What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 151 added, 95 removed, 219 unchanged (53% of the section changed)

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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;

the impact of the Tax Cuts and Jobs Act (“the Tax Act”);

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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 June 28, 2020, our restaurant system consisted of 217 Nathan’s franchised units, including 95 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 20 states, and 9 foreign countries.

At June 30, 2019, our restaurant system consisted of 253 Nathan’s franchised units, including 111 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 22 states, and 14 foreign countries.

At September 27, 2020, our restaurant system consisted of 214 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 September 29, 2019, our restaurant system consisted of 241 Nathan’s franchised units, including 111 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 22 states, and 12 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 have been the largest contributors to the Company’s profits.

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.

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The goal is to improve the performance of the existing restaurant system and to grow it through franchising efforts.

Additionally, while we do not expect to significantly increase the number of company-owned units, we do expect to 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.

Additionally, 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.

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.

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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.

As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in the 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 thirteen weeks ended June 28, 2020 (“fiscal 2021 period”) and continues into the second quarter of fiscal 2021.

The COVID-19 pandemic has had an impact on the Company’s business, financial condition, cash flows and results of operations for the twenty-six weeks ended September 27, 2020 (“fiscal 2021 period”) and continues into the third 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 our Branded Product Program customers.

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 seasonal location on the Coney Island Boardwalk opened on May 15, 2020.

As governmental restrictions ease, we expect to offer dine-in seating and service at reduced capacity at our restaurants.

The majority of our franchised locations were temporarily closed during the fiscal 2021 period due to their locations in venues that are closed (such as shopping malls and movie theaters) or venues operating at significantly reduced traffic (such as airports and highway travel plazas).

Such closures and disruptions have materially impacted franchise fees and royalties, as compared to the same period last year.

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.

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 impacted as many of our customers operate in venues that are currently closed and may be slow to reopen, such as professional sports venues, amusement parks, shopping malls and movie theaters.

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

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 third quarter of fiscal 2021:

Reduced payroll costs, through salary reductions and furloughs

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Introduced “ghost kitchens”

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

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, 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 position and results of operations.

Critical Accounting Policies and Estimates

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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 Standards          

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.

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(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.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding share-based compensation and the loss on disposal of property and equipment 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.

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

Thirteen weeks ended

June 28 , 20 20

June 30, 2019

Twenty-six weeks ended

September 2 7 , 20 20

September 29, 2019

September 27 , 20 20

September 29, 2019

Interest expense

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Share-based compensation

Loss on disposal of property and equipment

Adjusted EBITDA

Results of Operations

Thirteen weeks ended June 28 , 20 20 compared to thirteen weeks ended June 30 , 201 9

Revenues  

Total sales decreased by 67% to $6,683,000 for the thirteen weeks ended June 28, 2020 (“fiscal 2021 period”) as compared to $20,237,000 for the thirteen weeks ended June 30, 2019 (“fiscal 2020 period”).

Foodservice sales from the Branded Product Program decreased by 70.5% to $4,749,000 for the fiscal 2021 period as compared to sales of $16,113,000 in the fiscal 2020 period.

The sales from our Branded Product Program have been impacted by the COVID-19 pandemic as many of our customers operate in venues that are currently closed and may be slow to reopen, such as professional sports venues, amusement parks, shopping malls and movie theatres.

Thirteen weeks ended September 2 7 , 20 20 c ompared to thirteen weeks ended September 2 9 , 201 9

Total sales decreased by 43% to $12,692,000 for the thirteen weeks ended September 27, 2020 (“second quarter fiscal 2021”) as compared to $22,106,000 for the thirteen weeks ended September 29, 2019 (“second quarter fiscal 2020”).

Foodservice sales from the Branded Product Program decreased by 40% to $9,698,000 for the second quarter fiscal 2021 as compared to sales of $16,182,000 for the second quarter fiscal 2020.

The sales from our Branded Product Program have been negatively impacted by the COVID-19 pandemic as many of our customers operate in venues that are currently closed, such as movie theaters, or venues operating at reduced capacity, such as professional sports arenas, amusement parks and shopping malls.

