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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 27, 2021

OR

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

For the transition period from                       to                      

Commission File Number 000-51485

 

Ruth’s Hospitality Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

72-1060618

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1030 W. Canton Avenue, Suite 100,

Winter Park, FL

32789

(Address of principal executive offices)

(Zip code)

(407) 333-7440

Registrant’s telephone number, including area code

None

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

 

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

RUTH

Nasdaq

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

Accelerated Filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

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

 


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

 

The number of shares outstanding of the registrant’s common stock as of July 28, 2021 was 34,812,179, which includes 606,743 shares of unvested restricted stock.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

Part I — Financial Information

 

3

 

 

 

 

Item 1

Financial Statements:

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 27, 2021 and December 27, 2020

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Thirteen and Twenty-six Week Periods ended June 27, 2021 and June 28, 2020

 

4

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Thirteen and Twenty-six Week Periods ended June 27, 2021 and June 28, 2020

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Twenty-six Week Periods ended June 27, 2021 and June 28, 2020

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

 

Item 4

Controls and Procedures

 

24

 

 

 

Part II — Other Information

 

24

 

 

 

 

Item 1

Legal Proceedings

 

24

 

 

 

 

Item 1A

Risk Factors

 

24

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

25

 

 

 

 

Item 4

Mine Safety Disclosures

 

25

 

 

 

 

Item 5

Other Information

 

25

 

 

 

 

Item 6

Exhibits

 

25

 

 

 

 

Signatures

 

27

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

June 27,

 

 

December 27,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,339

 

 

$

95,402

 

Accounts receivable, less allowance for doubtful accounts 2021 - $131; 2020 - $322

 

 

15,915

 

 

 

24,309

 

Inventory

 

 

7,360

 

 

 

6,930

 

Prepaid expenses and other

 

 

4,337

 

 

 

3,653

 

Total current assets

 

 

114,951

 

 

 

130,294

 

Property and equipment, net of accumulated depreciation 2021 - $185,968; 2020 -

   $177,277

 

 

114,830

 

 

 

119,887

 

Operating lease right of use assets

 

 

172,129

 

 

 

188,386

 

Goodwill

 

 

45,549

 

 

 

45,549

 

Franchise rights, net of accumulated amortization 2021 - $7,657; 2020 - $6,534

 

 

43,361

 

 

 

44,484

 

Other intangibles, net of accumulated amortization 2021 - $1,634; 2020 - $1,569

 

 

4,049

 

 

 

4,114

 

Deferred income taxes

 

 

7,320

 

 

 

8,616

 

Other assets

 

 

1,194

 

 

 

1,344

 

Total assets

 

$

503,383

 

 

$

542,674

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,556

 

 

 

4,101

 

Accrued payroll

 

 

16,265

 

 

 

15,344

 

Accrued expenses

 

 

8,493

 

 

 

6,449

 

Deferred revenue

 

 

53,727

 

 

 

59,030

 

Current operating lease liabilities

 

 

18,272

 

 

 

20,854

 

Other current liabilities

 

 

5,059

 

 

 

2,543

 

Total current liabilities

 

 

110,372

 

 

 

108,321

 

Long-term debt

 

 

70,000

 

 

 

115,000

 

Operating lease liabilities

 

 

191,562

 

 

 

209,654

 

Unearned franchise fees

 

 

2,070

 

 

 

2,186

 

Other liabilities

 

 

69

 

 

 

69

 

Total liabilities

 

 

374,073

 

 

 

435,230

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share; 100,000,000 shares authorized, 34,426,843

   shares issued and outstanding at June 27, 2021, 34,256,921 shares issued and

   outstanding at December 27, 2020

 

 

344

 

 

 

343

 

Additional paid-in capital

 

 

83,753

 

 

 

83,424

 

Retained earnings

 

 

45,213

 

 

 

23,677

 

Treasury stock, at cost; 71,950 shares at June 27, 2021 and December 27, 2020

 

 

 

 

 

 

Total shareholders' equity

 

 

129,310

 

 

 

107,444

 

Total liabilities and shareholders' equity

 

$

503,383

 

 

$

542,674

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations—Unaudited

(Amounts in thousands, except share and per share data)

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

June 27,

 

 

June 28,

 

 

June 27,

 

 

June 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

104,165

 

 

$

26,978

 

 

$

185,801

 

 

$

130,018

 

Franchise income

 

 

4,528

 

 

 

956

 

 

 

8,320

 

 

 

4,582

 

Other operating income

 

 

2,217

 

 

 

483

 

 

 

4,072

 

 

 

