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

Thirteen and ~~Thirty-nine~~Twenty-six weeks ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~

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

Thirteen weeks ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~

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

~~Thirty-nine~~Twenty-six weeks ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~

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

~~Thirty-nine~~Twenty-six weeks ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~

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

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~~twenty-six week periods ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~ 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.

We have reclassified certain prior period items in the Consolidated Statement of Cash Flows in the thirty-nine week period ended December 23, 2018 to conform with the classifications for the fiscal year ended March 31, 2019. These reclassifications had no effect on previously reported cash flows. 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~~Consolidated Financial Statements and ~~notes~~Notes thereto included in Nathan’s Annual Report on Form ~~10-K~~10-K for the fiscal year ended March ~~31, 2019.~~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~~10-K for the fiscal year ended March ~~31, 2019.~~29, 2020.

Covid-19Pandemic

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 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 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 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 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). 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 franchise 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.

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 furloughs
	●	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 ~~STANDARDS~~

~~Leases~~STANDARD

In ~~February 2016,~~ January 2017, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~new~~an update to the accounting guidance ~~on leases, Topic 842, which outlines principles~~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 ~~recognition, measurement, presentation and disclosure~~amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of ~~leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on~~ the ~~balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases.~~goodwill. The Company adopted the new guidance during the first quarter of fiscal 2020 using the effective date of April 1, 2019 as the date of initial application; therefore, the comparative period has not been adjusted and continues to be reported under the previous lease guidance.

The new standard provides for a number of practical expedients upon adoption. The Company elected the package of practical expedients, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did not recognize right-of-use (“ROU”) assets or liabilities. The Company also elected the practical expedient for lessees to account for lease components and non-lease components as a single lease component for all underlying classes of assets. The Company did not elect the use-of-hindsight practical expedient.

~~As a result of adopting this new~~ guidance on the first day of fiscal year 2020, substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of $7,804,000 and $8,533,000, respectively, as of the first day of fiscal yearMarch 30, 2020. ~~The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets.~~

~~-8-~~

~~The effects of the changes made to the Company's consolidated balance sheet as of April 1, 2019 for the adoption of the new lease guidance were as follows (in thousands):~~

Balance at
March 31, 2019

Adjustments due to
adoption of the
new lease guidance

Reclassifications

Balance at
April 1, 2019

Other Assets

Operating lease assets
- 7,804 - 7,804
Other assets
465 - 31 496

Current Liabilities

Current portion of operating lease liabilities
- 1,162 - 1,162

Long Term Liabilities

Long-term operating lease liabilities
- 7,371 - 7,371
Other liabilities
1,390 (729 ) 31 692

The adoption of ~~the new~~this guidance ~~is non-cash in nature and had no~~did not have a material impact on ~~net cash flows from operating, investing, or financing activities.~~

~~See Note Pfor additional information regarding our lease arrangements and~~ the ~~Company's updated lease accounting policies.~~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~~( 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 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 guidance is effective prospectively for public business entities for annual reporting periods beginning after December 15, 2019. This standard is required to take effect in Nathan’s first quarter (June 2020) of our fiscal year ending March 28, 2021. Nathan’s does not expect the adoption of this new guidance to have a material impact on its results of operations or financial position.

In December 2019, the FASB issued ASU ~~2019-12,~~ 2019-12,“Income Taxes (Topic ~~740)~~740): Simplifying the Accounting for Income Taxes,”,” which is intended to simplify various aspects related to accounting for income taxes. ASU ~~2019-12~~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~~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~~( 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-~~
9

NOTE D – REVENUES

The Company’s disaggregated revenues for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~ are as follows (in thousands):

	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	December 29, 2019		December 23, 2018		December 29, 2019		December 23, 2018		September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019

Branded Products	$	13,694	$	12,453	$	45,989	$	44,308	$	9,698	$	16,182	$	14,447	$	32,295
Company-operated restaurants		1,662		1,951		11,710		12,140		2,994		5,924		4,928		10,048
Total sales		15,356		14,404		57,699		56,448		12,692		22,106		19,375		42,343

License royalties		4,412		4,316		18,559		18,160		8,268		5,425		18,791		14,147

Franchise royalties		802		805		2,829		2,906		409		1,047		519		2,027
Franchise fees		233		106		781		348		67		451		148		548
Total franchise fees and royalties		1,035		911		3,610		3,254		476		1,498		667		2,575

Advertising fund revenue		573		591		1,752		1,858		403		697		692		1,179

Total revenues	$	21,376	$	20,222	$	81,620	$	79,720	$	21,839	$	29,726	$	39,525	$	60,244

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

	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	December 29, 2019		December 23, 2018		December 29, 2019		December 23, 2018		September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019

United States	$	20,308	$	19,546	$	77,930	$	77,022	$	21,501	$	28,235	$	38,913	$	57,622
International		1,068		676		3,690		2,698		338		1,491		612		2,622
Total revenues	$	21,376	$	20,222	$	81,620	$	79,720	$	21,839	$	29,726	$	39,525	$	60,244

Contract balances

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

December 29,
2019

March 31,
2019

Deferred franchise fees (a)
$ 2,314 $ 3,005

September 27,
2020

March 29,
2020

Deferred franchise fees (a)
$ 1,834 $ 1,917

(a)
Deferred franchise fees of ~~$278~~$225 and ~~$2,036~~$1,609 as of ~~December 29, 2019~~ September 27, 2020 and ~~$318~~$230 and ~~$2,687~~$1,687 as of March ~~31, 2019~~ 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 29,
2019

December 23,
2018

Deferred franchise fees at beginning of period
3,005 3,139 (a)
Revenue recognized during the period
(781 ) (348 )
New deferrals due to cash received and other
90 828
Deferred franchise fees at end of period
$ 2,314 $ 3,619
~~(a)~~
~~Includes the cumulative effect of adopting Topic 606 of $2,735.~~

Twenty-six weeks ended

September 27,
2020

September 29,
2019

Deferred franchise fees at beginning of period
1,917 3,005
Additions to deferred revenue
65 59
Revenue recognized during the period
(148 ) (548 )
Deferred franchise fees at end of period
$ 1,834 $ 2,516

~~-10-~~
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

Estimate for fiscal year

2020 (a)
$ 71
2021
276
2021 (a)
$ 114
2022
266 218
2023
242 195
2024
231 183
2025
175
Thereafter
1,228 949
Total
$ 2,314 $ 1,834

(a)
Represents franchise fees expected to be recognized for the remainder of the ~~2020~~2021 fiscal year, which includes international development fees expected to be recognized over the duration of one year or less. Amount does not include ~~$781~~$148 of franchise fee revenue recognized for the ~~thirty-nine~~twenty-six weeks ended ~~December 29, 2019.~~September 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~~twenty-six week periods ended ~~December~~September 27, 2020 and September 29, 2019, ~~and December 23, 2018,~~ respectively.

Thirteen weeks
									Net Income
	Net Income				Number of Shares				Per Share					Net Income				Number of Shares				Net Income Per Share
	2019		2018		2019		2018		2019		2018			2020		2019		2020		2019		2020		2019
	(in thousands)				(in thousands)									(in thousands)				(in thousands)
Basic EPS
Basic calculation	$	1,213	$	9,722		4,225		4,187	$	0.29	$	2.32		$	3,655	$	3,658		4,115		4,227	$	0.89	$	0.87
Effect of dilutive employee stock options		-		-		-		34		-		(0.02	)		-		-		0		0		0		0
Diluted EPS
Diluted calculation	$	1,213	$	9,722		4,225		4,221	$	0.29	$	2.30		$	3,655	$	3,658		4,115		4,227	$	0.89	$	0.87

Thirty-nine weeks
									Net Income
Twenty-six weeks
	Net Income				Number of Shares				Per Share					Net Income				Number of Shares				Net Income Per Share
	2019		2018		2019		2018		2019		2018			2020		2019		2020		2019		2020		2019
	(in thousands)				(in thousands)									(in thousands)				(in thousands)
Basic EPS
Basic calculation	$	10,240	$	19,001		4,219		4,187	$	2.43	$	4.54		$	7,655	$	9,027		4,118		4,216	$	1.86	$	2.14
Effect of dilutive employee stock options		-		-		-		39		-		(0.04	)		-		-		0		0		0		0
Diluted EPS
Diluted calculation	$	10,240	$	19,001		4,219		4,226	$	2.43	$	4.50		$	7,655	$	9,027		4,118		4,216	$	1.86	$	2.14

Options to purchase 10,000 shares of common stock in the thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December~~September 27, 2020 and September 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-~~
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. ~~Cash~~The Company did not have any cash equivalents at ~~December~~September 27, 2020 and March 29, ~~2019~~ 2020.

At September 27, 2020 and March ~~31, 2019 were $20,000,000. Substantially~~29, 2020, substantially all of the Company’s cash ~~and cash equivalents~~balances are in excess of Federal government ~~insurance.~~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~~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~~September 27, 2020 and March 29, ~~2019 and March 31, 2019~~ 2020 were as follows (in thousands):

December 29, 2019

March 31, 2019

Face value

Fair value

Face Value

Fair value

Long-term debt
$ 150,000 $ 153,375 $ 150,000 $ 145,688

September 27, 2020

March 29, 2020

Face value

Fair value

Face Value

Fair value

Long-term debt
$ 150,000 $ 152,250 $ 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 29, 2019,~~ September 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 29,		March 31,		September 27,		March 29,
	2019		2019		2020		2020

Branded product sales	$	8,094	$	7,432	$	5,632	$	6,789
Franchise and license royalties		2,052		2,661		3,130		4,299
Other		788		665		460		257
		10,934		10,758		9,222		11,345

Less: allowance for doubtful accounts		498		585		255		237
Accounts and other receivables, net	$	10,436	$	10,173	$	8,967	$	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-~~
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~~twenty-six week period ended ~~December 29, 2019~~ September 27, 2020 and the fiscal year ended March ~~31, 2019~~ 29, 2020 are as follows (in thousands):

	December 29, 2019			March 31, 2019			September 27, 2020			March 29, 2020

Beginning balance	$	585		$	468		$	237		$	585
Reclassification to conform with Topic 606		-			77
Bad debt expense		7			100			27			71
Accounts written off		(94	)		(60	)
Write-offs and other								(9	)		(419	)
Ending balance	$	498		$	585		$	255		$	237

NOTE I – PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

	December 29,		March 31,		September 27,		March 29,
	2019		2019		2020		2020

Income taxes	$	113	$	106
Real estate taxes					$	73	$	75
Insurance		218		244		184		263
Marketing						0		369
Other		631		657		364		474
Total prepaid expenses and other current assets	$	962	$	1,007	$	621	$	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 September 27, 2020 and, as a result, no impairment charge was recorded for the thirteen and twenty-six week periods ended September 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 0 impairment charge was recorded for the thirteen and twenty-six week periods ended September 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 September 27, 2020.

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. NaN long-lived assets were deemed to be permanently impaired during the thirteen and twenty-six week periods ended September 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 29,

March 31,

September 27,

March 29,

2019

2019

2020

2020

Payroll and other benefits
$ 2,501 $ 3,150 $ 1,541 $ 3,075
Accrued rebates
689 770 212 514
Rent and occupancy costs
107 113 440 84
Deferred revenue
23 807 303 797
Construction costs
61 58 66 105
Interest
1,606 4,111 4,070 4,084
Professional fees
205 146 134 194
Sales, use and other taxes
36 27 57 17
Corporate income taxes
371 176
Other
242 202 358 251
Total accrued expenses and other current liabilities
$ 5,470 $ 9,384 $ 7,552 $ 9,297

Other liabilities consist of the following (in thousands):

December 29,

March 31,

September 27,

March 29,

2019

2019

2020

2020

Reserve for uncertain tax positions
$ 565 $ 496 $ 610 $ 567
Deferred rental liability
- 670
Other
236 224 129 129
Total other liabilities
$ 801 $ 1,390 $ 739 $ 696

~~-13-~~

NOTE KM – INCOME TAXES

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”) 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~~twenty-six periods ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~ reflect effective tax rates of ~~26.1%~~27.9% and ~~27.8%~~26.5%, respectively.