Our average selling prices increased by approximately 4%.

During the second quarter fiscal 2021, the volume of business decreased by approximately 44% as compared to the second quarter fiscal 2020.

Total Company-owned restaurant sales decreased by 49% to $2,994,000 during the second quarter fiscal 2021 compared to $5,924,000 during the second quarter fiscal 2020.

The decrease was primarily due to a decline in customer traffic related to the impact of the COVID-19 pandemic during the second quarter fiscal 2021.

Additionally, as stipulated under government orders, the dining rooms at our Company-owned restaurants are operating at reduced capacity and maintaining social distancing protocols under these same government orders.

License royalties increased by 52% to $8,268,000 in the second quarter fiscal 2021 as compared to $5,425,000 in the second quarter fiscal 2020.

Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co.

at retail and foodservice, substantially from sales of hot dogs to Sam’s Club and WalMart, increased 56% to $7,716,000 for the second quarter fiscal 2021 as compared to $4,935,000 in the second quarter fiscal 2020.

As consumers shelter at home, our licensing business continues to show strong consumer demand.

The increase is due to a 31% increase in retail volume during the second quarter fiscal 2021 period and a 24% increase in average net selling price as compared to the second quarter fiscal 2020 period.

Additionally, the foodservice business earned lower royalties of $82,000 as compared to the second quarter fiscal 2020 due to a shift in the Sam’s Club business.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $62,000 during the second quarter fiscal 2021 as compared to the second quarter fiscal 2020 primarily due to additional royalties earned on sales of French fries, pickles, cocktail franks and mozzarella sticks.

Franchise fees and royalties were $476,000 in the second quarter fiscal 2021 as compared to $1,498,000 in the second quarter fiscal 2020.

Total royalties were $409,000 in the second quarter fiscal 2021 as compared to $1,047,000 in the second quarter fiscal 2020.

Royalties earned under the Branded Menu program were $70,000 in the second quarter fiscal 2021 as compared to $220,000 in the second quarter fiscal 2020.

Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases.

Traditional franchise royalties were $339,000 in the second quarter fiscal 2021 as compared to $827,000 in the second quarter fiscal 2020.

Franchise restaurant sales declined to $6,969,000 in the second quarter fiscal 2021 as compared to $18,323,000 in the second quarter fiscal 2020 primarily due to temporary closings, as well as venues operating at significantly reduced traffic as a result of the COVID-19 pandemic.

Comparable domestic franchise sales (consisting of 42 Nathan’s outlets, excluding sales under the Branded Menu Program) were $5,638,000 in the second quarter fiscal 2021 as compared to $10,112,000 in the second quarter fiscal 2020.

At September 27, 2020, 214 franchised outlets, including domestic, international and Branded Menu Program outlets were operating compared to 241 domestic and international franchised or Branded Menu Program franchise outlets at September 29, 2019.

Total franchise fee income was $67,000 in the second quarter fiscal 2021 compared to $451,000 in the second quarter fiscal 2020.

Domestic franchise fee income was $31,000 in the second quarter fiscal 2021 compared to $35,000 in the second quarter fiscal 2020.

International franchise fee income was $26,000 in the second quarter fiscal 2021 compared to $41,000 during the second quarter fiscal 2020.

We recognized $10,000 in forfeited fees in the second quarter fiscal 2021, as compared to $375,000 of forfeited fees in the second quarter fiscal 2020 which were primarily from the termination of our Master Franchise Agreement for Russia and Kyrgyzstan.

During the second quarter fiscal 2021, two new traditional franchised outlets opened, domestically, including one new Branded Menu Program outlet.

During the second quarter fiscal 2020, nine new franchised outlets opened, including four new Branded Menu Program outlets.

Advertising fund revenue, after eliminating Company contributions, was $403,000 during the second quarter fiscal 2021, as compared to $697,000 during the second quarter fiscal 2020.

Costs and Expenses  

Overall, our cost of sales decreased by 39% to $9,927,000 in the second quarter fiscal 2021 as compared to $16,289,000 in the second quarter fiscal 2020.