2,353

 

Total revenues

 

 

110,910

 

 

 

28,417

 

 

 

198,193

 

 

 

136,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food and beverage costs

 

 

31,607

 

 

 

8,030

 

 

 

54,528

 

 

 

38,657

 

Restaurant operating expenses

 

 

45,400

 

 

 

26,273

 

 

 

82,983

 

 

 

81,827

 

Marketing and advertising

 

 

3,232

 

 

 

1,487

 

 

 

5,225

 

 

 

4,925

 

General and administrative costs

 

 

8,774

 

 

 

7,066

 

 

 

15,970

 

 

 

15,095

 

Depreciation and amortization expenses

 

 

5,084

 

 

 

5,522

 

 

 

10,147

 

 

 

11,345

 

Pre-opening costs

 

 

159

 

 

 

304

 

 

 

604

 

 

 

781

 

Gain on lease modifications

 

 

 

 

 

(488

)

 

 

 

 

 

(488

)

Loss on impairment

 

 

394

 

 

 

4,283

 

 

 

394

 

 

 

12,980

 

Total costs and expenses

 

 

94,650

 

 

 

52,477

 

 

 

169,851

 

 

 

165,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

16,260

 

 

 

(24,060

)

 

 

28,342

 

 

 

(28,169

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,128

)

 

 

(1,291

)

 

 

(2,431

)

 

 

(1,919

)

Other

 

 

36

 

 

 

3

 

 

 

80

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

15,168

 

 

 

(25,348

)

 

 

25,991

 

 

 

(30,052

)

Income tax expense (benefit)

 

 

2,757

 

 

 

(7,750

)

 

 

4,455

 

 

 

(8,636

)

Net income (loss)

 

$

12,411

 

 

$

(17,598

)

 

$

21,536

 

 

$

(21,416

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

0.36

 

 

$

(0.59

)

 

$

0.63

 

 

$

(0.74

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

$

0.36

 

 

$

(0.59

)

 

$

0.62

 

 

$

(0.74

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,398,251

 

 

 

29,951,332

 

 

 

34,340,492

 

 

 

29,119,296

 

Diluted

 

 

34,652,869

 

 

 

29,951,332

 

 

 

34,620,626

 

 

 

29,119,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

 

 

$

 

 

$

 

 

$

0.15

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity—Unaudited  

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 27, 2020

 

 

34,257

 

 

$

343

 

 

$

83,424

 

 

$

23,677

 

 

 

72

 

 

$

 

 

$

107,444

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,125

 

 

 

 

 

 

 

 

 

9,125

 

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

128

 

 

 

1

 

 

 

(1,802

)

 

 

 

 

 

 

 

 

 

 

 

(1,801

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,564

 

 

 

 

 

 

 

 

 

 

 

 

1,564

 

Balance at March 28, 2021

 

 

34,385

 

 

$

344

 

 

$

83,186

 

 

$

32,802

 

 

 

72

 

 

$

 

 

$

116,332

 

Net income

 

 

 

 

 

 

 

 

 

 

$

12,411

 

 

 

 

 

 

 

 

 

12,411

 

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

42

 

 

 

 

 

 

(618

)

 

 

 

 

 

 

 

 

 

 

 

(618

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,184

 

 

 

 

 

 

 

 

 

 

 

 

1,184

 

Balance at June 27, 2021

 

 

34,427

 

 

$

344

 

 

$

83,753

 

 

$

45,213

 

 

 

72

 

 

$

 

 

$

129,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Treasury Stock

 

 

Shareholders'

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Value

 

 

Equity

 

Balance at December 29, 2019

 

 

28,419

 

 

$

284

 

 

$

40,462

 

 

$

53,399

 

 

 

72

 

 

$

 

 

$

94,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,818

)

 

 

 

 

 

 

 

 

(3,818

)

Cash dividends, $0.15 per common share

 

 

 

 

 

 

 

 

 

 

 

(4,428

)

 

 

 

 

 

 

 

 

(4,428

)

Repurchase of common stock

 

 

(902

)

 

 

(9

)

 

 

(13,217

)

 

 

 

 

 

 

 

 

 

 

 

(13,226

)

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

100

 

 

 

1

 

 

 

(659

)

 

 

 

 

 

 

 

 

 

 

 

(658

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,065

 

 

 

 

 

 

 

 

 

 

 

 

2,065

 

Balance at March 29, 2020

 

 

27,617

 

 

$

276

 

 

$

28,652

 

 

$

45,153

 

 

 

72

 

 

$

 

 

$

74,081

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(17,598

)

 

 