Nathan’s effective tax ~~rates~~rate for the ~~thirty-nine~~twenty-six week ~~periods ended December~~period September 29, 2019 ~~and December 23, 2018 were~~was reduced by ~~1.6% and 0.2%, respectively,~~1.9% as a result of the tax benefits associated with stock compensation. For the ~~thirty-nine~~twenty-six week ~~periods~~period ended ~~December~~September 29, 2019, ~~and December 23, 2018,~~ excess tax benefits of $228,000~~and $47,000, respectively,~~ were reflected in the Consolidated Statements of Earnings as a reduction in determining the provision for income taxes. Nathan’s effective tax ~~rates~~rate without ~~these adjustments~~this adjustment would have been ~~27.8%~~28.4% for the fiscal 2020 ~~period and 28.0% for the fiscal 2019~~ period.

The amount of unrecognized tax benefits at ~~December 29, 2019~~ September 27, 2020 was ~~$300,000~~$333,000 all of which would impact Nathan’s effective tax rate, if recognized. As of ~~December 29, 2019,~~ September 27, 2020, Nathan’s had ~~$269,000~~$289,000 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. The audit is ongoing.

NOTE LN – 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 ~~hotdogs,~~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 the 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 ~~certain executive compensation,~~and compliance costs and ~~the operating results~~expenses of the advertising fund.

Interest expense, interest income, ~~gain on disposal of property and equipment,~~ 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.

~~-14-~~
Operating segment information is as follows (in thousands):

Thirteen weeks ended

Thirty-nine weeks ended

Thirteen weeks ended

Twenty-six weeks ended

December 29,
2019

December 23,
2018

December 29,
2019

December 23,
2018

Sept. 27, 2020

Sept. 29, 2019

Sept. 27, 2020

Sept. 29, 2019

��
Revenues

Branded Product Program
$ 13,694 $ 12,453 $ 45,989 $ 44,308 $ 9,698 $ 16,182 $ 14,447 $ 32,295
Product licensing
4,412 4,316 18,559 18,160 8,268 5,425 18,791 14,147
Restaurant operations
2,697 2,862 15,320 15,394 3,470 7,422 5,595 12,623
Corporate (1)
573 591 1,752 1,858 403 697 692 1,179
Total revenues
$ 21,376 $ 20,222 $ 81,620 $ 79,720 $ 21,839 $ 29,726 $ 39,525 $ 60,244

Income from operations

Branded Product Program
$ 1,917 $ 2,464 $ 6,244 $ 7,725 $ 1,252 $ 2,124 $ 1,524 $ 4,327
Product licensing
4,367 4,270 18,423 18,023 8,223 5,380 18,700 14,056
Restaurant operations
(599 ) (112 ) 2,254 2,733 (138 ) 2,103 (1,031 ) 2,853
Corporate
(1,822 ) (1,726 ) (6,244 ) (6,018 ) (1,753 ) (2,241 ) (3,515 ) (4,422 )
Income from operations
$ 3,863 $ 4,896 $ 20,677 $ 22,463 $ 7,584 $ 7,366 $ 15,678 $ 16,814

Gain on disposal of property and equipment
- 10,821 - 11,177
Loss on disposal of property and equipment
0 (2 ) 0 (2 )
Interest expense
(2,650 ) (2,650 ) (7,951 ) (7,951 ) (2,651 ) (2,651 ) (5,301 ) (5,301 )
Interest income
338 277 1,074 453 103 370 220 736
Other income, net
22 5 61 189 22 20 22 41
Income before provision for income taxes
$ 1,573 $ 13,349 $ 13,861 $ 26,331 $ 5,058 $ 5,103 $ 10,619 $ 12,288

~~(1)~~(1)
Represents advertising fund revenue
~~Represents advertising fund revenue~~

NOTE M–O – SHARE-BASED COMPENSATION

Total share-based compensation during the ~~thirteen-week~~thirteen week periods ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~ was $29,000 and ~~$29,000,~~$30,000, respectively. Total share-based compensation during the ~~thirty-nine~~twenty-six week periods ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~ was ~~$87,000 and $133,000, respectively.~~$58,000. Total share-based compensation is included in general and administrative expenses in our accompanying Consolidated Statements of Earnings. As of ~~December 29, 2019,~~ September 27, 2020, there was ~~$198,000~~$111,000 of unamortized compensation expense related to share-based incentive awards. ~~We expect~~The Company expects to recognize this expense over approximately ~~twenty~~eleven 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 Thirteen weeks ended Twenty-six weeks ended

December 29,
2019

December 23,
2018

December 29,
2019

December 23,
2018

Sept. 27, 2020

Sept. 29, 2019

Sept. 27, 2020

Sept. 29, 2019

Stock options
$ 21 $ 21 $ 64 $ 81 $ 21 $ 22 $ 42 $ 43
Restricted stock
8 8 23 52 8 8 16 15
Total compensation cost
$ 29 $ 29 $ 87 $ 133 $ 29 $ 30 $ 58 $ 58

Stock options:

There were no0 new share-based awards granted during the ~~thirty-nine~~twenty-six week period ~~December 29, 2019.~~ended September 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~~three-year period commencing September 12, 2019.
~~-15-~~

Transactions with respect to stock options for the ~~thirty-nine~~twenty-six weeks ended ~~December 29, 2019~~ September 27, 2020 are as ~~follows:~~follows:

Weighted-

Weighted-

Aggregate

Average

Average

Intrinsic

Exercise

Remaining

Value

Shares

Price

Contractual Life

(in thousands)

Options outstanding at March 31, 2019 fiscal year (A)
42,234 $ 46.807 1.32 $ 1,127
Granted
- - - -
Exercised
(32,234 ) $ 33.438 - 1,134
Options outstanding at December 29, 2019
10,000 $ 89.90 3.70 -

Options exercisable at December 29, 2019
3,333 $ 89.90 3.70 -
A-
~~Represents outstanding options after giving effect to the replacement options issued in connection with the Company’s special dividend to shareholders of record on December 22, 2017.~~
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
0 0 - -
Exercised
0 0 - 0
Options outstanding at September 27, 2020
10,000 $ 89.90 2.96 0

Options exercisable at September 27, 2020
6,667 $ 89.90 2.96 0

Restricted stock:

Transactions with respect to restricted stock for the ~~thirty-nine~~twenty-six weeks ended ~~December 29, 2019~~ September 27, 2020 are as follows:

Weighted-
Shares
Weighted-
Average
Grant-date
Fair value
Per share

Average

Grant-date
Fair value

Shares

Per share

Unvested restricted stock at March 31, 2019
1,000 $ 89.90
Unvested restricted stock at March 29, 2020
667 $ 89.90
Granted
- - 0 0
Vested
(333 ) $ 89.90 (334 ) $ 89.90
Unvested restricted stock at December 29, 2019
667 $ 89.90
Unvested restricted stock at September 27, 2020
333 $ 89.90

NOTE N–P – STOCKHOLDERS’ EQUITY

1. Dividends

Effective June ~~14, 2019,~~ 12, 2020, the Board declared its first quarterly cash dividend of $0.35 per share for fiscal year ~~2020,~~2021, aggregating ~~$1,479,000,~~$1,440,000, which was paid on June ~~28, 2019~~ 26, 2020 to stockholders of record as of the close of business on June ~~24, 2019.~~22, 2020.

Effective August ~~9, 2019,~~ 7, 2020, the Board declared its second quarterly cash dividend of $0.35 per share for fiscal year 2021,aggregating ~~$1,479,000,~~$1,440,000, which was paid on September ~~6, 2019~~ 4, 2020 to stockholders of record as of the close of business on August ~~26, 2019.~~24, 2020.

Effective November ~~8, 2019,~~ 6, 2020 the Board declared its third quarterly cash dividend of $0.35 per share ~~aggregating $1,479,000, which was paid~~payable on December ~~6, 2019~~ 4, 2020 to stockholders of record as of the close of business on November ~~25, 2019.~~

~~Effective February 7, 2020, the Board declared its fourth quarterly cash dividend of $0.35 per share payable on March 6, 2020 to stockholders of record as of the close of business on February 24,~~23, 2020.

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 O)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~~“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. In the event that the Company issues restricted stock awards pursuant to the 2010 Plan, each share of restricted stock would reduce the amount of available shares for issuance by either 3.2 shares for each share of restricted stock granted or 1 share for each share of restricted stock granted.

~~-16-~~
On September 18, 2019, the Company’s shareholders approved the Nathan’s Famous, Inc. 2019 Stock Incentive Plan (the ~~“2019~~“2019 Plan”). The 2019 Plan ~~will be~~became effective as of July 1, 2020 ~~(the~~(the "Effective Date"). Following the Effective Date, (i) no additional stock awards ~~shall be~~were granted under the 2010 Plan and (ii) all outstanding stock awards previously granted under the 2010 Plan ~~shall remain~~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.

~~Once effective,~~As of the Effective Date, we ~~will be~~were able to issue up to: (a) 369,584 shares of common stock under the 2019 Plan which includes: (i) shares that have been authorized but not issued pursuant to the 2010 Plan as of ~~July 1, 2020~~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 ~~July 1, 2020~~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 29, 2019,~~ September 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 that may be granted under the 2010 Plan.

3. Stock Repurchase PrPrograms~~ogram~~

During the period from October 2001 through ~~December 29, 2019,~~ September 27, 2020, Nathan’s purchased ~~5,155,472~~5,254,081 shares of common stock at a cost of ~~approximately $79,288,000~~$84,770,000 pursuant to various stock repurchase plans previously authorized by the Board of Directors. During the ~~thirty-nine~~twenty-six week period ended ~~December 29, 2019,~~ September 27, 2020, we repurchased ~~13,709~~26,676 shares of common stock at a cost of ~~$985,000.~~$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 29, 2019,~~ September 27, 2020, Nathan’s had repurchased ~~967,841~~1,066,450 shares at a cost of ~~$31,627,000~~$37,108,000 under the sixth stock repurchase plan. At ~~December 29, 2019,~~ September 27, 2020 there were ~~232,159~~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 twenty-six week period 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.

NOTE OQ – LONG-TERM DEBT

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

	December 29,			March 31,			September 27,			March 29,
	2019			2019			2020			2020

6.625% Senior Secured Notes due 2025	$	150,000		$	150,000
6.625% Senior Secured Notes due 2025							$	150,000		$	150,000
Less: unamortized debt issuance costs		(4,032	)		(4,551	)		(3,514	)		(3,860	)
Long-term debt, net	$	145,968		$	145,449		$	146,486		$	146,140

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the ~~"2025~~"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~~$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 1^st and November 1^st of each year. The Company made its required semi-annual interest payments of $4,968,750 on May 1, ~~2019~~ 2020 and November 1, ~~2019.~~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 29, 2019,~~ September 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.
~~-17-~~

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.

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.

18
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~~(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 has 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.

~~-18-~~
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
YEAR
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, ~~2021 and prior to November 1,~~ 2022
~~101.656~~100.000 %
~~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.

NOTE PR – 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.

~~Determination of Whether a Contract Contains a Lease~~

We determine if an arrangement is a lease at inception or modification of a contract, and classify each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. Operating leases represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease.

A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating lease or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

~~ROU Model and Determination of Lease Term~~

The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.