Our gross profit (representing the difference between sales and cost of sales) decreased to $2,765,000 or 21.8% of sales during the second quarter fiscal 2021 as compared to $5,817,000 or 26.3% of sales during the second quarter fiscal 2020.

The reduction in margin was primarily due to the higher cost of beef in the Branded Product Program, higher prime restaurant costs associated with new menu offerings, and higher labor costs associated with higher minimum hourly rates of pay at two of our Company-owned restaurants.

Cost of sales in the Branded Product Program decreased by approximately $5,261,000 during the second quarter fiscal 2021 as compared to the second quarter fiscal 2020, primarily due to the 6.5% increase in the average cost per pound of our hot dogs offset by the 44% decrease in the volume of product sold due to the COVID-19 pandemic as discussed above.

We did not make any purchase commitments of beef during the second quarter fiscal 2021 or the second quarter fiscal 2020.

If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

Beginning in May 2020, the cost of hot dogs increased significantly due primarily to the effects of the COVID-19 pandemic on the meat processing industry.

With respect to Company-owned restaurants, our cost of sales during the second quarter fiscal 2021 was $1,840,000 or 61.5% of restaurant sales, as compared to $2,941,000 or 49.6% of restaurant sales in the second quarter fiscal 2020.

We experienced higher food costs driven by the higher commodity costs of beef, higher prime costs associated with new menu offerings, and higher labor costs associated with higher minimum hourly rates of pay at two of our Company-owned restaurants.

We expect that our future labor costs will continue to be impacted by the remaining multi-year increase in minimum wage requirements in New York State as well as other new labor regulations and our food costs may be impacted by increases in commodity costs.

Restaurant operating expenses were $1,011,000 in the second quarter fiscal 2021 as compared to $1,108,000 in the second quarter fiscal 2020.

We incurred lower occupancy expenses of $75,000, lower utility expenses of $23,000, and lower repairs and maintenance expenses of $17,000 which were offset, in part, by higher delivery charges associated with offsite consumption.

Depreciation and amortization were $302,000 in the second quarter fiscal 2021 as compared to $337,000 in the second quarter fiscal 2020.

General and administrative expenses decreased by $947,000 or 27% to $2,612,000 in the second quarter fiscal 2021 as compared to $3,559,000 in the second quarter fiscal 2020.

The decrease in general and administrative expenses was primarily attributable to reduced corporate payroll expenses through salary reductions and furloughs, a lower incentive compensation accrual, reduced tradeshow expenses in light of the COVID-19 pandemic and reductions in other discretionary expenses including marketing and travel.

Advertising fund expense, after eliminating Company contributions, was $403,000 during the second quarter fiscal 2021, as compared to $1,067,000 in the second quarter fiscal 2020.

Interest expense of $2,651,000 in both the second quarter fiscal 2021 and the second quarter fiscal 2020 represented accrued interest of $2,478,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $173,000.

Interest income was $103,000 in the second quarter fiscal 2021 as compared to $370,000 in the second quarter fiscal 2020.

Other income, which primarily relates to a sublease of a franchised restaurant, was $22,000 in the second quarter fiscal 2021, as compared to $20,000 in the second quarter fiscal 2020.

Provision for Income Taxes  

The income tax provision for the second quarter fiscal 2021 and second quarter fiscal 2020 reflect effective tax rates of 27.7% and 28.3%, respectively.

The amount of unrecognized tax benefits at September 27, 2020 was $333,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of September 27, 2020, Nathan’s had $289,000 of accrued interest and penalties in connection with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to $16,000 during the fiscal year ending March 28, 2021.

Results of Operations

Twenty-six weeks ended September 2 7 , 20 20 compared to twenty-six weeks ended September 2 9 , 201 9

Total sales decreased by $22,968,000 to $19,375,000 for the twenty-six weeks ended September 27, 2020 (“fiscal 2021 period”) as compared to $42,343,000 for the twenty-six weeks ended September 29, 2019 (“fiscal 2020 period”).

Foodservice sales from the Branded Product Program decreased by 55% to $14,447,000 for the fiscal 2021 period as compared to sales of $32,295,000 for the fiscal 2020 period.