 

 

 

 

 

 

 

 

(17,598

)

Stock issuance

 

 

6,455

 

 

 

65

 

 

 

49,517

 

 

 

 

 

 

 

 

 

 

 

 

49,582

 

Shares issued under stock compensation plan net of shares withheld for tax effects

 

 

72

 

 

 

1

 

 

 

(395

)

 

 

 

 

 

 

 

 

 

 

 

(394

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,958

 

 

 

 

 

 

 

 

 

 

 

 

1,958

 

Balance at June 28, 2020

 

 

34,144

 

 

$

341

 

 

$

79,732

 

 

$

27,555

 

 

 

72

 

 

$

 

 

$

107,628

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Amounts in thousands)

 

 

 

26 Weeks Ended

 

 

 

June 27,

 

 

June 28,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,536

 

 

$

(21,416

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,147

 

 

 

11,345

 

Deferred income taxes

 

 

1,297

 

 

 

(3,156

)

Non-cash interest expense

 

 

284

 

 

 

83

 

Loss on impairment

 

 

394

 

 

 

12,980

 

Stock-based compensation expense

 

 

2,748

 

 

 

4,023

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,393

 

 

 

14,807

 

Inventories

 

 

(518

)

 

 

1,513

 

Prepaid expenses and other

 

 

(682

)

 

 

(1,104

)

Other receivable

 

 

 

 

 

 

(5,891

)

Other assets

 

 

11

 

 

 

 

Accounts payable and accrued expenses

 

 

6,825

 

 

 

(12,443

)

Deferred revenue

 

 

(5,303

)

 

 

(4,629

)

Operating lease liabilities and assets

 

 

(4,719

)

 

 

1,003

 

Other liabilities

 

 

1,591

 

 

 

153

 

Net cash provided by (used in) operating activities

 

 

42,004

 

 

 

(2,732

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(2,504

)

 

 

(8,202

)

Net cash used in investing activities

 

 

(2,504

)

 

 

(8,202

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal borrowings on long-term debt

 

 

 

 

 

85,000

 

Principal repayments on long-term debt

 

 

(45,000

)

 

 

(13,800

)

Principal borrowings on the CARES Act loan

 

 

 

 

 

20,000

 

Principal repayments on the CARES Act loan

 

 

 

 

 

(20,000

)

Net proceeds from sale of common stock

 

 

 

 

 

49,582

 

Repurchase of common stock

 

 

 

 

 

(13,226

)

Cash dividend payments

 

 

 

 

 

(4,428

)

Tax payments from the vesting of restricted stock and option exercises

 

 

(2,418

)

 

 

(1,052

)

Deferred financing costs

 

 

(145

)

 

 

(582

)

Net cash (used in) provided by financing activities

 

 

(47,563

)

 

 

101,494

 

Net (decrease) increase in cash and cash equivalents

 

 

(8,063

)

 

 

90,560

 

Cash and cash equivalents at beginning of period

 

 

95,402

 

 

 

5,567

 

Cash and cash equivalents at end of period

 

$

87,339

 

 

$

96,127

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

$

2,199

 

 

$

1,764

 

Income taxes

 

$

1,275

 

 

$

71

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued acquisition of property and equipment

 

$

1,475

 

 

$

357

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

RUTH’S HOSPITALITY GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited

(1) The Company and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ruth’s Hospitality Group, Inc. and its subsidiaries (collectively, the Company) as of June 27, 2021 and December 27, 2020 and for the thirteen and twenty-six week periods ended June 27, 2021 and June 28, 2020 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated financial statements include the financial statements of Ruth’s Hospitality Group, Inc. and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

Ruth’s Hospitality Group, Inc. is a restaurant company focused on the upscale dining segment. Ruth’s Hospitality Group, Inc. operates Company-owned Ruth’s Chris Steak House restaurants and sells franchise rights to Ruth’s Chris Steak House franchisees giving the franchisees the exclusive right to operate similar restaurants in a particular area designated in the franchise agreement. As of June 27, 2021, there were 148 Ruth’s Chris Steak House restaurants, including 73 Company-owned restaurants, three restaurants operating under contractual agreements and 72 franchisee-owned restaurants, including 21 international franchisee-owned restaurants in Aruba, Canada, China, Hong Kong, Indonesia, Japan, Mexico, Singapore and Taiwan. All Company-owned restaurants are located in the United States.  The Ruth’s Chris Steak House located in Bellevue, WA permanently closed in April 2021.

The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. The interim results of operations for the periods ended June 27, 2021 and June 28, 2020 are not necessarily indicative of the results that may be achieved for the full year. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the SEC’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2020.