~~-19-~~
19

~~Operating leases~~
For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday, no cash rent payments are typically due under the terms of the lease; however, rent expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other Assets” where the Company is a lessor. The Company recorded $32,000 in Other Assets at December 29, 2019. Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense relating to the operating lease liability. Variable lease cost for operating leases include Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than 12 months. Leases with an initial expected term of 12 months or less are not recorded in the Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Lease costs are recorded in the Consolidated Statements of Earnings based on the nature of the underlying lease as follows: (1) rental expense related to leases for Company-operated restaurants is recorded to “Restaurant Operating Expenses,” (2) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Other income, net” and (3) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative expenses.”
~~Rental income for operating leases on properties subleased to franchisees is recorded to “Other income, net.”~~
~~Significant Assumptions and Judgement~~
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (1) the classification and accounting for a lease or sublease as operating or finance, (2) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (3) the term over which leasehold improvements for each restaurant are amortized and (4) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income would vary if different estimates and assumptions were used.
Company as lessee

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

Thirteen weeks ended Thirty-nine weeks ended
Thirteen weeks
ended

Thirteen weeks
ended

Twenty-six weeks
ended

Twenty-six weeks
ended

December 29, 2019 December 29, 2019
September 27,
2020

September 29,
2019

September 27,
2020

September 29,
2019

Statement of Earnings

Operating lease cost
$ 339 $ 899 $ 396 $ 278 $ 811 $ 560
Short term lease cost
4 14 0 4 0 10
Variable lease cost
280 1,240 377 537 715 960
Less: Sublease income, net
(22 ) (63 ) (22 ) (20 ) (22 ) (41 )

Total net lease cost (a)
$ 601 $ 2,090 $ 751 $ 799 $ 1,504 $ 1,489

(a)
The thirteen and ~~thirty-nine~~twenty-six week periods ended ~~December~~September 27, 2020 and September 29, 2019 include ~~$470,~~$614, net and ~~$1,679,~~$1,194, net and $669, net and $1,209, net, respectively, recorded to “Restaurant Operating Expenses” for leases for Company-operated ~~restaurants, $153~~restaurants; $159 and ~~$474~~$332, and $150 and $321, respectively, recorded to “General and administrative expenses” for leases for corporate offices and ~~equipment~~equipment; and $22 and ~~$63~~$22, and $20 and $41, respectively, recorded to “Other income, net” for leased properties that are leased to ~~franchisees:~~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 29, 2019

December 29, 2019

Operating cash flows from operating leases
$ 60 $ 351
~~-20-~~
On November 29, 2019, the Company entered into an amendment to its lease agreement for its Coney Island Boardwalk restaurant, commencing on December 1, 2019 (the “Renewal Commencement Date”), extending the term for an additional eight (8) years, expiring November 30, 2027. The Company recorded an operating lease asset and liability of $1,911,000 on the Renewal Commencement date.

Thirteen weeks
ended

Thirteen weeks
ended

Twenty-six weeks
ended

Twenty-six weeks
ended

September 27,
2020

September 29,
2019

September 27,
2020

September 29,
2019

Operating cash flows from operating leases
$ 202 $ 131 $ 407 $ 291

The weighted average remaining lease term and weighted-average discount rate for operating leases as of ~~December 29, 2019~~ September 27, 2020 were as follows:

Weighted average remaining lease term (years):

Operating leases
~~8.3~~7.7

Weighted average discount rate:

Operating leases
~~8.870~~8.883 %

Future lease commitments to be paid and received by the Company as of ~~December 29, 2019~~ September 27, 2020 were as follows (in thousands):

Payments

Receipts

Payments

Receipts

Operating Leases

Subleases

Net Leases

Operating Leases

Subleases

Net Leases

Fiscal year:

2020 (a)
$ 247 $ 38 $ 209
2021
1,577 245 1,332
2021 (a)
$ 744 $ 77 $ 667
2022
1,831 247 1,584 1,837 247 1,590
2023
1,844 168 1,676 1,849 168 1,681
2024
1,774 169 1,605 1,774 169 1,605
2025
1,678 169 1,509
Thereafter
7,153 521 6,632 5,474 352 5,122
Total lease commitments
$ 14,426 $ 1,388 $ 13,038 $ 13,356 $ 1,182 $ 12,174
Less: Amount representing interest
4,314 3,648
Present value of lease liabilities (b)
$ 10,112 $ 9,708

(a)
Represents future lease commitments to be paid and received by the Company for the remainder of the 2021fiscal ~~year 2020 which excludes~~year. Amount does not include $633of lease commitments paid and received by the ~~thirty-nine weeks~~Company for the twenty-six week period ended ~~December 29, 2019.~~September 27, 2020.

(b)
The present value of minimum operating lease payments of ~~$1,449~~$1,821 and ~~$8,663~~$7,887 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

20
~~Future lease commitments to be paid and received by the~~ Company as ~~of March 31, 2019 were as follows (in thousands):~~

Payments

Receipts

Operating Leases

Subleases

Net Leases

Fiscal year:

2020
$ 1,162 $ 273 $ 889
2021
1,249 270 979
2022
1,503 272 1,231
2023
1,520 168 1,352
2024
1,453 169 1,284
Thereafter
5,868 521 5,347
Total lease commitments
$ 12,755 $ 1,673 $ 11,082
~~Company as lessor~~lessor

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

Thirteen weeks ended

Thirty-nine weeks ended

December 29, 2019

December 29, 2019

Operating lease income, net
$ 22 $ 63

Thirteen weeks
ended
September 27,
2020

Thirteen weeks
ended
September 29,
2019

Twenty-six weeks
ended
September 27,
2020

Twenty-six weeks
ended
September 29,
2019

Operating lease income, net
$ 22 $ 20 $ 22 $ 41

~~-21-~~

NOTE QS – 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~~5-year option and is limited to 24 months of rent for the firstthree years of the term. For the remainder of the term, ~~which expires in March 2020.~~ the Brooklyn Guaranty is limited to 12 months of rent plus reasonable costs of collection and attorney’s fees. As of September 27, 2020, Nathan’s has recorded a liability of ~~$217,000~~$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. ~~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.~~

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.

~~-22-~~
21

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;~~Notes (as defined herein); the impact of the Tax Cuts and Jobs Act (“the Tax 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 ~~31, 2019,~~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.

~~-23-~~
22

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~~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 ~~226~~241 Nathan’s franchised units, including 96111 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 22 states, and 10 foreign countries. At December 23, 2018, our restaurant system consisted of 261 Nathan’s franchised units, including 119 Branded Menu units, and five Company-owned units (including one seasonal unit), one of which was closed on January 6, 2019, located in 22 states, and 1312 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.

~~While we~~We remain committed to these parts of our business and we ~~begun implementing plans~~continue to reinvigorate our restaurant ~~system under the direction of our Senior Vice President of Restaurants to spearhead this initiative.~~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 ~~fries,~~fried potatoes, with other much higher quality ~~other~~ menu items developed to deliver best-in-class customer experience and greater customer frequency. Menu development activities ~~will be~~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. In order to support these activities, we expect to incur approximately $800,000 to $900,000 of incremental expenses as compared to this years’ anticipated spending, including $370,000 projected to be incurred by the Advertising Fund. Additionally, while we do not expect to significantly increase the number of ~~company-owned operations,~~Company-owned units, we ~~do expect to~~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 ~~31, 2019,~~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~~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 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 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.
23
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 third quarter of fiscal 2021:
●
Reduced payroll costs, through salary reductions and furloughs
●
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, 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 ~~31, 2019,~~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). ~~As discussed~~Except for the adoption in Note B – simplifying the ~~Company adopted Topic 842, “Leases” effective April 1, 2019. There~~testing for goodwill impairment, there have been no other significant changes to the Company’s accounting policies subsequent to March ~~31, 2019.~~29, 2020.

Adoption of New Accounting ~~Standards~~Standard

Please refer to Note B of the preceding consolidated financial statements for our discussion of the Adoption of the New Accounting Standard.
~~-24-~~

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.

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 and the ~~(gain)~~loss on disposal of property and equipment that the Company believes will impact the comparability of its results of operations.
24

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 29,
2019

December 23,
2018

December 29,
2019

December 23,
2018

(unaudited)

(unaudited)

Net income
$ 1,213 $ 9,722 $ 10,240 $ 19,001
Interest expense
2,650 2,650 7,951 7,951
Provision for income taxes
360 3,627 3,621 7,330
Depreciation and amortization
294 278 941 962
EBITDA
4,517 16,277 22,753 35,244

Share-based compensation
29 29 87 133
(Gain) on disposal of property and equipment (A)
- (10,821 ) - (11,177 )
Adjusted EBITDA
$ 4,546 $ 5,485 $ 22,840 $ 24,200
~~(A)~~
~~We have reclassified (Gain) on disposal of property and equipment in the thirteen and thirty-nine week periods ended December 23, 2018 to conform with the March 31, 2019 classifications.~~
Thirteen weeks ended Twenty-six weeks ended

September 27, 2020

September 29, 2019

September 27, 2020

September 29, 2019

(unaudited)

(unaudited)

Net income
$ 3,655 $ 3,658 $ 7,655 $ 9,027
Interest expense
2,651 2,651 5,301 5,301
Provision for income taxes
1,403 1,445 2,964 3,261
Depreciation and amortization
302 337 612 647
EBITDA
8,011 8,091 16,532 18,236

Share-based compensation
29 30 58 58
Loss on disposal of property and equipment
- 2 - 2
Adjusted EBITDA
$ 8,040 $ 8,123 $ 16,590 $ 18,296

Results of Operations

Thirteen weeks ended ~~December~~September 297, ~~201~~20920 compared to thirteen weeks ended ~~Dec~~September ~~ember~~ 2239, 20189

Revenues

Total sales ~~increased~~ decreasedby ~~6.6%~~43% to ~~$15,356,000~~$12,692,000 for the thirteen weeks ended ~~December 29, 2019~~September 27, 2020 (“~~third~~second quarter fiscal ~~2020”~~2021”) as compared to ~~$14,404,000~~$22,106,000 for the thirteen weeks ended ~~December 23, 2018~~September 29, 2019 (“~~third~~second quarter fiscal ~~2019”~~2020”). Foodservice sales from the Branded Product Program ~~increased~~ decreasedby ~~10.0%~~40% to ~~$13,694,000~~$9,698,000 for the ~~third~~second quarter fiscal ~~2020~~2021 as compared to sales of ~~$12,453,000 in~~$16,182,000 for the ~~third~~second quarter fiscal ~~2019. During~~2020. The sales from our Branded Product Program have been negatively impacted by the ~~third quarter fiscal 2020, the volume~~COVID-19 pandemic as many of ~~business increased by approximately 8.1%~~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 ~~our~~shopping malls. Our average selling prices increased by approximately ~~1.7%~~4%.
During the fiscal 2018 period, we added a new distributor to our distribution network that increased our sales during implementation of the new distributor. In addition to the additional business realized, beginning in the third quarter fiscal 2018, this distributor temporarily provided distribution to a number of significant contract accounts, further increasing their fiscal 2018 purchases. During the first quarter of fiscal 2019, the temporary distribution to our significant contract accounts began reverting back to our traditional methodology, although not fully completed until the second quarter fiscal 2021, the volume of business decreased by approximately 44% as compared to the second quarter fiscal ~~2019. We believe that the temporary distribution method did not impact comparability of our quarterly results.~~2020.
~~-25-~~

Total Company-owned restaurant sales decreased by ~~14.8%~~49% to ~~$1,662,000~~$2,994,000 during the ~~third~~second quarter fiscal ~~2020~~2021 compared to ~~$1,951,000~~$5,924,000 during the ~~third~~second quarter fiscal ~~2019. Comparable Company-owned restaurant sales, excluding sales from the restaurant that~~2020. The decrease was ~~sold last year, increased by approximately $52,000 or 3.2% as compared~~primarily due to a decline in customer traffic related to the ~~comparable period last year.~~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 ~~were $ 4,412,000~~increased by 52% to $8,268,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$4,316,000~~$5,425,000 in the ~~third~~second quarter fiscal ~~2019.~~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 ~~6.4%~~56% to ~~$3,979,000~~$7,716,000 for the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$3,741,000~~$4,935,000 in the ~~third~~second quarter fiscal ~~2019.~~2020. As consumers shelter at home, our licensing business continues to show strong consumer demand. The increase ~~at retail~~ is ~~primarily~~ due to a ~~higher average net selling price of 6.9% which was partly offset by a 1.3% decrease~~31% increase in retail volume during the ~~third~~second quarter fiscal ~~2020~~2021 period and a 24% increase in average net selling price as compared to the ~~third~~second quarter fiscal ~~2019.~~2020 period. Additionally, the foodservice business earned lower royalties of ~~$77,000~~$82,000 as compared to the ~~third~~second quarter fiscal ~~2019~~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 ~~declined~~increased by ~~$142,000~~$62,000 during the ~~third~~second quarter fiscal ~~2020 period~~2021 as compared to the ~~third~~second quarter fiscal ~~2019~~2020 primarily due to ~~the transition~~additional royalties earned on sales of ~~our enrobed hot dog products to a new licensee.~~French fries, pickles, cocktail franks and mozzarella sticks.