Our average selling prices increased by approximately 4%.

During the fiscal 2021 period, the volume of business decreased by approximately 57% as compared to the fiscal 2020 period.

Total Company-owned restaurant sales decreased by 53.1% to $1,934,000 during the fiscal 2021 period as compared to $4,124,000 during the fiscal 2020 period.

The decrease was primarily due to a decline in traffic related to the impact of the COVID-19 pandemic during the fiscal 2021 period.

Due to governmental restrictions, our Company-owned restaurants have been only offering food through take-out and delivery services.

Total Company-owned restaurant sales decreased by 51% to $4,928,000 during the fiscal 2021 period compared to $10,048,000 during the fiscal 2020 period.

The decrease was primarily due to a decline in customer traffic related to the impact of the COVID-19 pandemic during the fiscal 2021 period.

License royalties increased by 33% to $18,791,000 in the fiscal 2021 period as compared to $14,147,000 in the fiscal 2020 period.

Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co.

at retail and foodservice, substantially from sales of hot dogs to Sam’s Club and WalMart, increased 19.5% to $9,744,000 for the 2021 fiscal period as compared to $8,157,000 in the fiscal 2020 period.

at retail, substantially from sales of hot dogs to Sam’s Club and WalMart, increased 33% to $17,460,000 for the fiscal 2021 period as compared to $13,092,000 in the fiscal 2020 period.

As consumers shelter at home, our licensing business continues to show strong consumer demand.

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Additionally, the foodservice business earned lower royalties of $349,000 as compared to the fiscal 2020 period due to a shift in the Sam’s Club business.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $214,000 during the fiscal 2021 period as compared to the fiscal 2020 period primarily due to additional royalties earned on sales of French fries, cocktail franks and mozzarella sticks.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $276,000 during the fiscal 2021 period as compared to the fiscal 2020 period primarily due to additional royalties earned on sales of French fries, pickles, cocktail franks and mozzarella sticks.

Franchise fees and royalties were $667,000 in the fiscal 2021 period as compared to $2,575,000 in the fiscal 2020 period.

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Traditional franchise royalties were $432,000 in the fiscal 2021 period as compared to $1,598,000 in the fiscal 2020 period.

Franchise restaurant sales declined to $2,218,000 in the fiscal 2021 period as compared to $17,516,000 in the fiscal 2020 period primarily due to mandated shutdowns and stay at home orders across the country as a result of the COVID-19 pandemic.

Franchise restaurant sales declined to $9,188,000 in the fiscal 2021 period as compared to $35,838,000 in the fiscal 2020 period primarily due to temporary closures, as well as venues operating at significantly reduced traffic as a result of the COVID-19 pandemic.

Comparable domestic franchise sales (consisting of 46 Nathan’s outlets, excluding sales under the Branded Menu Program) were $7,193,000 in the fiscal 2021 period as compared to $21,969,000 in the fiscal 2020 period.

At June 28, 2020, 217 franchised outlets, including domestic, international and Branded Menu Program outlets were operating compared to 253 franchised outlets, including domestic, international and Branded Menu Program outlets at June 30, 2019.

Total franchise fee income was $81,000 in the fiscal 2021 period as compared to $97,000 in the fiscal 2020 period.

Domestic franchise fee income was $33,000 in the fiscal 2021 period as compared to $38,000 in the fiscal 2020 period.

International franchise fee income was $25,000 in the fiscal 2021 period as compared to $41,000 during the fiscal 2020 period.

Total franchise fee income was $148,000 in the fiscal 2021 period compared to $548,000 in the fiscal 2020 period.

Domestic franchise fee income was $64,000 in the fiscal 2021 period compared to $73,000 in the fiscal 2020 period.

International franchise fee income was $51,000 in the fiscal 2021 period compared to $82,000 during the fiscal 2020 period.

We recognized $33,000 and $393,000 in forfeited fees in the fiscal 2021 and fiscal 2020 periods, respectively.

During the fiscal 2021 period, two new traditional franchised outlets opened, domestically.