The Company operates on a 52- or 53-week fiscal year ending on the last Sunday in December. The fiscal quarters ended June 27, 2021 and June 28, 2020 each contained thirteen weeks and are referred to herein as the second quarter of fiscal year 2021 and the second quarter of fiscal year 2020, respectively. Fiscal years 2021 and 2020 are both 52-week years.

COVID-19 Impact

In March 2020 the World Health Organization declared the novel coronavirus 2019 (COVID-19) a pandemic and the United States declared it a National Public Health Emergency, which has resulted in a significant reduction in revenue at the Company’s restaurants due to mandatory restaurant closures, capacity limitations, social distancing guidelines or other restrictions mandated by governments across the world, including federal, state and local governments in the United States.  As a result of these developments, the Company has experienced a significant negative impact on its revenues, results of operations and cash flows compared to periods prior to the onset of the pandemic. During the second quarter of fiscal year 2021 most of the Company’s restaurants were operating with open dining rooms. As of June 27, 2021, 75 of the 76 Company-owned and -managed restaurants were open and one was closed. This is an unprecedented event in the Company’s history, and it is uncertain how the conditions surrounding COVID-19 will continue to change.  The extent to which COVID-19 will continue to impact the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of the COVID-19 virus and the adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates, the actions taken to contain the impact of COVID-19, and further actions that may be taken to limit the resulting economic impact.

7


Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reporting of revenue and expenses during the periods presented to prepare these condensed consolidated financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the carrying amounts of property and equipment, goodwill, franchise rights, operating lease right of use assets and obligations related to gift cards, income taxes, operating lease liabilities, incentive compensation, workers’ compensation and medical insurance. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740).  This update modifies Topic 740 to simplify the accounting for income taxes.  The Company adopted this new standard on December 28, 2020.  The adoption of ASU 2019-12 did not have a significant impact on the Company’s financial reporting.

(2) Fair Value Measurements

The carrying amounts of cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued expenses and other current liabilities are reasonable estimates of their fair values due to their short duration. Borrowings classified as long-term debt as of June 27, 2021 and December 27, 2020 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying value, plus unpaid interest and deferred financing costs of $681 thousand at June 27, 2021, represents a reasonable estimate of FV (Level 2).

The Company’s non-financial assets measured at fair value on a non-recurring basis as of June 27, 2021 were as follows (in thousands):

 

 

 

Fair Value as of June 27, 2021

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

 

Total Losses on Impairment

 

Long-lived assets

 

$

 

 

$

 

 

$

 

 

$

306

 

 

The Company’s non-financial assets measured at fair value on a non-recurring basis as of December 27, 2020 were as follows (in thousands):

 

 

Fair Value as of December 27, 2020

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

 

Total Losses on Impairment

 

Long-lived assets

 

$

1,708

 

 

$

1,708

 

 

$

 

 

$

12,736

 

Territory rights

 

$

 

 

$

 

 

$

 

 

$

3,101

 

 

(3) Leases

The Company leases restaurant facilities and equipment.  The Company determines whether an arrangement is or contains a lease at contract inception.  The Company’s leases are all classified as operating leases, which are included as operating lease right of use assets (“ROU assets”) and operating lease liabilities in the Company’s condensed consolidated balance sheet.  Operating lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date.  ROU assets are measured based on the operating lease liabilities adjusted for lease incentives, initial indirect costs and impairments of operating lease assets.  Minimum lease payments include only the fixed lease components of the agreements, as well as any variable rate payments that depend on an index, which are measured initially using the index at the lease commencement dates.  To determine the present value of future minimum lease payments, the Company estimates incremental borrowing rates based on the information available at the lease commencement dates, or amendment date for contract modifications.  The Company estimates its incremental borrowing rates by determining the synthetic credit rating of the Company using quantitative and qualitative analysis and then adjusting the synthetic credit rating to a collateralized credit rating.  A spread curve is then developed using the U.S. corporate bond yield curve of the same credit rating and the U.S. Treasury curve to determine the rate for different terms.  The expected lease terms include options to extend when it is reasonably certain the Company will exercise the options up to a total term of 20 years.  Total lease cost is expensed on a straight-line basis over the life of a lease.  Additionally, incentives received

8


from landlords used to fund leasehold improvements reduce the ROU assets related to those leases and are amortized as reductions to lease expense over the lives of the leases.  Variable lease payments that do not depend on a rate or index, payments associated with non-lease components and short-term rentals (leases with terms less than 12 months) are expensed as incurred.