Franchise fees and royalties were ~~$1,035,000~~$476,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$911,000~~$1,498,000 in the ~~third~~second quarter fiscal ~~2019.~~2020. Total royalties were ~~$802,000~~$409,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$805,000~~$1,047,000 in the ~~third~~second quarter fiscal ~~2019.~~2020. Royalties earned under the Branded Menu program were ~~$148,000~~$70,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$167,000~~$220,000 in the ~~third~~second quarter fiscal ~~2019.~~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 ~~$654,000~~$339,000 in the ~~third~~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 as compared to $638,000 in the third quarter fiscal 2019. Franchise restaurant sales increased to $14,587,000 in the third quarter fiscal 2020 as compared to $14,158,000 in the third quarter fiscal 2019 primarily due to ~~an 8.0% increase in comparable domestic sales which was more than offset by~~temporary closings, as well as venues operating at significantly reduced traffic as a result of the ~~impact of units closed in the previous year, net of units opened in the current year.~~COVID-19 pandemic. Comparable domestic franchise sales (consisting of 8342 Nathan’s outlets, excluding sales under the Branded Menu Program) were ~~$11,810,000~~$5,638,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$10,933,000~~$10,112,000 in the ~~third~~second quarter fiscal ~~2019.~~2020.
25

At ~~December 29, 2019, 226~~ September 27, 2020, 214franchised outlets, including domestic, international and Branded Menu Program outlets were operating compared to ~~261~~241 domestic and international franchised or Branded Menu Program franchise outlets at ~~December 23, 2018.~~September 29, 2019. Total franchise fee income was ~~$233,000~~$67,000 in the ~~third~~second quarter fiscal ~~2020~~2021 compared to ~~$106,000~~$451,000 in the ~~third~~second quarter fiscal ~~2019.~~2020. Domestic franchise fee income was $31,000 in the second quarter fiscal 2021 compared to $35,000 in the ~~third~~second quarter fiscal ~~2020 compared to $38,000 in the third quarter fiscal 2019.~~2020. International franchise fee income was ~~$38,000~~$26,000 in the ~~third~~second quarter fiscal ~~2020~~2021 compared to ~~$42,000~~$41,000 during the ~~third~~second quarter fiscal ~~2019.~~ 2020.
We recognized ~~$160,000~~$10,000 in forfeited fees in the second quarter fiscal 2021, as compared to $375,000 of forfeited fees in the ~~third~~second quarter fiscal 2020 which were primarily from the termination of our Master Franchise Agreement for ~~Turkey~~Russia and ~~the closing of various domestic and international franchise locations~~Kyrgyzstan. ~~as compared to forfeited fees of $26,000 in~~During the ~~third~~second quarter fiscal ~~2019.~~2021, twonew traditional franchised outlets opened, domestically, including onenew Branded Menu Program outlet. During the ~~third~~second quarter fiscal 2020, ~~three~~nine new franchised outlets ~~opened. During the third quarter fiscal 2019, three~~opened, including four new ~~franchised outlets opened.~~Branded Menu Program outlets.

Advertising fund revenue, after eliminating Company contributions, was ~~$573,000~~$403,000 during the ~~third~~second quarter fiscal ~~2020 and $591,000~~2021, as compared to $697,000 during the ~~third~~second quarter fiscal ~~2019 period.~~2020.

Costs and Expenses

Overall, our cost of sales ~~increased~~decreased by ~~$1,602,000~~39% to ~~$12,262,000~~$9,927,000 in the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$10,660,000~~$16,289,000 in the ~~third~~second quarter fiscal ~~2019.~~2020. Our gross profit (representing the difference between sales and cost of sales) decreased to ~~$3,094,000~~$2,765,000 or ~~20.1%~~21.8% of sales during the ~~third~~second quarter fiscal ~~2020~~2021 as compared to ~~$3,744,000~~$5,817,000 or ~~26.0%~~26.3% of sales during the ~~third~~second quarter fiscal ~~2019.~~2020. The reduction in margin was primarily due to the higher cost of beef in the Branded Product Program, ~~and~~ higher prime restaurant costs ~~due in part to the incremental food~~associated with new menu offerings, and higher labor costs associated with ~~the rollout~~higher minimum hourly rates of ~~a variety~~pay at two of ~~new products.~~our Company-owned restaurants.

Cost of sales in the Branded Product Program ~~increased~~decreased by approximately ~~$1,769,000~~$5,261,000 during the ~~third~~second quarter fiscal ~~2020~~2021 as compared to the ~~third~~second quarter fiscal ~~2019,~~2020, primarily due to the ~~10.5%~~6.5% increase in the average cost per pound of our hot dogs ~~and~~offset by the ~~8.1% increase~~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.
Other Items
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.
26
Interest income was $103,000in 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 27, 2020 compared to twenty-six weeks ended September 29, 2019
Revenues
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 decreasedby 55% to $14,447,000 for the fiscal 2021 period as compared to sales of $32,295,000 for the fiscal 2020 period. 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 fiscal 2021 period, the volume of business decreasedby approximately 57% as compared to the fiscal 2020 period.
Total Company-owned restaurant sales decreasedby 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. 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 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, 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. The increase is due to a 16% increase in retail volume during the fiscal 2021 period and a 19% increase in average net selling price as compared to the fiscal 2020 period. 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 $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. Total royalties were $519,000 in the fiscal 2021 period as compared to $2,027,000 in the fiscal 2020 period. Royalties earned under the Branded Menu program were $87,000 in the fiscal 2021 period as compared to $429,000 in the fiscal 2020 period. 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 $432,000 in the fiscal 2021 period as compared to $1,598,000 in the fiscal 2020 period. 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.
27
At September 27, 2020, 214franchised 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 $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.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
Overall, our cost of sales decreased by 52% to $15,224,000 in the fiscal 2021 period as compared to $31,711,000 in the fiscal 2020 period. 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, 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 $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. We did not make any purchase commitments of beef during the fiscal ~~2020~~2021 and ~~2019~~2020 periods. 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 ~~third quarter~~ fiscal ~~2020~~2021 period was ~~$1,141,000~~$3,184,000 or ~~68.7%~~64.6% of restaurant sales, as compared to ~~$1,308,000~~$5,232,000 or ~~67.0%~~52.1% of restaurant sales in the ~~third quarter~~ fiscal ~~2019. Excluding the restaurant that was sold, costs of sales were 65.8% of restaurant sales in the third quarter of fiscal 2019.~~2020 period. We experienced higher ~~prime~~food costs ~~due in part to~~driven by the ~~incremental food and labor costs associated with the rollout of various new products in addition to~~ higher commodity costs of beef, higher prime costs associated with new menu offerings, and higher ~~wage rates, principally~~labor costs associated with ~~the effects~~higher minimum hourly rates of ~~the New York State minimum wage increase.~~pay at two of our Company-owned restaurants.We ~~expect that these higher costs will continue for the remainder of the fiscal 2020 period as we continue to introduce new products. We also~~ expect that our future labor costs ~~at our restaurants outside of New York City~~ 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 ~~any increase~~our food costs may be impacted by increases in commodity costs.
~~-26-~~

Restaurant operating expenses were ~~$764,000~~$1,863,000 in the ~~third quarter~~ fiscal ~~2020~~2021 period as compared to ~~$766,000~~$2,027,000 in the ~~third quarter~~ fiscal ~~2019. Excluding $83,000 of restaurant operating expenses from the fiscal 2019 period for the restaurant that was sold, we~~2020 period. We incurred ~~higher maintenance costs of $29,000, higher insurance costs of $21,000 and other~~lower occupancy expenses of ~~$18,000.~~$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 ~~was $294,000~~were $612,000 in the ~~third quarter~~ fiscal ~~2020~~2021 period as compared to ~~$278,000~~$647,000 in the ~~third quarter~~ fiscal 2019 as a result of amortization of the Arthur Treachers’ intellectual property which was partly offset by lower capital spending and reduced depreciation and amortization attributable to the restaurant that was sold of $3,000.2020 period.
General and administrative expenses ~~increased~~decreased by ~~$589,000~~$2,040,000 or ~~19.5%~~27% to ~~$3,620,000~~$5,456,000 in the ~~third quarter~~ fiscal ~~2020~~2021 period as compared to ~~$3,031,000~~$7,496,000 in the ~~third quarter~~ fiscal ~~2019.~~2020 period. The ~~increase~~decrease in general and administrative expenses was primarily attributable to ~~higher costs associated with~~reduced corporate payroll expenses through salary reductions and furloughs, a lower incentive compensation accrual, reduced tradeshow expenses in light of the ~~transformation efforts within our restaurant business, including higher compensation~~COVID-19 pandemic and reductions in other discretionary expenses including ~~severance,~~ marketing and ~~franchise solicitation costs aggregating $434,000 and higher professional fees of $68,000.~~travel.

Advertising fund expense, after eliminating Company contributions, was ~~$573,000 during~~$692,000in the ~~third quarter~~ fiscal ~~2020,~~2021 period, as compared to ~~$591,000~~$1,549,000 in the ~~third quarter~~ fiscal ~~2019.~~2020 period.

Other Items
Interest expense of ~~$2,650,000~~$5,301,000 in both the ~~third quarter~~fiscal 2021 period and the fiscal 2020 ~~and third quarter fiscal 2019~~period represented accrued interest of ~~$2,478,000~~$4,955,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of ~~$172,000.~~$346,000.

Interest income was ~~$338,000for~~$220,000 in the ~~third quarter~~ fiscal ~~2020~~2021 period as compared to $~~277,000~~736,000 in the ~~third quarter~~ fiscal ~~2019.~~
~~During the third quarter fiscal 2019 we recognized a gain on the sale of our Company-owned restaurant located in Bay Ridge, Brooklyn, NY of $10,821,000.~~2020 period.

Other income, which primarily relates ~~primarily~~ to a sublease ~~income from~~of a franchised restaurant, ofwas $22,000 and $41,000 in ~~each of~~ the ~~third quarter~~fiscal 2021 and fiscal 2020 ~~and third quarter fiscal 2019, which was partly offset by miscellaneous asset disposals during the third quarters fiscal 2020 and fiscal 2019.~~periods, respectively.
28

Provision for Income Taxes

The income tax provision for the ~~thirteen-week periods ended December 29, 2019~~fiscal 2021 period and ~~December 23, 2018~~fiscal 2020 period reflect effective tax rates of ~~22.9%~~27.9% and ~~27.2%~~26.5%, respectively. ~~During~~Nathan’s effective tax rate for the ~~third quarter~~ fiscal 2020 period was reduced by 1.9% as a result of the ~~Company’s~~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 ~~was favorably affected by 3.3% due to its return to provision~~without this adjustment ~~of approximately $52,000 in connection with the filing of its March 2019 tax returns. In November 2019, the State of New Jersey notified Nathan’s that our tax returns~~would have been 28.4% for the ~~years ended March 2016, 2017, and 2018 will be audited.~~fiscal 2020 period.

The amount of unrecognized tax benefits at ~~December 29, 2019~~September 27, 2020 was ~~$300,000~~$333,000 all of which would impact Nathan’s effective tax rate, if recognized. As of ~~December 29 2019,~~September 27 2020, Nathan’s had ~~$269,000~~$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 ~~$11,000~~$16,000 during the fiscal year ending March ~~29, 2020.~~
~~Results of Operations~~
T~~hirty~~-~~nine~~ ~~weeks ended~~ ~~December~~ 29~~, 201~~9 ~~compared to t~~~~hirty-nine week~~~~s ended~~ ~~Dece~~~~mber 2~~3~~, 201~~8
~~Revenues~~
Total sales increased by 2.2% or $1,251,000 to $57,699,000 for the thirty-nine weeks ended December 29, 2019 (“fiscal 2020 period”) as compared to $56,448,000 for the thirty-nine weeks ended December 23, 2018 (“fiscal 2019 period”). Foodservice sales from the Branded Product Program increased by 3.8% to $45,989,000 for the fiscal 2020 period as compared to sales of $44,308,000 in the fiscal 2019 period. During the fiscal 2020 period, the volume of business increased by approximately 3.9% and the average selling prices increased by approximately 0.2%.
During the fiscal 2018 period, we added a new distributor to our distribution network that increased our sales during implementation of the new distributor. In addition to the additional business realized, beginning in the third quarter fiscal 2018, this distributor temporarily provided distribution to a number of significant contract accounts, further increasing their fiscal 2018 purchases. During the first quarter of fiscal 2019, the temporary distribution to our significant contract accounts began reverting to our traditional methodology, although not fully completed until the second quarter of fiscal 2019. Excluding the effects of the re-distributors’ purchases in both years, we estimate that customer shipments increased by approximately 1.0% through the second quarter fiscal 2020.
~~-27-~~
Total Company-owned restaurant sales decreased by 3.5% to $11,710,000 during the fiscal 2020 period compared to $12,140,000 during the fiscal 2019 period. Comparable Company-owned restaurant sales, excluding sales from the restaurant that was sold last year, increased by approximately $685,000 or 6.2% due primarily to higher sales at our Coney Island locations where weather conditions were very favorable as compared to the comparable period last year in addition to higher sales at our traditional restaurants in Oceanside and Yonkers, New York.
License royalties increased by 2.2% to $18,559,000 in the fiscal 2020 period as compared to $18,160,000 in the fiscal 2019 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 3.2% to $17,071,000 for the 2020 fiscal period as compared to $16,536,000 in the fiscal 2019 period. The increase at retail is due to a 3.9% increase in volume during the fiscal 2020 period as compared to the fiscal 2019 period, which was partly offset by a decline in average net selling price of 0.8%. Additionally, the foodservice business earned lower royalties of $16,000 as compared to the fiscal 2019 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $136,000 during the fiscal 2020 period as compared to the fiscal 2019 period primarily due to the transition of our enrobed hot dog products to a new licensee.
Franchise fees and royalties were $3,610,000 in the fiscal 2020 period as compared to $3,254,000 in the fiscal 2019 period. Total royalties were $2,829,000 in the fiscal 2020 period as compared to $2,906,000 in the fiscal 2019 period. Royalties earned under the Branded Menu program were $577,000 in the fiscal 2020 period as compared to $649,000 in the fiscal 2019 period. 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 $2,252,000 in the fiscal 2020 period as compared to $2,257,000 in the fiscal 2019 period. Franchise restaurant sales increased to $50,425,000 in the fiscal 2020 period as compared to $50,090,000 in the fiscal 2019 period primarily due to a 4.4% increase in comparable domestic sales which was partly offset by the impact of units closed in the previous fiscal year, net of units opened in the current year. Comparable domestic franchise sales (consisting of 84 Nathan’s outlets, excluding sales under the Branded Menu Program) were $40,556,000 in the fiscal 2020 period as compared to $38,829,000 in the fiscal 2019 period.
At December 29, 2019, 226 franchised outlets, including domestic, international and Branded Menu Program outlets were operating compared to 261 domestic and international franchised or Branded Menu Program franchise outlets at December 23, 2018. Total franchise fee income was $781,000 in the fiscal 2020 period compared to $348,000 in the fiscal 2019 period. Domestic franchise fee income was $108,000 in the fiscal 2020 period compared to $117,000 in the fiscal 2019 period. International franchise fee income was $120,000 in the fiscal 2020 period compared to $127,000 during the fiscal 2019 period. We recognized $553,000 of forfeited fees in the fiscal 2020 period primarily from the termination of our Master Franchise Agreements for Russia, Kyrgyzstan and Turkey and the closing of various domestic and international franchise locations as compared to forfeited cancellation fees of $104,000 in the fiscal 2019 period. During the fiscal 2020 period, 15 franchised outlets opened, including five international units and three new Branded Menu Program outlets. During the fiscal 2019 period, 12 new franchised outlets opened, including five international locations and four new Branded Menu Program outlets.
~~Advertising fund revenue, after eliminating Company contributions, was $1,752,000 in the fiscal 2020 period, as compared to $1,858,000 during the fiscal 2019 period.~~
~~Costs and Expenses~~
Overall, our cost of sales increased by 6.6% to $43,973,000 in the fiscal 2020 period as compared to $41,266,000 in the fiscal 2019 period. Our gross profit (representing the difference between sales and cost of sales) decreased to $13,726,000 or 23.8% of sales during the fiscal 2020 period as compared to $15,182,000 or 26.9% of sales during the fiscal 2019 period. The reduction in margin was primarily due to the higher cost of beef in the Branded Product Program.
Cost of sales in the Branded Product Program increased by approximately $3,077,000 during the fiscal 2020 period as compared to the fiscal 2019 period, primarily due to the 5.1% increase in the average cost per pound of our hot dogs and the 3.9% increase in the volume of product sold discussed above. We did not make any purchase commitments for beef during the fiscal 2020 and 2019 periods. 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.
With respect to Company-owned restaurants, our cost of sales during the fiscal 2020 period was $6,373,000 or 54.4% of restaurant sales, as compared to $6,743,000 or 55.5% of restaurant sales in the fiscal 2019 period. Excluding the restaurant that was sold, cost of sales would have been 54.2% of restaurant sales in the fiscal 2019 period. We experienced higher prime costs due in part to the incremental food and labor costs associated with the rollout of various new products in addition to higher commodity costs of beef. The impact of higher wages, principally associated with the effects of the New York State minimum wage increase, were partly offset by the impact of higher sales at the comparable four Company-owned restaurants. We expect that our future labor costs at our restaurants outside of New York City 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 any increase in commodity costs.
~~-28-~~
Restaurant operating expenses were $2,791,000 in the fiscal 2020 period as compared to $2,817,000 in the fiscal 2019 period. Excluding $261,000 of restaurant operating expenses from the fiscal 2019 period for the restaurant that was sold, we incurred higher occupancy costs of $62,000, primarily percentage rent on higher sales and property taxes, higher insurance costs of $54,000, marketing expenses of $38,000 and maintenance and other expenses of $62,000.
Depreciation and amortization was $941,000 in the fiscal 2020 period as compared to $962,000 in the fiscal 2019 period as a result of amortization of the Arthur Treachers’ intellectual property which was partly offset by lower capital spending and reduced depreciation and amortization attributable to the restaurant that was sold of $19,000.
~~General and administrative expenses increased~~by $762,000 or 7.4% to $11,116,000 in the fiscal 2020 period as compared to $10,354,000 in the fiscal 2019 period. The increase in general and administrative expenses was primarily attributable to higher costs associated with the transformation efforts within our restaurant business including higher compensation expenses, including severance, marketing and franchise solicitation costs aggregating $761,000.
Advertising fund expense, after eliminating Company contributions, was $2,122,000 in the fiscal 2020 period, as compared to $1,858,000 in the fiscal 2019 period. Nathan’s has determined that the Advertising Funds’ normal seasonal deficit is not expected to be fully recovered during the remainder of the fiscal year and reflected the projected deficit in its second quarter fiscal 2020 results of operations.
~~Other Items~~
Interest expense of $7,951,000 in the fiscal 2020 and fiscal 2019 periods represented accrued interest of $7,433,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $518,000.
~~Interest income was $1,074,000 for the fiscal 2020 period as compared to $453,000 in the fiscal 2019 period.~~
Gain on disposal of property and equipment during the fiscal 2019 period, represent gains from the sale of our Company-owned restaurant located in Bay Ridge, Brooklyn, NY and the sale of our Florida office.
Other income, primarily relates primarily to sublease income from a franchised restaurant of $63,000 in each of the fiscal 2020 and fiscal 2019 periods. During the fiscal 2019 period, we recognized a fee of $175,000 to extend the closing date of the sale of our restaurant located in Bay Ridge, Brooklyn, NY.
~~Provision for Income Taxes~~
The income tax provision for the thirty-nine week periods ended December 29, 2019 and December 23, 2018 reflect effective tax rates of 26.1% and 27.8%, respectively. Nathan’s effective tax rate for the thirty-nine week periods ended December 29, 2019 and December 23, 2018 were reduced by 1.6% and 0.2%, respectively, as a result of the tax benefits associated with stock compensation. For the thirty-nine weeks ended December 29, 2019 and December 23, 2018, excess tax benefits of $228,000 and $47,000, respectively, were reflected in the Consolidated Statements of Earnings as a reduction to the provision for income taxes. Nathan’s effective tax rates without these adjustments would have been 27.8% for the fiscal 2020 period and 28.0% for the fiscal 2019 period. During the third quarter fiscal 2020, the Company’s tax rate was favorably affected by 0.4% due to its return to provision adjustment of approximately $52,000 in connection with the filing of its March 2019 tax returns. In November 2019, the State of New Jersey notified Nathan’s that our tax returns for the years ended March 2016, 2017, and 2018 will be audited.
The amount of unrecognized tax benefits at December 29, 2019 was $300,000 all of which would impact Nathan’s effective tax rate, if recognized. As of December 29 2019, Nathan’s had $269,000 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 $11,000 during the fiscal year ending March 29, 2020.28, 2021.

Off-Balance Sheet Arrangements

At ~~December~~September 27, 2020 and September 29, 2019, ~~and December 23, 2018,~~ 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.

~~-29-~~
Liquidity and Capital Resources

Cash and cash equivalents at ~~December 29, 2019~~September 27, 2020 aggregated ~~$77,395,000~~$81,519,000, a ~~$1,949,000~~$4,402,000 increase during the fiscal 2021 period as compared to cash and cash equivalents of ~~$75,446,000~~$77,117,000 at March ~~31, 2019.~~29, 2020. Net working capital increased to ~~$77,761,000~~$78,978,000 from ~~$72,237,000~~$75,165,000 at March ~~31, 2019. During fiscal 2020, we~~29, 2020. We paid ~~both~~our semi-annual interest payments ~~on the 2025 Notes~~for fiscal 2021 of $4,968,750 on May 1, ~~2019~~2020 and November 1, ~~2019.~~2020, respectively. We ~~paid three quarterly dividends totaling $4,437,000.~~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 OQ – 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 thirty-nine week period ended December 29, 2019, we paid interest of $4,968,750 each on May 1, 2019 and November 1, 2019 for the 2025 Notes.~~ The 2025 Notes have no scheduled principal amortization payments prior to its final maturity on November 1, 2025.

The Indenture for the 2025 Notes 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 for the 2025 Notes 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.
~~As of December 29, 2019, Nathan’s was in compliance with all covenants associated with the 2025 Notes.~~
~~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. 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.
~~-30-~~
~~The 2025 Notes and the guarantees will be 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 has 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 collateralized 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.~~
Cash provided by operations of ~~$6,662,000~~$9,107,000 in the fiscal ~~2020~~2021 period is primarily attributable to net income of ~~$10,240,000~~$7,655,000 in addition to other non-cash operating items of ~~$2,172,000, offset by~~$1,154,000, as well as changes in other operating assets and liabilities of ~~$5,750,000.~~$298,000. Non-cash operating expenses consist principally of ~~$941,000 of~~ depreciation and amortization ~~$518,000~~of $612,000, amortization of debt issuance ~~cost, $291,000~~costs of ~~deferred income taxes, $228,000~~$346,000, share-based compensation expense of ~~excess income tax benefits from stock-based compensation arrangements~~$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 ~~accounting for certain aspects~~COVID-19 pandemic, lower franchise and license royalty receivables of ~~its share-based payments to employees, share-based compensation expense of $87,000 and non-cash rental expense of $100,000. In the fiscal 2020 period, accounts and other receivables increased~~$1,169,000, offset, in part, by ~~$263,000 due primarily to higher receivables from Branded Product Program sales of $662,000 and~~ higher seasonal receivables due on behalf of the Advertising ~~Fund of $184,000 which were partly offset by lower license royalties of $609,000.~~Fund. In the fiscal ~~2020~~2021 period, accounts payable, accrued expenses and other current liabilities decreased by ~~$4,930,000~~$2,166,000 due to ~~lower accrued interest of $2,505,000 as a result of timing of our interest payments, deferred revenue of $784,000 that was earned during the fiscal 2020 period and~~ the reduction in accrued payroll and other benefits of ~~$649,000~~$1,534,000 resulting from the payment of year-end incentive ~~compensation.~~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. 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 ~~$788,000~~$421,000 due principally to ~~fluctuations of~~reduced product purchases made for the Branded Product Program ~~sales~~as a result of the COVID-19 pandemic and ~~expenses associated with certain seasonal activities.~~the timing of share repurchases under the 10b-5 plan.
~~-31-~~

Cash used in investing activities was ~~$361,000~~$318,000 in the fiscal ~~2020~~2021 period primarily in connection with capital expenditures incurred for our Branded Product Program and ~~select restaurant improvements.~~the installation of a new point-of sale system at our Company-owned restaurants.

Cash used in financing activities of ~~$4,352,000~~$4,387,000 in the fiscal ~~2020~~2021 period relates to the payments of the Company’s quarterly $0.35 per share cash dividend totaling ~~$4,437,000. During~~$2,880,000. Additionally, during the fiscal ~~2020~~2021 period, Nathan’s repurchased ~~13,709~~26,676 shares of common stock for ~~$985,000. The Company also paid $8,000 for withholding taxes on the net share vesting of employee restricted stock. The Company also received $1,078,000 of proceeds from the exercise of stock options.~~$1,501,000.

During the period from October 2001 through ~~December 29, 2019,~~September 27, 2020, Nathan’s purchased ~~5,155,472~~5,254,081 shares of its common stock at a cost of approximately ~~$79,288,000~~$84,770,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors. Since March 26, 2007, we have repurchased ~~3,264,372~~3,362,981 shares at a total cost of approximately ~~$72,130,000,~~$77,612,000, reducing the number of shares then-outstanding by ~~54.2%~~55.9%.
29

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 29, 2019,~~September 27, 2020, Nathan’s has repurchased ~~967,841~~1,066,450 shares at a cost of ~~$31,626,000~~ $37,108,000under the sixth stock repurchase plan. At ~~December 29, 2019,~~September 27, 2020, there were ~~232,159~~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 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 ~~December 29, 2019~~September 27, 2020 aggregating ~~$77,395,000.~~ $81,519,000.Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. In November 2017, we refinanced our 2020 Notes through the issuance of the 2025 Notes and, our Board of Directors announced the payment of a $5.00 per share special dividend to the shareholders of record as of the close of business on December 22, 2017. ~~Effective~~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’~~Nathan’s Board of Directors authorized the increase of its regular quarterly dividend to $0.35 from ~~$0.25, and the~~$0.25. The Company paid its first quarter fiscal 2021 dividend of $1,440,000 on June ~~28, 2019,~~26, 2020 and its second quarter fiscal 2021 dividend of $1,440,000 on September ~~6, 2019 and its third quarter dividend on December 6, 2019.~~4, 2020.

Effective ~~February 7,~~November 6, 2020, the Company declared its ~~fourth~~third quarter dividend of $0.35 per common share to stockholders of record as of the close of business on ~~February 24,~~November 23, 2020, which is payable on ~~March 6,~~December 4, 2020.

We expect that in the future we will make investments in certain existing ~~or select new~~ restaurants, support the growth of the Branded Product and Branded Menu Programs, service the outstanding debt, fund our dividend ~~distributions~~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 ~~29, 2020,~~28, 2021, we will be required to make interest payments of $9,937,500, of which all have been made as of November 1, ~~2019.~~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 ~~December 29, 2019,~~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: rent, property taxes and insurance. 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 ~~December 29, 2019~~September 27, 2020 (in thousands):


Payments Due by Period

Payments Due by Period

Cash Contractual Obligations

Total

Less than
1 Year

1-3 Years

3-5 Years

More than
5 Years

Total

Less than
1 Year

1-3 Years

3-5 Years

More than
5 Years

Long term debt (a)
$ 150,000 $ - $ - $ - $ 150,000 $ 150,000 $ - $ - $ - $ 150,000
Employment Agreements(b)
4,850 1,500 2,000 950 400 3,808 1,333 1,875 400 200
Operating Leases ~~(b)~~(c)
14,426 1,449 3,669 3,493 5,815 13,356 1,821 3,695 3,382 4,458
Gross Cash Contractual Obligations
169,276 2,949 5,669 4,443 156,215 167,164 3,154 5,570 3,782 154,658
Sublease Income ~~(b)~~(c)
1,388 245 411 338 394 1,182 247 329 338 268
Net Cash Contractual Obligations
$ 167,888 $ 2,704 $ 5,258 $ 4,105 $ 155,821 $ 165,982 $ 2,907 $ 5,241 $ 3,444 $ 154,390

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

b)
Reflects the temporary salary reduction implemented in response to COVID-19.
c)
See Note PR to the Consolidated Financial Statements for additional information on the ~~Consolidated Financial Statements for additional information on the~~ Company’s lease commitments.
~~-32-~~

At ~~December 29, 2019,~~September 27, 2020, the Company had unrecognized tax benefits of ~~$300,000.~~$333,000. The Company believes that is reasonably possible that the unrecognized tax benefits may decrease by ~~$11,000~~$16,000 within the next year. A reasonable estimate of the timing of the remaining liabilities is not practicable.
30

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 September 27, 2020, Nathan’s has recorded a liability of ~~$217,000~~$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. ~~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.~~

Inflationary Impact

We do not believe that general inflation has materially impacted earnings since 2006. However, we have experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. ~~Since~~Between April 2018 ~~our commodity cost for hot dogs had begun moderately escalating~~and March 2020, beef prices traded within a range of + or - 10%. Prices were at the lowest levels between ~~January~~October 2018 and ~~June 2019. Beef prices remained consistently higher during the summer~~March 2019 ~~than during the summer 2018 before escalating by approximately 12%~~ as compared to ~~the fourth calendar quarter~~higher levels between October 2019 and March 2020. Our average cost of ~~2018. As such, our market price for~~ hot dogs ~~during our third quarter fiscal~~between October 2019 and March 2020 was approximately ~~10.5%~~11.2% higher than ~~the third quarter fiscal~~between October 2018 and March 2019. Our average cost of hot dogs between October 2019 ~~resulting in the fiscal~~and September 2020 ~~period being~~was approximately ~~5.1%~~9.4% higher than between October 2018 and September 2019.
Beginning in May 2020, the ~~fiscal 2019 period.~~cost of hot dogs has increased significantly due primarily to the effects of the COVID-19 pandemic on the meat processing industry.

We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal ~~2020.~~2021. To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations. In the past, we entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. Our most recent purchase commitment was completed in 2016 for approximately 2,600,000 pounds of hot dogs. We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets.

New York State passed legislation increasing the minimum hourly wage for fast food workers of restaurant chains with 30 or more locations nationwide. The increase is being phased in differently between New York City and the rest of New York State. Effective December 31, ~~2018,~~2019, the minimum wage ~~increased to~~was $15.00 ~~and $12.75~~ in New York City and ~~outside~~increased to $13.75 per hour for the remainder of New York ~~City, respectively.~~State.

The minimum hourly rate of pay for the remainder of New York State ~~increased to $13.75 on Dec. 31, 2019; and~~ will increase to $14.50 on Dec. 31, 2020; and $15.00 on July 1, 2021.

All of Nathan’s Company-operated restaurants are within New York State, two of which operate within New York City that have been significantly affected by this new legislation.

The Company is further ~~monitoring~~studying the impact on the Company’s operations and is ~~executing~~developing strategies and tactics, including pricing and potential operating efficiencies, to minimize the effects of these increases and future increases. We have recently increased certain selling prices to pass on recent cost of sales increases. However, if we are unable to fully offset these and future increases through pricing and operating efficiencies, our margins and profits will be negatively affected.

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 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~~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. Due to Nathan’s dependency on weather conditions at our two Coney Island beach locations during the summer season, we are unable to determine the potential impact on our results of operations, which could be material. We believe that we have been able to implement tools to minimize the financial impact of this legislation. ~~Nevertheless, we incurred approximately $5,000 of additional costs due to this legislation during the fiscal 2020 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.
~~-33-~~

We believe that these increases in the minimum wage and other changes in employment law have had a significant financial impact on our financial results and the results of our franchisees that operate in New York State. Our business could be negatively impacted if the decrease in margins for our franchisees results in the potential loss of new franchisees or the closing of a significant number of franchised restaurants.

The Company’s business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, also see the discussions in “Forward-Looking Statements” and “Notes to Consolidated Financial Statements” in this Form 10-Q and “Risk Factors” in our Form 10-K for our fiscal year ended March ~~31, 2019.~~29, 2020.

~~-34-~~
31

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Cash

We have historically invested our cash and cash equivalents in money market funds or short-term, fixed rate, highly rated and highly liquid instruments which are generally reinvested when they mature. Although these existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events. As of ~~December 29, 2019,~~September 27, 2020, Nathan’s cash and cash equivalents aggregated ~~$77,395,000.~~$81,519,000. Earnings on this cash would increase or decrease by approximately ~~$193,000~~$204,000 per annum for each 0.25% change in interest rates.

Borrowings

At ~~December 29, 2019,~~September 27, 2020, we had $150,000,000 of 2025 Notes outstanding which are due in November 2025. Interest expense on these borrowings would increase or decrease by approximately $375,000 per annum for each 0.25% change in interest rates. We currently do not anticipate entering into interest rate swaps or other financial instruments to hedge our borrowings.

Commodity Costs

We do not believe that general inflation has materially impacted earnings since 2006. However, we have experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. ~~Since~~Between April 2018 ~~our commodity cost for hot dogs had been stable before beginning to decline in September~~and March 2020, beef prices traded within a range of + or - 10%. Prices were at the lowest levels between October 2018 ~~into December 2018. Beef prices began moderately escalating between January~~ and ~~June 2019. Beef prices remained consistently higher during the summer~~March 2019 ~~than during the summer 2018 before escalating by approximately 12%~~ as compared to ~~the fourth calendar quarter~~higher levels between October 2019 and March 2020. Our average cost of ~~2018. As such, our market price for~~ hot dogs ~~during our third quarter fiscal~~between October 2019 and March 2020 was approximately ~~10.5%~~11.2% higher than ~~the third quarter fiscal~~between October 2018 and March 2019. Our average cost of hot dogs between October 2019 ~~resulting in the fiscal~~and September 2020 ~~period being~~was approximately ~~5.1%~~9.4% higher than between October 2018 and September 2019.
Beginning in May 2020, the ~~fiscal 2019 period.~~cost of hot dogs has increased significantly due primarily to the effects of the COVID-19 pandemic on the meat processing industry.

We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal ~~2020.~~2021. To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations. In the past, we entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. Our most recent purchase commitment was completed in 2016 for approximately 2,600,000 pounds of hot dogs. We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets.

With the exception of purchase commitments, we have not attempted to hedge against fluctuations in the prices of the commodities we purchase using future, forward, option or other instruments. As a result, we expect that the majority of our future commodity purchases will be subject to market changes in the prices of such commodities. We have attempted to enter sales agreements with our customers that are correlated to our cost of beef, thus reducing our market volatility, or have passed through permanent increases in our commodity prices to our customers that are not on formula pricing, thereby reducing the impact of long-term increases on our financial results. A short-term increase or decrease of 10.0% in the cost of our food and paper products for the ~~thirty-nine weeks~~twenty-six week period ended ~~December 29, 2019~~September 27, 2020 would have increased or decreased our cost of sales by approximately ~~$3,942,000.~~$1,310,000.

Foreign Currencies

Foreign franchisees generally conduct business with us and make payments in United States dollars, reducing the risks inherent with changes in the values of foreign currencies. As a result, we have not purchased future contracts, options or other instruments to hedge against changes in values of foreign currencies and we do not believe fluctuations in the value of foreign currencies would have a material impact on our financial results.

~~-35-~~
32

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(e) and Exchange Act Rule 15d-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended ~~December 29, 2019~~September 27, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the reasonable assurance level.

~~-36-~~
33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended March ~~31, 2019,~~29, 2020, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing Nathan's. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

~~In 2016,~~On September 12, 2020, the ~~Company’s Board~~Company accepted the surrender of ~~Directors authorized increases to the sixth stock repurchase plan (the "Plan") for the purchase of up to 1,200,000~~111 shares of ~~its~~ common stock ~~on behalf~~ of the ~~Company. The Plan does not have a set expiration date. Purchases under~~Company in connection with 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 onpayment of taxes upon the ~~repurchases.~~vesting of restricted stock.
~~ISSUER PURCHASES OF EQUITY SECURITIES~~
~~Period (A)~~
~~Total Number of~~
~~Shares Purchased (B)~~
~~Average Price Paid~~
~~per Share~~
~~Total Number of~~
~~Shares Purchased as~~
~~Part of Publicly~~
~~Announced Plans or~~
~~Programs~~
~~Maximum Number~~
~~of Shares that May~~
~~Yet Be Purchased~~
~~Under the Plans or~~
~~Programs~~
September 30, 2019
October 27, 2019
-
-
-
245,868
October 28, 2019
November 24, 2019
-
-
-
245,868
November 25, 2019
December 29, 2019
13,709
$71.90
13,709
232,159
Total
13,709
-
13,709
232,159
~~(A)~~
~~Represents the Company’s fiscal periods during the quarter ended December 29, 2019.~~
~~(B)~~ ~~Shares purchased in a privately negotiated transaction.~~

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

Effective ~~February 7,~~November 6, 2020, the Board declared its quarterly cash dividend of $0.35 per share which is payable on ~~March 6,~~December 4, 2020 to shareholders of record as of the close of business on ~~February 24,~~November 23, 2020.

~~-37-~~
34

Item 6. Exhibits.

31.1
*Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
*Certification of the Chief ~~Executive~~Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~31.2~~32.1
*Certification ~~of the Chief Financial Officer~~by Eric Gatoff, CEO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section ~~302~~906 of the Sarbanes-Oxley Act of 2002.

~~32.1~~
*Certification by Eric Gatoff, CEO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2
*Certification by ~~Ronald G. DeVos,~~Robert Steinberg, CFO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ~~18 U.S.C. Section 1350, as adopted pursuant to~~ Section 906 of the Sarbanes-Oxley Act of 2002.

101.1
*The following materials from the Nathan’s Famous, Inc., Quarterly Report on Form 10-Q for the quarter ended ~~December 29, 2019~~September 27, 2020 formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Stockholders’ ~~(Deficit),~~Deficit, (iv) the Consolidated Statements of Cash Flows and (v) related notes.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith.

~~-38-~~
35

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NATHAN'S FAMOUS, INC.
Date: ~~February 7,~~November 6, 2020
By:
/s/ Eric Gatoff
Eric Gatoff
Chief Executive Officer
(Principal Executive Officer)
~~(Principal Executive Officer)~~
Date: ~~February 7,~~November 6, 2020
By:
/s/ ~~Ronald G. DeVos~~
~~Ronald G. DeVos~~
~~Vice President - Finance~~
~~and Chief Financial Officer~~Robert Steinberg

Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
~~-39-~~
~~Exhibit Index.~~
~~31.1~~
*Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
~~31.2~~
*Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
~~32.1~~
*Certification by Eric Gatoff, CEO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~32.2~~
*Certification by Ronald G. DeVos, CFO, Nathan’s Famous, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101.1~~
*The following materials from the Nathan’s Famous, Inc., Quarterly Report on Form 10-Q for the quarter ended December 29, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statements of Stockholders’ (Deficit), (iv) the Consolidated Statements of Cash Flows and (v) related notes.

*~~Filed herewith.~~
~~-40-~~
36

Delaware	11-3166443
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

	Large accelerated filer	☐	Accelerated filer	☒
	Non-accelerated filer ☐
☐	Smaller reporting company	☒
		Emerging growth company	☐

	December 29, 2019			March 31, 2019			September 27, 2020			March 29, 2020
	(Unaudited)						(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents (Note F)	$	77,395		$	75,446		$	81,519		$	77,117
Accounts and other receivables, net (Note H)		10,436			10,173			8,967			11,108
Inventories		599			535			557			378
Prepaid expenses and other current assets (Note I)		962			1,007			621			1,181
Total current assets		89,392			87,161			91,664			89,784

Property and equipment, net of accumulated depreciation of $9,481 and $8,611, respectively		4,365			4,889
Operating lease assets (Note P)		9,274			-
Property and equipment, net of accumulated depreciation of $10,024 and $9,468, respectively								4,372			4,610
Operating lease assets (Note R)								8,648			9,181
Goodwill		95			95			95			95
Intangible asset, net		1,297			1,353
Intangible asset								1,212			1,269
Deferred income taxes		52			343			7			0
Other assets		455			465			334			343

Total assets	$	104,930		$	94,306		$	106,332		$	105,282

LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Current portion of operating lease liabilities (Note P)	$	1,449		$	-
Accounts payable		4,434			5,222		$	3,088		$	3,509
Accrued expenses and other current liabilities (Note J)		5,470			9,384
Accrued expenses and other current liabilities (Note L)								7,552			9,297
Current portion of operating lease liabilities (Note R)								1,821			1,583
Deferred franchise fees		278			318			225			230
Total current liabilities		11,631			14,924			12,686			14,619

Long-term debt, net of unamortized debt issuance costs of $4,032 and $4,551, respectively (Note O)		145,968			145,449
Long-term operating lease liabilities (Note P)		8,663			-
Other liabilities (Note J)		801			1,390
Long-term debt, net of unamortized debt issuance costs of $3,514 and $3,860, respectively (Note Q)								146,486			146,140
Operating lease liabilities (Note R)								7,887			8,532
Other liabilities (Note L)								739			696
Deferred franchise fees		2,036			2,687			1,609			1,687
Deferred income taxes								0			9

Total liabilities		169,099			164,450			169,407			171,683

COMMITMENTS AND CONTINGENCIES (Note Q)
COMMITMENTS AND CONTINGENCIES (Note S)

STOCKHOLDERS’ (DEFICIT)
Common stock, $.01 par value; 30,000,000 shares authorized; 9,368,792 and 9,336,338 shares issued; and 4,213,320 and 4,194,575 shares outstanding at December 29, 2019 and March 31, 2019, respectively		94			93
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 September 27, 2020 and March 29, 2020, respectively								94			94
Additional paid-in capital		62,101			60,945			62,182			62,130
(Accumulated deficit)		(47,076	)		(52,879	)		(40,581	)		(45,356	)
Stockholders’ equity before treasury stock		15,119			8,159			21,695			16,868

Treasury stock, at cost, 5,155,472 and 5,141,763 shares at December 29, 2019 and March 31, 2019		(79,288	)		(78,303	)
Total stockholders’ (deficit)		(64,169	)		(70,144	)
Treasury stock, at cost, 5,254,081 and 5,227,405 shares at September 27, 2020 and March 29, 2020								(84,770	)		(83,269	)
Total stockholders’ deficit								(63,075	)		(66,401	)

Total liabilities and stockholders’ (deficit)	$	104,930		$	94,306
Total liabilities and stockholders’ deficit							$	106,332		$	105,282

					Additional										Total							Additional											Total
	Common		Common		Paid-in		(Accumulated			Treasury Stock, at Cost					Stockholders’			Common		Common		Paid-in			(Accumulated			Treasury Stock, at Cost					Stockholders’
	Shares		Stock		Capital		Deficit)			Shares		Amount			(Deficit)			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	)
Balance, June 28, 2020																			9,368,792	$	94	$	62,159		$	(42,796	)		5,254,081	$	(84,770	)	$	(65,313	)

Repurchase of common stock		-		-		-		-			13,709		(985	)		(985	)
Shares issued in connection with share-based compensation plans																			223		0		0			0			0		0			0
Withholding tax on net share settlement of share-based compensation plans																			-		0		(6	)		0			-		0			(6	)
Dividends on common stock		-		-		-		(1,479	)		-		-			(1,479	)		-		0		0			(1,440	)		-		0			(1,440	)
Share-based compensation		-		-		29		-			-		-			29			-		0		29			0			-		0			29
Net income		-		-		-		1,213			-		-			1,213			-		0		0			3,655			-		0			3,655
Balance, December 29, 2019		9,368,792	$	94	$	62,101	$	(47,076	)		5,155,472	$	(79,288	)	$	(64,169	)
Balance, September 27, 2020																			9,369,015	$	94	$	62,182		$	(40,581	)		5,254,081	$	(84,770	)	$	(63,075	)

					Page Number
					~~Number~~
PART I.				FINANCIAL INFORMATION

~~PART I.~~Item 1.				~~FINANCIAL INFORMATION~~ Financial Statements.		3

				Consolidated Financial Statements
~~Item 1.~~	~~Financial Statements.~~	3
				Consolidated Balance Sheets – September 27, 2020 (Unaudited) and March 29, 2020		3

				~~Consolidated Financial Statements~~
	~~Consolidated Balance Sheets – December 29, 2019 (Unaudited) and March 31, 2019~~	3

	Consolidated Statements of Earnings (Unaudited) – Thirteen and ~~Thirty-nine~~Twenty-six Weeks Ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~		4


	Consolidated Statements of Stockholders’ ~~(Deficit)~~Deficit (Unaudited) – Thirteen Weeks Ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~		5

				Consolidated Statements of Stockholders’ Deficit (Unaudited) – Twenty-six Weeks Ended September 27, 2020 and September 29, 2019		6

				~~Consolidated Statements of Stockholders’ (Deficit) (Unaudited) – Thirty-nine Weeks Ended December 29, 2019 and December 23, 2018~~	6

	Consolidated Statements of Cash Flows (Unaudited) – ~~Thirty-nine~~Twenty-six Weeks Ended ~~December~~September 27, 2020 and September 29, 2019 ~~and December 23, 2018~~		7


	Notes to Consolidated Financial Statements		8

Item 2.				Management's Discussion and Analysis of Financial Condition and Results of Operations.	23	22

Item 3.				Quantitative and Qualitative Disclosures About Market Risk.	35	32

Item 4.				Controls and Procedures.	36	33

PART II.				OTHER INFORMATION

Item 1.				Legal Proceedings.	37	34

Item 1A.				Risk Factors.	37	34

Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds.	37	34

Item 3.				Defaults Upon Senior Securities.	37	34

Item 4.				Mine Safety Disclosures.	37	34

Item 5.				Other Information.	37	34

Item 6.				Exhibits.	38	35

SIGNATURES				39		36

~~Exhibit Index~~		40

	December 29, 2019			December 23, 2018			September 27, 2020			September 29, 2019
Cash flows from operating activities:
Net income	$	10,240		$	19,001		$	7,655		$	9,027
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		941			962			612			647
(Gain) on disposal of property and equipment		-			(11,177	)
Loss on disposal of property and equipment								0			2
Non-cash rental expense								127			0
Amortization of debt issuance costs		518			518			346			346
Share-based compensation expense		87			133			58			58
Income tax benefit on stock option exercises		228			47			0			228
Provision for doubtful accounts		7			48			27			23
Deferred income taxes		291			(27	)		(16	)		(16	)
Non-cash rental expense		100			-
Changes in operating assets and liabilities:
Accounts and other receivables, net		(270	)		865			2,114			(2,020	)
Inventories		(64	)		(98	)		(179	)		(80	)
Prepaid expenses and other current assets		45			2,270			560			412
Other assets		10			(48	)		9			5
Accounts payable, accrued expenses and other current liabilities		(4,930	)		(5,196	)		(2,166	)		(2,171	)
Deferred franchise fees		(691	)		53			(83	)		(489	)
Other liabilities		150			22			43			123

Net cash provided by operating activities		6,662			7,373			9,107			6,095

Cash flows from investing activities:
Proceeds from disposal of property and equipment		-			12,775
Purchase of property and equipment		(361	)		(326	)		(318	)		(182	)

Net cash (used in) provided by investing activities		(361	)		12,449
Net cash used in investing activities								(318	)		(182	)

Cash flows from financing activities:
Dividends paid to stockholders		(4,437	)		(3,289	)		(2,880	)		(2,958	)
Proceeds from exercise of stock options		1,078			134			0			1,078
Payments of withholding tax on net share settlement of share-based compensation plans		(8	)		(174	)		(6	)		(8	)
Repurchase of treasury stock		(985	)		(1,000	)		(1,501	)		0

Net cash (used in) financing activities		(4,352	)		(4,329	)
Net cash used in financing activities								(4,387	)		(1,888	)

Net increase in cash and cash equivalents		1,949			15,493			4,402			4,025

Cash and cash equivalents, beginning of period		75,446			57,339			77,117			75,446

Cash and cash equivalents, end of period	$	77,395		$	72,832		$	81,519		$	79,471

Cash paid during the period for:
Interest	$	9,938		$	9,936		$	4,969		$	4,969
Income taxes paid	$	3,269		$	2,658
Income taxes							$	2,743		$	2,955

Noncash financing activity:
Non-cash financing activity:
Dividends declared per share	$	1.05		$	0.75		$	.70		$	.70

	Balance at March 31, 2019		Adjustments due to adoption of the new lease guidance			Reclassifications		Balance at April 1, 2019
Other Assets
Operating lease assets		-		7,804			-		7,804
Other assets		465		-			31		496

Current Liabilities
Current portion of operating lease liabilities		-		1,162			-		1,162

Long Term Liabilities
Long-term operating lease liabilities		-		7,371			-		7,371
Other liabilities		1,390		(729	)		31		692

	Estimate for fiscal year		Estimate for fiscal year
2020 (a)	$	71
2021		276
2021 (a)			$	114
2022		266		218
2023		242		195
2024		231		183
2025				175
Thereafter		1,228		949
Total	$	2,314	$	1,834

	December 29, 2019				March 31, 2019
	Face value		Fair value		Face Value		Fair value

Long-term debt	$	150,000	$	153,375	$	150,000	$	145,688

	September 27, 2020				March 29, 2020
	Face value		Fair value		Face Value		Fair value

Long-term debt	$	150,000	$	152,250	$	150,000	$	138,000

	December 29,		March 31,		September 27,		March 29,
	2019		2019		2020		2020
Reserve for uncertain tax positions	$	565	$	496	$	610	$	567
Deferred rental liability		-		670
Other		236		224		129		129
Total other liabilities	$	801	$	1,390	$	739	$	696

				Weighted-		Weighted-		Aggregate
				Average		Average		Intrinsic
				Exercise		Remaining		Value
	Shares			Price		Contractual Life		(in thousands)


Options outstanding at March 31, 2019 fiscal year (A)		42,234		$	46.807		1.32	$	1,127
Granted		-			-		-		-
Exercised		(32,234	)	$	33.438		-		1,134
Options outstanding at December 29, 2019		10,000		$	89.90		3.70		-

Options exercisable at December 29, 2019		3,333		$	89.90		3.70		-

	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		0		0		-		-
Exercised		0		0		-		0
Options outstanding at September 27, 2020		10,000	$	89.90		2.96		0

Options exercisable at September 27, 2020		6,667	$	89.90		2.96		0

				Weighted-		Shares			Weighted- Average Grant-date Fair value Per share
				Average
				Grant-date Fair value
	Shares			Per share
Unvested restricted stock at March 31, 2019		1,000		$	89.90
Unvested restricted stock at March 29, 2020							667		$	89.90
Granted		-			-		0			0
Vested		(333	)	$	89.90		(334	)	$	89.90
Unvested restricted stock at December 29, 2019		667		$	89.90
Unvested restricted stock at September 27, 2020							333		$	89.90


	●	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.

~~YEAR~~	PERCENTAGE
YEAR
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, ~~2021 and prior to November 1,~~ 2022		~~101.656~~100.000	%
~~On or after November 1, 2022~~		~~100.000~~	%

	Thirteen weeks ended			Thirty-nine weeks ended			Thirteen weeks ended			Thirteen weeks ended			Twenty-six weeks ended			Twenty-six weeks ended
	December 29, 2019			December 29, 2019			September 27, 2020			September 29, 2019			September 27, 2020			September 29, 2019
Statement of Earnings
Operating lease cost	$	339		$	899		$	396		$	278		$	811		$	560
Short term lease cost		4			14			0			4			0			10
Variable lease cost		280			1,240			377			537			715			960
Less: Sublease income, net		(22	)		(63	)		(22	)		(20	)		(22	)		(41	)

Total net lease cost (a)	$	601		$	2,090		$	751		$	799		$	1,504		$	1,489

	Thirteen weeks ended		Thirty-nine weeks ended
	December 29, 2019		December 29, 2019

Operating cash flows from operating leases	$	60	$	351

Weighted average remaining lease term (years):
Operating leases	~~8.3~~7.7

Weighted average discount rate:
Operating leases	~~8.870~~8.883	%

	Payments		Receipts				Payments		Receipts
	Operating Leases		Subleases		Net Leases		Operating Leases		Subleases		Net Leases

Fiscal year:
2020 (a)	$	247	$	38	$	209
2021		1,577		245		1,332
2021 (a)							$	744	$	77	$	667
2022		1,831		247		1,584		1,837		247		1,590
2023		1,844		168		1,676		1,849		168		1,681
2024		1,774		169		1,605		1,774		169		1,605
2025								1,678		169		1,509
Thereafter		7,153		521		6,632		5,474		352		5,122
Total lease commitments	$	14,426	$	1,388	$	13,038	$	13,356	$	1,182	$	12,174
Less: Amount representing interest		4,314						3,648
Present value of lease liabilities (b)	$	10,112					$	9,708

	Thirteen weeks ended		Thirty-nine weeks ended
	December 29, 2019		December 29, 2019

Operating lease income, net	$	22	$	63

	Thirteen weeks ended					Thirty-nine weeks ended
	December 29, 2019		December 23, 2018			December 29, 2019		December 23, 2018
	(unaudited)					(unaudited)

Net income	$	1,213	$	9,722		$	10,240	$	19,001
Interest expense		2,650		2,650			7,951		7,951
Provision for income taxes		360		3,627			3,621		7,330
Depreciation and amortization		294		278			941		962
EBITDA		4,517		16,277			22,753		35,244

Share-based compensation		29		29			87		133
(Gain) on disposal of property and equipment (A)		-		(10,821	)		-		(11,177	)
Adjusted EBITDA	$	4,546	$	5,485		$	22,840	$	24,200

	Thirteen weeks ended				Twenty-six weeks ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
	(unaudited)				(unaudited)

Net income	$	3,655	$	3,658	$	7,655	$	9,027
Interest expense		2,651		2,651		5,301		5,301
Provision for income taxes		1,403		1,445		2,964		3,261
Depreciation and amortization		302		337		612		647
EBITDA		8,011		8,091		16,532		18,236

Share-based compensation		29		30		58		58
Loss on disposal of property and equipment		-		2		-		2
Adjusted EBITDA	$	8,040	$	8,123	$	16,590	$	18,296

	●	~~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.~~

~~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%~~

	Payments Due by Period										Payments Due by Period
Cash Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long term debt (a)	$	150,000	$	-	$	-	$	-	$	150,000	$	150,000	$	-	$	-	$	-	$	150,000
Employment Agreements(b)		4,850		1,500		2,000		950		400		3,808		1,333		1,875		400		200
Operating Leases ~~(b)~~(c)		14,426		1,449		3,669		3,493		5,815		13,356		1,821		3,695		3,382		4,458
Gross Cash Contractual Obligations		169,276		2,949		5,669		4,443		156,215		167,164		3,154		5,570		3,782		154,658
Sublease Income ~~(b)~~(c)		1,388		245		411		338		394		1,182		247		329		338		268
Net Cash Contractual Obligations	$	167,888	$	2,704	$	5,258	$	4,105	$	155,821	$	165,982	$	2,907	$	5,241	$	3,444	$	154,390

	b)	Reflects the temporary salary reduction implemented in response to COVID-19.
	c)	See Note PR to the Consolidated Financial Statements for additional information on the ~~Consolidated Financial Statements for additional information on the~~ Company’s lease commitments.

September 30, 2019 October 27, 2019	-	-	-	245,868
October 28, 2019 November 24, 2019	-	-	-	245,868
November 25, 2019 December 29, 2019	13,709	$71.90	13,709	232,159
Total	13,709	-	13,709	232,159

	~~(A)~~	~~Represents the Company’s fiscal periods during the quarter ended December 29, 2019.~~
	~~(B)~~	~~Shares purchased in a privately negotiated transaction.~~

	NATHAN'S FAMOUS, INC.


Date: ~~February 7,~~November 6, 2020	By:	/s/ Eric Gatoff
		Eric Gatoff
		Chief Executive Officer (Principal Executive Officer)
		~~(Principal Executive Officer)~~