During the fiscal 2020 period, four new traditional franchised outlets opened, domestically.

Advertising fund revenue, after eliminating Company contributions, was $289,000 in the fiscal 2021 period, as compared to $482,000 in the fiscal 2020 period.

The forfeited fees in the fiscal 2020 period were primarily from the termination of our Master Franchise Agreements for Russia and Kyrgyzstan.

During the fiscal 2021 period, six franchised outlets opened, including three new Branded Menu Program outlets, domestically.

During the fiscal 2020 period, thirteen franchised outlets opened, including four new Branded Menu Program outlets.

Advertising fund revenue, after eliminating Company contributions, was $692,000 in the fiscal 2021 period, as compared to $1,179,000 during the fiscal 2020 period.

Costs and Expenses  

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Our gross profit (representing the difference between sales and cost of sales) decreased to $4,151,000 or 21.4% of sales during the fiscal 2021 period as compared to $10,632,000 or 25.1% of sales during the fiscal 2020 period.

The reduction in margin was primarily due to the higher cost of beef in the Branded Product Program and higher prime restaurant costs associated with new menu offerings.

Cost of sales in the Branded Product Program decreased by approximately $14,439,000 during the fiscal 2021 period as compared to the fiscal 2020 period, primarily due to the 8.3% increase in the average cost per pound of our hot dogs offset by the 57% decrease in the volume of product sold due to the COVID-19 pandemic as discussed above.

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With respect to Company-owned restaurants, our cost of sales during the fiscal 2021 period was $3,184,000 or 64.6% of restaurant sales, as compared to $5,232,000 or 52.1% of restaurant sales in the fiscal 2020 period.

We experienced higher food costs driven by the higher commodity costs of beef, and higher labor costs in connection with training associated with the introduction of new menu offerings.

Restaurant operating expenses were $1,863,000 in the fiscal 2021 period as compared to $2,027,000 in the fiscal 2020 period.

We incurred lower marketing expenses of $48,000 and lower utility expenses of $14,000.

Depreciation and amortization was $310,000 in the fiscal 2021 and fiscal 2020 periods.

We incurred lower occupancy expenses of $63,000, lower utility expenses of $37,000, lower marketing expenses of $52,000 and lower repairs and maintenance expenses of $22,000 which were offset, in part, by higher delivery charges associated with offsite consumption.

Depreciation and amortization were $612,000 in the fiscal 2021 period as compared to $647,000 in the fiscal 2020 period.

General and administrative expenses decreased by $2,040,000 or 27% to $5,456,000 in the fiscal 2021 period as compared to $7,496,000 in the fiscal 2020 period.

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Advertising fund expense, after eliminating Company contributions, was $692,000 in the fiscal 2021 period, as compared to $1,549,000 in the fiscal 2020 period.

Interest expense of $2,650,000 in the fiscal 2021 and fiscal 2020 periods represented accrued interest of $2,477,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $173,000.

Interest income was $117,000 for the fiscal 2021 period as compared to $366,000 in the fiscal 2020 period.

Other income, which primarily relates to a sublease of a franchised restaurant, was $21,000 in the fiscal 2020 period.

Provision for Income Taxes

The income tax provision for the thirteen-week periods ended June 28, 2020 and June 30, 2019 reflect effective tax rates of 28.1% and 25.3%, respectively.

Nathan’s effective tax rate for the thirteen-week period June 30, 2019 was reduced by 3.2%, as a result of the tax benefits associated with stock compensation.

For the thirteen weeks ended June 30, 2019, excess tax benefits of $228,000, were reflected in the Consolidated Statements of Earnings as a reduction to the provision for income taxes.

Interest expense of $5,301,000 in both the fiscal 2021 period and the fiscal 2020 period represented accrued interest of $4,955,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $346,000.

Interest income was $220,000 in the fiscal 2021 period as compared to $736,000 in the fiscal 2020 period.

Other income, which primarily relates to a sublease of a franchised restaurant, was $22,000 and $41,000 in the fiscal 2021 and fiscal 2020 periods, respectively.

