restrictions and public perceptions of the risks associated with COVID-19 have caused consumers to avoid or limit nonessential travel, gatherings in public places and other social interactions, which has adversely affected, and could continue to adversely affect, our business. The COVID-19 pandemic, has and may continue to impact customer traffic at our Company-owned restaurants and franchised restaurants, as well as sales to our Branded Product Program customers.

 

Three of our four Company-owned restaurants remained open throughout the fiscal 2021 period and continued to offer food primarily through take-out and delivery. Our location on the Coney Island Boardwalk opened on May 15, 2020 for the summer months and closed for the season on September 13, 2020. Beginning in the second quarter fiscal 2021, the Company re-opened the dining rooms at our Company-owned restaurants located in Oceanside, New York and Yonkers, New York, which currently remain open. Although, these dining rooms are open, they are operating at reduced capacity, as stipulated under government orders, as well as due to social distancing protocols that are also mandated by the same government orders. Even without government restrictions, customers may continue to choose to reduce or to eliminate in-restaurant dining because of the rise in the number of COVID-19 cases.

 

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A majority of our franchised locations closed temporarily during the fiscal 2021 period due to their locations being in venues that were closed (such as movie theaters) or venues operating at reduced traffic levels (such as airports, highway travel plazas and shopping malls). Such closures and disruptions have materially impacted franchise fees and royalties during the fiscal 2021 period, as compared to the same period last year. We are principally focused on the well-being and safety of our guests, franchisees, restaurant associates and all other employees. Approximately 60% of our franchised locations have reopened as of the date of this report.

 

The sales and profits from our Branded Product Program have been adversely impacted as many of our customers operate in venues that are currently closed (such as movie theaters) or venues operating at reduced traffic levels, such as professional sports arenas, amusement parks and shopping malls.

 

To help mitigate the impact of the COVID-19 pandemic, we have taken the following decisive actions during the fiscal 2021 period which continue into the fourth quarter of fiscal 2021:

 

 

Reduced payroll costs, through salary reductions and the transition of certain Corporate personnel from a furloughed status to a permanent layoff

 

Reduced discretionary operating expenses, including marketing and travel

 

Postponed non-essential capital spending

 

Launched curbside delivery at three of our four Company-owned restaurants

 

Introduced “ghost kitchens” whereby well-known restaurants have the ability to market our products for pick-up or in the form of meal-kits for at home preparation

 

Implemented enhanced health and safety protocols across the Company

 

While there is significant uncertainty as to the duration and extent of the impact of the COVID-19 pandemic, we expect the pandemic will continue to have a negative impact on our revenue and net income for the remainder of fiscal 2021. Even as government restrictions are lifted and vaccines begin to be distributed, the ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels, and could result in reduced restaurant traffic and consumer spending trends that may adversely impact our financial condition and results of operations.

 

Critical Accounting Policies and Estimates

 

As discussed in our Form 10-K for the fiscal year ended March 29, 2020, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; leases; impairment of goodwill and other intangible assets; impairment of long-lived assets; share-based compensation and income taxes (including uncertain tax positions). Except for the adoption in Note B – simplifying the testing for goodwill impairment, there have been no other significant changes to the Company’s accounting policies subsequent to March 29, 2020.

 

Adoption of New Accounting Standard                  

 

Please refer to Note B of the preceding consolidated financial statements for our discussion of the Adoption of the New Accounting Standard.

 

New Accounting Standards Not Yet Adopted         

 

Please refer to Note C of the preceding consolidated financial statements for our discussion of New Accounting Standards Not Yet Adopted.

 

EBITDA and Adjusted EBITDA

 

The Company believes that EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, are useful to investors to assist in assessing and understanding the Company's operating performance and underlying trends in the Company's business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a common performance measure.

 

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Reconciliation of GAAP and Non-GAAP Measures

 

The following is provided to supplement certain Non-GAAP financial measures.

 

In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles in the United States of America ("US GAAP"), the Company has provided EBITDA, a non-GAAP financial measure, which is defined as net income excluding (i) interest expense; (ii) provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding share-based compensation that the Company believes will impact the comparability of its results of operations.

 

EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income or other measures of financial performance or liquidity in conformity with US GAAP. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other companies. Analysis of results and outlook on a non-US GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with US GAAP.

 

The following is a reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands):

 

    Thirteen weeks ended     Thirty-nine weeks ended  
   

December 27, 2020

   

December 29, 2019

   

December 27, 2020

   

December 29, 2019

 
   

(unaudited)

   

(unaudited)

 
                                 

Net income

  $ 1,359     $ 1,213     $ 9,014     $ 10,240  

Interest expense

    2,650       2,650       7,951       7,951  

Provision for income taxes

    492       360       3,456       3,621  

Depreciation and amortization

    288       294       900