Provision for Income Taxes  

The income tax provision for the fiscal 2021 period and fiscal 2020 period reflect effective tax rates of 27.9% and 26.5%, respectively.

Nathan’s effective tax rate for the fiscal 2020 period was reduced by 1.9% as a result of the tax benefits associated with stock compensation.

For the fiscal 2020 period, 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 28.4% for the fiscal 2020 period.

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.

The audit is ongoing.

The amount of unrecognized tax benefits at June 28, 2020 was $321,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of June 28, 2020, Nathan’s had $274,000 of accrued interest and penalties in connection with unrecognized tax benefits.

The amount of unrecognized tax benefits at September 27, 2020 was $333,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of September 27 2020, Nathan’s had $289,000 of accrued interest and penalties in connection with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to $16,000 during the fiscal year ending March 28, 2021.

Off-Balance Sheet Arrangements  

At June 28, 2020 and June 30, 2019, Nathan’s did not have any open purchase commitments for hot dogs.

At September 27, 2020 and September 29, 2019, Nathan’s did not have any open purchase commitments for hot dogs.

Nathan’s may enter into purchase commitments in the future as favorable market conditions become available.

Liquidity and Capital Resources

Cash and cash equivalents at June 28, 2020 aggregated $76,941,000, a $176,000 decrease during the fiscal 2021 period as compared to cash and cash equivalents of $77,117,000 at March 29, 2020.

Cash and cash equivalents at September 27, 2020 aggregated $81,519,000, a $4,402,000 increase during the fiscal 2021 period as compared to cash and cash equivalents of $77,117,000 at March 29, 2020.

Net working capital increased to $78,978,000 from $75,165,000 at March 29, 2020.

On May 1, 2020, we paid our first semi-annual interest payment of $4,968,750 for fiscal 2021.

We paid our first quarter dividend of $1,440,000 on June 26, 2020.

We paid our semi-annual interest payments for fiscal 2021 of $4,968,750 on May 1, 2020 and November 1, 2020, respectively.

We expect to pay our third quarter dividend on December 4, 2020.

In November 2017, the Company refinanced its then-outstanding 2020 Notes totaling $135.0 million at 10.000% per annum by issuing $150.0 million 2025 Notes at 6.625% per annum.

Please refer to Note Q –

Long Term Debt in the accompanying Consolidated Financial Statements, for a further discussion of the Redemption.

Long Term Debt in the accompanying Consolidated Financial Statements, for further discussion of the Redemption.

The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1 st and November 1 st of each year, beginning on May 1, 2018.

Semi-annual interest payments are $4,968,750.

During the thirteen-week period ended June 28, 2020, we paid interest of $4,968,750 on May 1, 2020 for the 2025 Notes.

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

Cash provided by operations of $3,002,000 in the fiscal 2021 period is primarily attributable to net income of $4,000,000 in addition to other non-cash operating items of $584,000, offset by changes in other operating assets and liabilities of $1,582,000.

Non-cash operating expenses consist principally of $310,000 of depreciation and amortization, $173,000 amortization of debt issuance costs, share-based compensation expense of $29,000, non-cash rental expense of $66,000, and bad debts of $14,000.

In the fiscal 2021 period, accounts and other receivables decreased by $2,870,000 due primarily to lower Branded Product Program receivables of $3,231,000 due to reduced sales as a result of the COVID-19 pandemic, offset, in part, by higher franchise and license royalty receivables and higher seasonal receivables due on behalf of the Advertising Fund.

In the fiscal 2021 period, accounts payable, accrued expenses and other current liabilities decreased by $4,127,000 due to the reduction in accrued interest of $2,491,000 resulting from our May 2020 debt service payment.

Accrued payroll and other benefits declined by $1,929,000 resulting from the payment of year-end compensation.

This was offset by higher accrued corporate taxes of $1,199,000.

Accounts payable decreased by $790,000 due principally to reduced product purchases made for the Branded Product Program due to the slowdown resulting from the COVID-19 pandemic.

Cash provided by operations of $9,107,000 in the fiscal 2021 period is primarily attributable to net income of $7,655,000 in addition to other non-cash operating items of $1,154,000, as well as changes in other operating assets and liabilities of $298,000.

Non-cash operating expenses consist principally of depreciation and amortization of $612,000, amortization of debt issuance costs of $346,000, share-based compensation expense of $58,000, non-cash rental expense of $127,000, and bad debts of $27,000.

In the fiscal 2021 period, accounts and other receivables decreased by $2,114,000 due primarily to lower Branded Product Program receivables of $1,157,000 due to reduced sales as a result of the COVID-19 pandemic, lower franchise and license royalty receivables of $1,169,000, offset, in part, by higher seasonal receivables due on behalf of the Advertising Fund.

In the fiscal 2021 period, accounts payable, accrued expenses and other current liabilities decreased by $2,166,000 due to the reduction in accrued payroll and other benefits of $1,534,000 resulting from the payment of year-end incentive compensation and earned deferred revenue of $494,000.

Rebates due under the Branded Product Program were lower by $302,000 due primarily to reduced sales as a result of the COVID-19 pandemic.

Partially offsetting this reduction were increased accrued expenses for construction costs and other items.

Cash used in investing activities was $237,000 in the fiscal 2021 period primarily in connection with capital expenditures incurred for our Branded Product Program and the installation of a new point-of-sale system at our Company-owned units.

Cash used in financing activities of $2,941,000 in the fiscal 2021 period relates to the payment of the Company’s regular $0.35 per share cash dividend of $1,440,000.

This was offset by higher accrued corporate taxes of $195,000 and higher accrued rent and occupancy costs of $356,000.

Accounts payable decreased by $421,000 due principally to reduced product purchases made for the Branded Product Program as a result of the COVID-19 pandemic and the timing of share repurchases under the 10b-5 plan.

Cash used in investing activities was $318,000 in the fiscal 2021 period primarily in connection with capital expenditures incurred for our Branded Product Program and the installation of a new point-of sale system at our Company-owned restaurants.

Cash used in financing activities of $4,387,000 in the fiscal 2021 period relates to the payments of the Company’s quarterly $0.35 per share cash dividend totaling $2,880,000.

Additionally, during the fiscal 2021 period, Nathan’s repurchased 26,676 shares of common stock for $1,501,000.

During the period from October 2001 through June 28, 2020, Nathan’s purchased 5,254,081 shares of its common stock at a cost of approximately $84,770,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors.

During the period from October 2001 through September 27, 2020, Nathan’s purchased 5,254,081 shares of its common stock at a cost of approximately $84,770,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors.

Since March 26, 2007, we have repurchased 3,362,981 shares at a total cost of approximately $77,612,000, reducing the number of shares then-outstanding by 55.9%.

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 June 28, 2020, Nathan’s has repurchased 1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan.

At June 28, 2020, there were 133,550 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

As of September 27, 2020, Nathan’s has repurchased 1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan.

At September 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.

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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 will expire on the earlier of (a) August 12, 2020 or (b) the earlier of when (i) the aggregate purchase price of all shares of common stock purchased under the 10b5-1 Plan equals $5,550,000 and (ii) the aggregate purchases under the 10b5-1 Plan equals 100,000 shares unless terminated earlier by the Company’s Board of Directors.

During the thirteen weeks ended June 28, 2020, 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.

At June 28, 2020, $1,322,000 or 22,406 shares were available for repurchase under the 10b5-1 Plan.

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 twenty-six weeks ended September 27, 2020, 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.

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.

As discussed above, we had cash and cash equivalents at June 28, 2020 aggregating $76,941,000.

As discussed above, we had cash and cash equivalents at September 27, 2020 aggregating $81,519,000.

Our Board routinely monitors and assesses its cash position and our current and potential capital requirements.

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On May 31, 2018, Nathan’s Board of Directors authorized the commencement of a regular dividend of $1.00 per share per annum, payable at the rate of $0.25 per share per quarter.

On June 14, 2019, Nathans’

Board of Directors authorized the increase of its regular quarterly dividend to $0.35 from $0.25.

The Company paid its first quarter fiscal 2021 dividend of $1,440,000 on June 26, 2020.

Effective August 7, 2020, the Company declared its second quarter dividend of $0.35 per common share to stockholders of record as of the close of business on August 24, 2020, which is payable on September 4, 2020.

On June 14, 2019, Nathan’s Board of Directors authorized the increase of its regular quarterly dividend to $0.35 from $0.25.

The Company paid its first quarter fiscal 2021 dividend of $1,440,000 on June 26, 2020 and its second quarter fiscal 2021 dividend of $1,440,000 on September 4, 2020.

Effective November 6, 2020, the Company declared its third quarter dividend of $0.35 per common share to stockholders of record as of the close of business on November 23, 2020, which is payable on December 4, 2020.

We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs, service the outstanding debt, fund our dividend program and may continue our stock repurchase programs, funding those investments from our operating cash flow.

We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis.

During the fiscal year ending March 28, 2021, we will be required to make interest payments of $9,937,500, of which $4,968,750 has been made on May 1, 2020.

During the fiscal year ending March 28, 2021, we will be required to make interest payments of $9,937,500, of which all have been made as of November 1, 2020.

Management believes that available cash, cash equivalents and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements, fund dividend distributions and stock repurchases for at least the next 12 months.

At June 28, 2020, we sublet one property to a franchisee that we lease from a third party.

At September 27, 2020, we sublet one property to a franchisee that we lease from a third party.

We remain contingently liable for all costs associated with this property including:

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We may incur future cash payments with respect to such property, consisting primarily of future lease payments, including costs and expenses associated with terminating such lease.

The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of June 28, 2020 (in thousands):

The following schedule represents Nathan’s cash contractual obligations and commitments by maturity as of September 27, 2020 (in thousands):

Payments Due by Period

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Represents the principal due on the 2025 Notes, but does not include interest expense.

Reflects the temporary salary reductions implemented in response to COVID-19, estimated to remain in place for six months.

Reflects the temporary salary reduction implemented in response to COVID-19.

See Note R to the Consolidated Financial Statements for additional information on the Company’s lease commitments.

At June 28, 2020, the Company had unrecognized tax benefits of $321,000.

At September 27, 2020, the Company had unrecognized tax benefits of $333,000.

The Company believes that is reasonably possible that the unrecognized tax benefits may decrease by $16,000 within the next year.

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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 June 28, 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.

As of September 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.

Inflationary Impact           

We do not believe that general inflation has materially impacted earnings since 2006.

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Our average cost of hot dogs between October 2019 and March 2020 was approximately 11.2% higher than between October 2018 and March 2019.

Our average cost of hot dogs between April 2020 and June 2020 was approximately 9.1% higher than between April 2019 and June 2019.

Our average cost of hot dogs between October 2019 and September 2020 was approximately 9.4% higher than between October 2018 and September 2019.

Beginning in May 2020, the cost of hot dogs has increased significantly due primarily to the effects of the COVID-19 pandemic on the meat processing industry.

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Effective April 1, 2014, the City of New York, passed legislation requiring employers to offer paid sick leave to all employees, including part-time employees, who work more than 80 hours for the employer.

Nathan’s currently operates two restaurants that have been affected by this legislation.

Effective November 27, 2017, the City of New York Fair Work Week Legislation package of bills took effect that the city estimates will cover some 65,000 fast food workers by giving them more predictable work schedules.

Nathan’s operates two restaurants that have been affected by this legislation.

Effective November 27, 2017, the City of New York Fair Work Week Legislation package of bills took effect that covers approximately 65,000 fast food workers by giving them more predictable work schedules.

A key component of the package is a requirement that fast food restaurants schedule their workers at least two weeks in advance or pay employees between $10 to $75 per scheduling change, depending on the situation.

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We believe that we have been able to implement tools to minimize the financial impact of this legislation.

Nevertheless, we incurred approximately $1,000 of additional costs due to this legislation during the fiscal 2021 period.

Continued increases in labor, food and other operating expenses, including health care, could adversely affect our operations and those of the restaurant industry and we might have to further reconsider our pricing strategy as a means to offset reduced operating margins.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis