What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-02-04 · 139 added, 203 removed, 142 unchanged (71% of the section changed)

18 unchanged sentences

the impact of the COVID-19 pandemic;

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, including the effect on our ability to fund working capital, operations and make new investments;

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;

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, including the effect on our ability to fund working capital, operations and make new investments;

economic (including inflationary pressures like those currently being experienced), weather (including the impact on the supply of cattle and the impact 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;

legislative and business conditions;

the collectibility of receivables;

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the ability to continue to attract franchisees;

the impact of the 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”

the impact of the minimum wage legislation on labor costs in New York State or other changes in labor laws, including regulations which could render a franchisor as a “joint employee”

or the impact of our 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;

the enforceability of international franchising agreements;

the future effects of any food borne illness;

such as bovine spongiform encephalopathy, BSE or e-coli;

26 unchanged sentences

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.

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 the royalties, fees and other sums we can earn from franchising the Nathan’s restaurant concept (including the Branded Menu Program and virtual or “ghost”

At December 26, 2021, our restaurant system, excluding virtual or “ghost”

kitchens, consisted of 242 Nathan’s franchised units, including 120 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 18 states, and 14 foreign countries.

At December 27, 2020, our restaurant system, excluding virtual or “ghost”

kitchens, consisted of 215 Nathan’s franchised units, including 93 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 19 states, and 9 foreign countries.

Our strategic emphasis is focused on increasing 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, including virtual or “ghost”

The primary drivers of our growth have been our Licensing and Branded Product Programs which have been the largest contributors to the Company’s profits.

We continue to reinvigorate our restaurant system.

The operating plan we have adopted in this regard is focused on surrounding our core items, Nathan’s World Famous Beef Hot Dogs and crinkle-cut French fried potatoes, with other much higher quality menu items, including fresh angus hamburgers and hand-dipped chicken sandwiches, developed to deliver best-in-class customer experience and greater customer frequency.

Menu development activities have been combined with concept positioning efforts, operational improvements and more effective digital and social marketing campaigns.

The goal is to improve the performance of the existing restaurant system and to grow it through franchising efforts, including virtual or “ghost”

While we do not expect to significantly increase the number of Company-owned restaurants, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system.

At June 26, 2022, our restaurant system, excluding virtual kitchens, consisted of 238 Nathan’s franchised units, including 121 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 18 states, and 12 foreign countries (including 7 Branded Menu units in Ukraine which are temporarily closed as a result of the Russia-Ukraine conflict.) Our virtual kitchens in operation consisted of 196 units located in 15 states and 5 foreign countries.

At June 27, 2021, our restaurant system consisted of 219 Nathan’s franchised units, including 100 Branded Menu units, and four Company-owned units (including one seasonal unit), located in 19 states, and 10 foreign countries.

Our virtual kitchens in operation consisted of 201 units located in 18 states and 7 foreign countries.

Our primary focus is to expand the market penetration of the Nathan’s Famous brand by increasing 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, including virtual kitchens.

The primary drivers of our recent growth have been our Licensing and Branded Product Programs which have been the largest contributors to the Company’s profits.

While we do not expect to significantly increase the number of Company-owned units, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system.

We continue to seek opportunities to drive sales in a variety of ways as we adapt to the ever-changing consumer and environment.

Our virtual or “ghost”

kitchens should position us to further expand our delivery options and should allow us to reach even more of our customers.

Our virtual kitchens should position us to further expand our delivery options and should allow us to reach even more of our customers.

As described in our Annual Report on Form 10-K for the year ended March 27, 2022, 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, beef trimmings and other commodities 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 Company’s 10.000% Senior Secured Notes due 2020, paid a portion of the special $5.00 cash dividend and used any remaining proceeds for general corporate purposes, including working capital.

In addition, our future operating results could be impacted by supply constraints on beef or by increased costs of beef, beef trimmings and other commodities due to inflationary pressures compared to earlier periods.

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 Company’s 10.000% Senior Secured Notes due 2020, paid a portion of the special $5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital.

On January 26, 2022, the Company redeemed $40,000,000 in aggregate principal amount of its 2025 Notes.

As a result of the partial redemption, the Company expects to reduce its future cash interest exposure by $2,650,000 per annum.

As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in the Form 10-Q quarterly report.

As a result of the partial redemption, the Company expects to reduce its future cash interest expense by $2,650,000 per annum.

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

See “Reconciliation of GAAP and Non-GAAP Measures.”

Impact of COVID-19 pandemic on our business

In March 2020, the World Health Organization declared the novel strain of coronavirus (“COVID-19”) a global pandemic.

During the first half of the fiscal 2022 period, the number of COVID-19 cases continued to stabilize with approved vaccines being more widely distributed and administered and, as a result, more regions continued to loosen restrictions, adhering to state and local guidelines.

Although the Company experienced higher revenue in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021, there continues to be uncertainty around the COVID-19 pandemic as the Omicron variant of COVID-19, which appears to be the most transmissible variant to date, has caused a recent increase in COVID-19 cases globally and has also led to evolving recommendations and restrictions by federal, state and local government officials.

Our ability to attract and retain employees at our Company-owned restaurants remains challenged, as the job market for these employees has become more competitive.

The challenges in the labor market have also affected some suppliers, resulting in some intermittent product shortages.

The Company cannot predict if new variants of COVID-19, in addition to the Delta variant and the Omicron variant, will be discovered or if there will be another surge, what additional restrictions may be enacted, to what extent it can maintain off-premises sales volumes, whether it can maintain sufficient staffing levels, or if individuals will be comfortable returning to its dining rooms or venues such as professional sports arenas, amusement parks, shopping malls or movie theaters during or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the Company as a whole.

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report.

The duration of the disruption on global, national, and local economies cannot be reasonably estimated at this time due to the ongoing effects of this situation.

Management is continually evaluating the impact of this global crisis on its financial condition, liquidity, operations, and workforce and will take additional actions as necessary.

Impact of COVID-19 Pandemic and Inflation

In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a novel strain of coronavirus, designated COVID-19.

COVID-19 related pressures have continued into the first quarter of fiscal 2023, although to a lesser extent than during the fiscal year 2022.

As approved vaccines continue to be distributed and administered, state and local restrictions continue to be lessened.

Customer traffic at our Company-owned restaurants, in particular at Coney Island, during the first quarter of fiscal 2023 increased by approximately 13% over the first quarter of fiscal 2022.

Additionally, we experienced increased customer traffic within our franchise system, including shopping malls, movie theaters, as well as airport and highway travel plazas.

The increase in customer traffic translated into higher Company-owned restaurant sales and higher franchise fees and royalties over the first quarter of fiscal 2022.

Additionally, as the economy continues to reopen and travel continues to increase, our Branded Product Program customers, including professional sports arenas, amusement parks, shopping malls and movie theaters have experienced stronger attendance contributing to higher sales over the first quarter of fiscal 2022.

We continue to follow guidance from health officials in determining the appropriate restrictions, if any, to place within our operations.

Our Company-owned and franchised restaurants could be disrupted by COVID-19 related employee absences or due to changes in the availability and cost of labor.

We remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain;

however, we have experienced rising transportation costs, rising costs of hot dogs due to the higher costs for beef and beef trimmings, and other food costs and paper products, which could continue to increase as the impact of COVID-19 continue across the supply chain.

We anticipate that inflationary pressures that began in the latter half of fiscal 2022 in labor and commodity costs, in particular beef and beef trimmings, due to supply chain challenges will continue during the remainder of fiscal 2023 and may impact our operations.

As a result of the recent inflationary pressures and the continued supply chain challenges, we expect to mitigate, to the extent possible, the impact with planned price increases on select products and menu items that were implemented during the first quarter of 2023.

We continue to monitor these inflationary pressures and will continue to implement mitigation plans as needed.

There continues to be uncertainty around the COVID-19 pandemic as variants including Omicron and BA.4 and BA.5, subvariants of Omicron, have caused increases in the number of reported COVID-19 cases.

We cannot predict the ultimate duration, scope and severity of the COVID-19 pandemic or its ultimate impact on our business in the short or long-term.

The ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels, and may result in reduced customer traffic and consumer spending trends that may adversely impact our financial condition and results of operations.

Critical Accounting Policies and Estimates

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Our most critical accounting policies and estimates relate to revenue recognition;

impairment of goodwill and other intangible assets;

impairment of intangible assets;

impairment of long-lived assets;

share-based compensation and income taxes (including uncertain tax positions).

Except for the adoption in Note B –

ASU 2019-12, “

Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, ”

there have been no other significant changes to the Company’s accounting policies subsequent to March 28, 2021.

Adoption of New Accounting Standard                   

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

New Accounting Standards Not Yet Adopted          

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

and income taxes (including uncertain tax positions).

Since March 27, 2022, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.

New Accounting Standard Not Yet Adopted          

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

EBITDA and Adjusted EBITDA

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

Thirteen weeks ended

Thirty-nine weeks ended

June 26, 2022

June 27, 2021

Interest expense

5 unchanged sentences

Thirteen weeks ended December 26, 2021 compared to thirteen weeks ended December 27, 2020

Total revenues increased by 44% to $25,913,000 for the thirteen weeks ended December 26, 2021 (“third quarter fiscal 2022”) as compared to $18,030,000 for the thirteen weeks ended December 27, 2020 (“third quarter fiscal 2021”) as we continued to lap the significant impact of COVID-19 on our results beginning in March 2020.

Total sales increased by 65% to $18,637,000 for the third quarter fiscal 2022 as compared to $11,322,000 for the third quarter fiscal 2021.

Foodservice sales from the Branded Product Program increased by 69% to $16,901,000 for the third quarter fiscal 2022 as compared to sales of $10,003,000 for the third quarter fiscal 2021.

The sales from our Branded Product Program have increased as certain government mandated restrictions associated with the COVID-19 pandemic have eased with approved vaccines being more widely distributed and administered.

Most of our Branded Product Program customers have reopened adhering to state and local guidelines, such as professional sports arenas, amusement parks, shopping malls and movie theaters.

During the third quarter fiscal 2022, the total pounds of hot dogs sold in the Branded Product Program increased by approximately 40% as compared to the third quarter fiscal 2021.

Our average selling prices increased by approximately 19% as compared to the third quarter fiscal 2021.

Total Company-owned restaurant sales increased by 32% to $1,736,000 during the third quarter fiscal 2022 as compared to $1,319,000 during the third quarter fiscal 2021.

The increase was primarily due to an increase in our average check and an increase in traffic at our Coney Island locations due to the easing of certain government mandated restrictions as a result of the public health measures taken to reduce exposure to the COVID-19 virus compared to the third quarter fiscal 2021.

The higher average check was driven by an increase in menu prices and the mix of items sold.

License royalties decreased by 0.3% to $5,878,000 in the third quarter fiscal 2022 as compared to $5,898,000 in the third quarter fiscal 2021.

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 WalMart, decreased 0.8% to $5,239,000 for the third quarter fiscal 2022 as compared to $5,284,000 in the third quarter fiscal 2021.

The decrease is due to an 11% decrease in retail volume during the third quarter fiscal 2022 period which was offset by a 14% increase in average net selling price as compared to the third quarter fiscal 2021.

The foodservice business earned lower royalties of $8,000 as compared to the third quarter fiscal 2021.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $24,000 during the third quarter fiscal 2022 as compared to the third quarter fiscal 2021 primarily due to additional royalties earned on sales of proprietary spices, cocktail franks and mozzarella sticks, offset in part, by lower royalties earned on french fries.

Franchise fees and royalties were $919,000 in the third quarter fiscal 2022 as compared to $420,000 in the third quarter fiscal 2021.

The increase was primarily due to the continued momentum associated with the recovery from the COVID-19 pandemic.

Total royalties were $744,000 in the third quarter fiscal 2022 as compared to $361,000 in the third quarter fiscal 2021.

Royalties earned under the Branded Menu program were $101,000 in the third quarter fiscal 2022 as compared to $65,000 in the third quarter fiscal 2021.

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

Ghost kitchen royalties were $88,000 in the third quarter fiscal 2022.

Traditional franchise royalties were $555,000 in the third quarter fiscal 2022 as compared to $296,000 in the third quarter fiscal 2021.

Franchise restaurant sales increased to $12,280,000 in the third quarter fiscal 2022 as compared to $6,178,000 in the third quarter fiscal 2021 primarily due to the reopening of a majority of our franchised locations.

Approximately 88% of our franchise system was open at the end of the third quarter fiscal 2022 as compared to 62% at the end of the third quarter fiscal 2021.

Comparable domestic franchise sales (consisting of 48 Nathan’s outlets, excluding sales under the Branded Menu Program) were $8,884,000 in the third quarter fiscal 2022 as compared to $4,912,000 in the third quarter fiscal 2021.

At December 26, 2021, 242 franchised outlets, including domestic, international and Branded Menu Program outlets were operating as compared to 215 domestic and international franchised or Branded Menu Program franchise outlets at December 27, 2020.

Total franchise fee income was $175,000 in the third quarter fiscal 2022 as compared to $59,000 in the third quarter fiscal 2021.

Domestic franchise fee income was $36,000 in the third quarter fiscal 2022 as compared to $34,000 in the third quarter fiscal 2021.

International franchise fee income was $63,000 in the third quarter fiscal 2022 as compared to $25,000 during the third quarter fiscal 2021.

We recognized $76,000 in forfeited fees in the third quarter fiscal 2022.

We did not recognize any forfeited fees in the third quarter fiscal 2021.

During the third quarter fiscal 2022, twelve franchised outlets opened, as well as fourteen Branded Menu Program outlets.

Additionally, 39 ghost kitchens opened.

During the third quarter fiscal 2021, one franchised outlet opened.

Advertising fund revenue, after eliminating Company contributions, was $479,000 during the third quarter fiscal 2022 and $390,000 during the third quarter fiscal 2021 period.

Costs and Expenses

Overall, our cost of sales increased by 79% to $16,040,000 in the third quarter fiscal 2022 as compared to $8,937,000 in the third quarter fiscal 2021.

Our gross profit (representing the difference between sales and cost of sales) increased to $2,597,000 or 14% of sales during the third quarter fiscal 2022 as compared to $2,385,000 or 21% of sales during the third quarter fiscal 2021.

Cost of sales in the Branded Product Program increased by 85% to $14,724,000 in the third quarter fiscal 2022 as compared to $7,948,000 in the third quarter fiscal 2021, primarily due to the 40% increase in the volume of product sold as discussed above, as well as a 31% increase in the average cost per pound of our hot dogs.

Beginning in July 2021, the cost of hot dogs has increased significantly due to higher costs for beef and beef trimmings, labor, packaging and transportation, as well as supply chain challenges associated with increased consumer demand as a result of the continued recovery from the COVID-19 pandemic.

We did not make any purchase commitments of beef during the third quarter fiscal 2022 or the third quarter fiscal 2021.

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 third quarter fiscal 2022 was $1,316,000 or 76% of restaurant sales, as compared to $989,000 or 75% of restaurant sales in the third quarter fiscal 2021.

The increase in cost of sales, during the third quarter of fiscal 2022 was primarily due to the 32% increase in sales as discussed above, in addition to higher commodity costs and restaurant labor costs.

The availability of labor remains a challenge at our Company-owned restaurants and it has required us to remain flexible as it relates to staffing levels and costs.

Our labor costs were also impacted by the additional increase in minimum wage requirements in New York State which commenced on July 1, 2021.

Our food costs may be impacted by increases in commodity costs, as well as the mix of products that we sell.

Restaurant operating expenses were $547,000 in the third quarter fiscal 2022 as compared to $759,000 in the third quarter fiscal 2021.

We incurred lower occupancy expenses of $286,000, which were offset, in part, by higher utility expenses of $22,000, higher insurance expenses of $26,000 and higher delivery charges associated with offsite consumption.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $259,000 in the third quarter fiscal 2022 as compared to $288,000 in the third quarter fiscal 2021.

General and administrative expenses decreased by $278,000 or 8% to $2,975,000 in the third quarter fiscal 2022 as compared to $3,253,000 in the third quarter fiscal 2021.

The decrease in general and administrative expenses was primarily attributable to lower corporate payroll expenses of $428,000, which were offset, in part, by higher insurance costs of $76,000 and higher marketing and trade show related expenses of $108,000.

Advertising fund expense, after eliminating Company contributions, was $479,000 during the third quarter fiscal 2022, as compared to $390,000 in the third quarter fiscal 2021.

Interest expense of $2,650,000 in both the third quarter fiscal 2022 and the third quarter fiscal 2021 represented accrued interest of $2,477,000 on the 2025 Notes and amortization of debt issuance costs of $173,000.

Interest income was $24,000 for the third quarter fiscal 2022 as compared to $89,000 in the third quarter fiscal 2021.

Other income, primarily relates to a sublease of a franchised restaurant offset, in part, by a termination fee associated with the Brooklyn Guaranty.

Provision for Income Taxes

The income tax provision for the third quarter fiscal 2022 and third quarter fiscal 2021 reflect effective tax rates of 28.8% and 26.6%, respectively.

During the third quarter fiscal 2022, the Company’s effective tax rate was unfavorably affected by 0.2% due to its return to provision adjustment in connection with the filing of its March 2021 tax returns.

During the third quarter fiscal 2021, the Company’s effective tax rate was favorably affected by 1.0% due to its return to provision adjustment in connection with the filing of its March 2020 tax returns.

The amount of unrecognized tax benefits at December 26, 2021 was $445,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of December 26, 2021, Nathan’s had $307,000 of accrued interest and penalties in connection with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefits excluding accrued interest and penalties could be further reduced by up to $19,000 during the fiscal year ending March 27, 2022.

Results of Operations

Thirty-nine weeks ended December 26, 2021 compared to thirty-nine weeks ended December 27, 2020

Total revenues increased by 57% to $90,110,000 for the thirty-nine weeks ended December 26, 2021 (“fiscal 2022 period”) as compared to $57,555,000 for the thirty-nine weeks ended December 27, 2020 (“fiscal 2021 period”) as we continued to lap the significant impact of COVID-19 on our results beginning in March 2020.

Total sales increased by 100% to $61,462,000 for the fiscal 2022 period as compared to $30,697,000 for the fiscal 2021 period.

Foodservice sales from the Branded Product Program increased by 113% to $51,960,000 for the fiscal 2022 period as compared to sales of $24,450,000 for the fiscal 2021 period.

Most of our Branded Product Program customers have reopened adhering to state and local guidelines, such as professional sports arenas, amusement parks, shopping malls and movie theaters.

During the fiscal 2022 period, the total pounds of hot dogs sold in the Branded Product Program increased by approximately 98% as compared to the fiscal 2021 period.

Thirteen weeks ended June 26, 2022 compared to thirteen weeks ended June 27, 2021

Total revenues increased by 27% to $39,720,000 for the thirteen weeks ended June 26, 2022 (“fiscal 2023 period”) as compared to $31,319,000 for the thirteen weeks ended June 27, 2021 (“fiscal 2022 period”).

Total sales increased by 39% to $26,894,000 for the fiscal 2023 period as compared to $19,325,000 for the fiscal 2022 period which included foodservice sales from the Branded Product Program increasing by 45% to $23,171,000 for the fiscal 2023 period as compared to sales of $15,996,000 in the fiscal 2022 period.

During the fiscal 2023 period, the volume of hot dogs sold increased by approximately 29% as compared to the fiscal 2022 period.

Our average selling prices increased by approximately 14% as compared to the fiscal 2022 period.

Total Company-owned restaurant sales increased by 12% to $3,723,000 during the fiscal 2023 period as compared to $3,329,000 during the fiscal 2022 period.

The higher average check was driven by an increase in menu prices and the mix of items sold.

License royalties decreased by 2% to $24,218,000 in the fiscal 2022 period as compared to $24,689,000 in the fiscal 2021 period.

The increase was primarily due to an increase in traffic at our Coney Island locations.

License royalties increased by 6% to $11,314,000 in the fiscal 2023 period as compared to $10,682,000 in the fiscal 2022 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 WalMart, decreased 3% to $22,161,000 for the 2022 fiscal period as compared to $22,743,000 in the fiscal 2021 period.

The decrease is due to a 1.4% decrease in retail volume during the fiscal 2022 period and a 0.6% decrease in average net selling price as compared to the fiscal 2021 period.

at retail and foodservice, including sales of hot dogs to WalMart, increased 6% to $10,450,000 in the fiscal 2023 period as compared to $9,880,000 in the fiscal 2022 period.

The increase is due to a 15% increase in average net selling price as compared to the fiscal 2022 period, which was offset by an 8% decrease in retail volume.

The foodservice business earned higher royalties of $62,000 as compared to the fiscal 2022 period.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $111,000 during the fiscal 2022 period as compared to the fiscal 2021 period primarily due to additional royalties earned on sales of proprietary spices, cocktail franks and mozzarella sticks, offset, in part, by lower royalties earned on french fries.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $62,000 during the fiscal 2023 period as compared to the fiscal 2022 period primarily due to additional royalties earned on sales of French fries and pickles.

Franchise fees and royalties were $1,093,000 in the fiscal 2023 period as compared to $907,000 in the fiscal 2022 period.

The increase was primarily due to the continued momentum associated with the recovery from the COVID-19 pandemic.

Total royalties were $901,000 in the fiscal 2023 period as compared to $800,000 in the fiscal 2022 period.

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

Ghost kitchen royalties were $258,000 in the fiscal 2022 period.

Virtual kitchen royalties were $44,000 in the fiscal 2023 period as compared to $73,000 in the fiscal 2022 period.

Traditional franchise royalties were $717,000 in the fiscal 2023 period as compared to $645,000 in the fiscal 2022 period.

Franchise restaurant sales increased to $40,910,000 in the fiscal 2022 period as compared to $15,366,000 in the fiscal 2021 period primarily due to the reopening of a majority of our franchised locations.

Comparable domestic franchise sales (consisting of 52 Nathan’s outlets, excluding sales under the Branded Menu Program) were $30,780,000 in the fiscal 2022 period as compared to $12,213,000 in the fiscal 2021 period.

Franchise restaurant sales increased to $15,946,000 in the fiscal 2023 period as compared to $12,985,000 in the fiscal 2022 period primarily due to higher sales at airport locations;

highway travel plazas;

movie theaters;

and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 63 Nathan’s franchised restaurants, excluding sales under the Branded Menu Program) were $13,114,000 in the fiscal 2023 period as compared to $10,335,000 in the fiscal 2022 period.         

At June 26, 2022, 238 franchised units, including domestic, international and Branded Menu Program units were operating as compared to 219 franchised units, including domestic, international and Branded Menu Program units at June 27, 2021.

Total franchise fee income was $192,000 in the fiscal 2023 period as compared to $107,000 in the fiscal 2022 period.

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International franchise fee income was $70,000 in the fiscal 2023 period as compared to $54,000 during the fiscal 2022 period.

We recognized $130,000 and $33,000 of forfeited fees in the fiscal 2022 and fiscal 2021 periods, respectively.

During the fiscal 2022 period, fifteen franchised outlets opened, as well as thirty-two Branded Menu Program outlets.

Additionally, 164 ghost kitchens opened.

During the fiscal 2021 period, five franchised outlets opened, including one Branded Menu Program outlet.

Additionally, 75 ghost kitchens opened during the fiscal 2021 period.

Advertising fund revenue, after eliminating Company contributions, was $1,437,000 in the fiscal 2022 period, as compared to $1,082,000 during the fiscal 2021 period.

We recognized $93,000 and $18,000 in forfeited fees in the fiscal 2023 and fiscal 2022 periods, respectively.

During the fiscal 2023 period, three new traditional franchised units opened.

Additionally, 15 new virtual kitchens opened.

During the fiscal 2022 period, one new traditional franchised unit opened, internationally, as well as seven new Branded Menu Program units.

Additionally, 71 new virtual kitchens opened.

Advertising fund revenue, after eliminating Company contributions, was $419,000 in the fiscal 2023 period, as compared to $405,000 in the fiscal 2022 period.

Costs and Expenses

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Our gross profit (representing the difference between sales and cost of sales) increased to $4,227,000 or 16% of sales during the fiscal 2023 period as compared to $3,960,000 or 20% of sales during the fiscal 2022 period.

Cost of sales in the Branded Product Program increased by 127% to $45,343,000 during the fiscal 2022 period as compared to $19,988,000 during the fiscal 2021 period, primarily due to the 98% increase in the volume of product sold as discussed above, as well as a 14% increase in the average cost per pound of our hot dogs.

Cost of sales in the Branded Product Program increased by 54% to $20,400,000 in the fiscal 2023 period as compared to $13,230,000 in the fiscal 2022 period, primarily due to the 29% increase in the volume of hot dogs sold as discussed above, as well as a 21% increase in the average cost per pound of our hot dogs.

We did not make any purchase commitments for beef during the fiscal 2022 and 2021 periods.

We did not make any purchase commitments of beef during the fiscal 2023 and 2022 periods.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2023 period was $2,267,000 or 61% of restaurant sales, as compared to $2,135,000 or 64% of restaurant sales in the fiscal 2022 period.

The increase in cost of sales during the fiscal 2022 period was primarily due to the 52% increase in sales discussed above, in addition to higher commodity costs and restaurant labor costs.

The availability of labor remains a challenge at our Company-owned restaurants and it has required us to remain flexible as it relates to staffing levels and costs.

Our labor costs were also impacted by the additional increase in minimum wage requirements in New York State which commenced on July 1, 2021.

Our food costs may be impacted by increases in commodity costs, as well as the mix of products that we sell.

The increase in cost of sales during the fiscal 2023 period was primarily due to the 12% increase in sales discussed above.

The decrease in cost of sales, as a percent of total restaurant sales, was due to an increase in customer counts driving higher sales which were offset by higher commodity costs and restaurant labor costs.

Food and paper costs as a percentage of Company-owned restaurant sales were 29%, down from 30% in the comparable period of the prior year primarily due to commodity inflation, offset by an increase in sales.

Labor and related expenses as a percentage of Company-owned restaurant sales were 32%, down from 34% in the comparable period in the prior year due to labor wage increases as a result of competitive pressures, offset by higher sales.

Restaurant operating expenses were $1,032,000 in the fiscal 2023 period as compared to $1,111,000 in the fiscal 2022 period.

We incurred lower occupancy expenses of $74,000, which were offset by higher utility expenses of $52,000, higher repairs and maintenance expenses of $50,000, higher insurance expenses of $90,000 and higher delivery charges associated with offsite consumption.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, were $807,000 in the fiscal 2022 period as compared to $900,000 in the fiscal 2021 period.

We incurred lower occupancy expenses of $119,000, offset by higher utility expenses of $20,000, and higher insurance costs of $25,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $233,000 in the fiscal 2023 period as compared to $278,000 in the fiscal 2022 period.

General and administrative expenses increased by $131,000 or 4% to $3,589,000 in the fiscal 2023 period as compared to $3,458,000 in the fiscal 2022 period.

The increase in general and administrative expenses was primarily attributable to a higher incentive compensation accrual of $324,000, higher insurance costs of $159,000 and higher marketing and trade show related expenses of $360,000.

The increase in general and administrative expenses was primarily attributable to higher marketing and trade show related expenses of $237,000, and higher bad debt expense of $81,000, offset in part, by lower salaries expense of $113,000 and lower professional fees of $55,000.

Advertising fund expense, after eliminating Company contributions, was $419,000 in the fiscal 2023 period, as compared to $405,000 in the fiscal 2022 period.

Interest expense of $7,951,000 in both the fiscal 2022 period and the fiscal 2021 period represented accrued interest of $7,433,000 on the 2025 Notes and amortization of debt issuance costs of $518,000.

Interest income was $88,000 for the fiscal 2022 period as compared to $309,000 in the fiscal 2021 period.

Other income, primarily relates to a sublease of a franchised restaurant offset, in part, by a termination fee associated with the Brooklyn Guaranty.

Interest expense of $1,944,000 in the fiscal 2023 period represented accrued interest of $1,817,000 on the 2025 Notes and amortization of debt issuance costs of $127,000.

Interest expense of $2,650,000 in the fiscal 2022 period represented accrued interest of $2,477,000 on the 2025 Notes and amortization of debt issuance costs of $173,000.

Interest income was $22,000 in the fiscal 2023 period as compared to $36,000 in the fiscal 2022 period.

Other income, net was $22,000 and $16,000 in the fiscal 2023 and fiscal 2022 periods, respectively, which primarily relates to sublease income from a franchised restaurant.

Provision for Income Taxes

The income tax provision for the fiscal 2022 period and fiscal 2021 period reflect effective tax rates of 28.1% and 27.7%, respectively.

The amount of unrecognized tax benefits at December 26, 2021 was $445,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of December 26, 2021, Nathan’s had $307,000 of accrued interest and penalties in connection with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefits excluding accrued interest and penalties could be further reduced by up to $19,000 during the fiscal year ending March 27, 2022.

The income tax provision for the thirteen week periods ended June 26, 2022 and June 27, 2021 reflect effective tax rates of 27.8% and 28.9%, respectively.

The effective tax rates are higher than the statutory rates primarily due to state and local taxes.

The amount of unrecognized tax benefits at June 26, 2022 was $418,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of June 26, 2022, 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 26, 2023.

Off-Balance Sheet Arrangements

At December 26, 2021 and December 27, 2020, Nathan’s did not have any open purchase commitments for hot dogs.

At June 26, 2022 and June 27, 2021, Nathan’s did not have any open purchase commitments for hot dogs.

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

Liquidity and Capital Resources          

Cash and cash equivalents at December 26, 2021 aggregated $86,168,000, a $5,104,000 increase during the fiscal 2022 period as compared to cash and cash equivalents of $81,064,000 at March 28, 2021.

Net working capital decreased to $48,204,000 from $80,072,000 at March 28, 2021 due to the irrevocable notice of redemption of $40,000,000 of the Company’s 2025 Notes and the designation of such 2025 Notes to be redeemed as a current liability.

We paid our semi-annual interest payments for fiscal 2022 of $4,968,750 on May 1, 2021 and November 1, 2021, respectively.

We paid our first, second and third quarter fiscal 2022 dividend payments of $1,440,000 on June 25, 2021, September 3, 2021 and December 3, 2021, respectively.

We expect to pay our fourth quarter dividend on March 4, 2022.

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.

On December 15, 2021, the Company announced its intent to complete the partial redemption, in the principal amount of $40,000,000, of the 2025 Notes.

On January 26, 2022, the Company completed the redemption by paying cash of $41,288,094, inclusive of the redemption premium and accrued interest, and recognized a loss on early extinguishment of approximately $1,400,000 that primarily reflected the redemption premium and the write-off of a portion of previously recorded debt issuance costs.

Please refer to Note Q –

Long-Term Debt in the accompanying consolidated interim financial statements for a further discussion regarding the Company’s indebtedness.

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.

Cash and cash equivalents at June 26, 2022 aggregated $47,668,000, a $2,395,000 decrease during the fiscal 2023 period as compared to cash and cash equivalents of $50,063,000 at March 27, 2022.

Net working capital increased to $53,173,000 in the fiscal 2023 period from $48,988,000 at March 27, 2022.

On May 1, 2022, we paid our first semi-annual interest payment of $3,643,750 for the fiscal 2023 period.

We paid our first quarter fiscal 2023 dividend of $1,852,000 on June 24, 2022.

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

Semi-annual interest payments are $3,643,750.

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

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Non-cash operating expenses consist principally of depreciation and amortization of $233,000, amortization of debt issuance costs of $127,000, share-based compensation expense of $8,000, and bad debts of $81,000.

In the fiscal 2022 period, accounts and other receivables increased by $2,635,000 due primarily to higher Branded Product Program receivables of $3,705,000, higher receivables due to the Advertising Fund of $890,000 which were offset, in part, by lower franchise and license royalties receivable of $2,232,000.

Prepaid expenses and other current assets decreased by $504,000 due primarily to the reduction of prepaid income taxes and insurance of $280,000 and $131,000, respectively.

In the fiscal 2022 period, accounts payable, accrued expenses and other current liabilities decreased by $1,395,000 due to lower accrued interest of $2,505,000 as a result of timing of our interest payments on our 2025 Notes, deferred revenue of $841,000 that was earned during the fiscal 2022 period and the reduction in accrued payroll and other benefits of $586,000 primarily from the payment of year-end fiscal 2021 incentive compensation.

Rebates due under the Branded Product Program were higher by $156,000 due primarily to increased sales as a result of the recovery from the COVID-19 pandemic.

Accounts payable increased by $1,673,000 due principally to higher product purchases for the Branded Product Program.

In the fiscal 2023 period, accounts and other receivables increased by $7,558,000 due primarily to higher receivables from Branded Product Program sales of $4,486,000, higher franchise and license royalties receivable of $2,143,000, and higher receivables due to the Advertising Fund of $698,000 .

Prepaid expenses and other current assets decreased by $133,000 due principally to a decrease in prepaid insurance of $61,000 and prepaid trade show expenses of $138,000 offset, in part, by an increase in prepaid real estate taxes of $81,000.

Accounts payable, accrued expenses and other current liabilities increased by $1,123,000 due principally to an increase in accounts payable of $1,836,000 due to the timing of seasonal product purchases for our Branded Product Program and Company-owned restaurants, as well as an increase in accrued rebates due under the Branded Product Program of $389,000 as a result of higher sales.

Additionally, there was an increase in accrued corporate taxes of $2,553,000 due to the timing of estimated tax payments and higher earnings.

Offsetting these increases was a reduction in accrued payroll and other benefits of $1,736,000 resulting from the payment of year-end compensation as well as a reduction in accrued interest expense of $1,827,000 resulting from the partial redemption of our 2025 Notes and our May 2022 interest payment on our 2025 Notes.

Cash used in investing activities was $244,000 in the fiscal 2023 period primarily in connection with capital expenditures incurred for our Branded Product Program and our Coney Island restaurants.

Cash used in financing activities of $4,327,000 in the fiscal 2022 period relates primarily to the payments of the Company’s quarterly $0.35 per share cash dividends on June 25, 2021, September 3, 2021 and December 3, 2021 totaling $4,320,000.

During the period from October 2001 through December 26, 2021, Nathan’s purchased 5,254,081 shares of its common stock at a cost of approximately $84,770,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors (the “Board”).

During the fiscal 2022 period, we did not repurchase any shares of common stock.

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

In 2016, the Board 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 26, 2021, Nathan’s has repurchased 1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan.

At December 26, 2021, there were 133,550 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

Cash used in financing activities of $2,922,000 in the fiscal 2023 period relates to the payment of the Company’s regular $0.45 per share cash dividend on June 24, 2022 of $1,852,000.

Additionally, during the fiscal 2023 period, the Company repurchased 20,370 shares of common stock for $1,070,000 under the 10b5-1 Plan.

In 2016, the Company’s Board of Directors (the "Board") authorized increases to the sixth stock repurchase plan for the purchase of up to 1,200,000 shares of its common stock on behalf of the Company.

As of June 26, 2022, Nathan’s has repurchased 1,086,820 shares at a cost of $38,178,000 under the sixth stock repurchase plan.

At June 26, 2022, there were 113,180 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

The plan does not have a set expiration date.

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There is no set time limit on the repurchases.

On March 13, 2020, the Board approved a 10b5-1 stock plan (the “10b5-1 Plan”) which expired on August 12, 2020.

During the fiscal 2021 period, the Company repurchased in open market transactions 26,676 shares of the Company’s common stock at an average share price of $56.26 for a total cost of $1,501,000 under the 10b5-1 Plan.

As discussed above, we had cash and cash equivalents at December 26, 2021 aggregating $86,168,000.

On June 14, 2022, the Board approved a 10b5-1 stock plan (the “10b5-1 Plan”) which will expire on the earlier of (a) September 13, 2022 or (b) the earlier of when the aggregate purchases under the 10b5-1 Plan equals 50,000 shares unless terminated earlier by the Board.

During the thirteen weeks ended June 26, 2022, the Company repurchased in open market transactions 20,370 shares of the Company’s common stock at an average price of $52.49 for a total cost of $1,070,000 under the 10b5-1 Plan.

At June 26, 2022, 29,630 shares were available for repurchase under the 10b5-1 Plan.

Through July 29, 2022, the Company repurchased an additional 13,896 shares of the Company’s common stock at an average price of $54.51 for a total cost of $758,000 .

At July 29, 2022, 15,734 shares were available for repurchase under the 10b5-1 Plan.

As discussed above, we had cash and cash equivalents at June 26, 2022 aggregating $47,668,000.

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 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.

On May 31, 2018, the Board 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, the Board authorized the increase of its regular quarterly dividend to $0.35 from $0.25.

Effective February 4, 2022, the Board authorized the increase of its regular quarterly dividend to $0.45 from $0.35.

The Company paid its first quarter fiscal 2022 dividend of $1,440,000 on June 25, 2021, its second quarter fiscal 2022 dividend of $1,440,000 on September 3, 2021 and its third quarter fiscal 2022 dividend of $1,440,000 on December 3, 2021.

Effective February 4, 2022, the Company declared its fourth quarter dividend of $0.45 per common share to stockholders of record as of the close of business on February 21, 2022, which is payable on March 4, 2022.

On February 4, 2022, the Board authorized the increase of its regular quarterly dividend to $0.45 from $0.35.

The Company paid its first quarter fiscal 2023 dividend of $1,852,000 on June 24, 2022.

Effective August 5, 2022, the Company declared its second quarter fiscal 2023 dividend of $0.45 per common share to stockholders of record as of the close of business on August 22, 2022, which is payable on September 2, 2022.

If the Company pays regular quarterly cash dividends for the remainder of fiscal 2023 at the same rate as declared in the first quarter of fiscal 2023, the Company’s total cash requirement for dividends for all of fiscal 2023 would be approximately $7,361,000 based on the number of shares of common stock outstanding at July 29, 2022.

The Company intends to declare and pay quarterly cash dividends;

however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.

Our ability to pay future dividends is limited by the terms of the Indenture for the 2025 Notes.

In addition, the 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.

We may also return capital to our stockholders through stock repurchases, subject to any restrictions in the Indenture, although there is no assurance that the Company will make any repurchases under its existing stock repurchase plan.

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

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

During the fiscal year ending March 27, 2022, we will be required to make interest payments of $10,563,194 which include its required semi-annual interest payments of $4,968,750 on May 1, 2021 and November 1, 2021, and $625,694 on January 25, 2022 in connection with the partial redemption discussed above.

During the fiscal year ending March 26, 2023, we will be required to make interest payments of $7,287,500, of which $3,643,750 has been made on May 1, 2022.

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 26, 2021, we sublet one property to a franchisee that we lease from a third party.

At June 26, 2022, we sublet one property to a franchisee that we lease from a third party.

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

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These contractual obligations impact our short-term and long-term liquidity and capital resource needs.

There have been no material changes in our contractual obligations since March 28, 2021 other than as described in connection with the partial redemption of the 2025 Notes discussed above.

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 was obligated to make payments under the Brooklyn Guaranty in the event of a default by the tenant/franchisee.

The Brooklyn Guaranty had an initial term of 10 years and one 5-year option and was limited to 24 months of rent for the first three years of the term.

For the remainder of the term, the Brooklyn Guaranty was limited to 12 months of rent plus reasonable costs of collection and attorney’s fees.

The Company entered into a termination of lease agreement effective January 15, 2022 (the “Termination Date”).

As consideration for all outstanding amounts due and payable under the Brooklyn Guaranty, the Company agreed to pay a termination fee in the amount of $75,000, of which the Company agreed to pay 50% or $37,500 and the tenant/franchisee agreed to pay 50% or $37,500.

The Company paid its share of the termination fee in January 2022.

Inflationary Impact

Historically, we do not believe that general inflation has materially impacted earnings.

However, we have experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities.

Our average cost of hot dogs between April 2021 and December 2021 was approximately 14% higher than between April 2020 and December 2020.

There have been no material changes in our contractual obligations since March 27, 2022.                           

Inflationary Impact                   

Beginning in fiscal 2022 and continuing into the first quarter of fiscal 2023, we have experienced inflationary pressures on commodity prices.

We expect this trend to continue throughout the remainder of fiscal 2023.

Our average cost of hot dogs during fiscal 2022 was approximately 19% higher than during fiscal 2021.

Our average cost of hot dogs between April 2022 and June 2022 was approximately 21% higher than between April 2021 and June 2021.

Inherent volatility experienced in certain commodity markets, such as those for beef and beef trimmings due to seasonal shifts, climate conditions, industry demand, inflationary pressures and other macroeconomic factors could have a significant effect on our results of operations.

We have experienced competitive pressure on labor rates as a result of the increase in the minimum hourly wage for fast food workers which increased to $15.00 in New York state during fiscal 2022 where our Company-owned restaurants are located.

Additionally, as the economy reopens with the continued recovery from the COVID-19 pandemic, there has been an increased demand for labor at all levels which has resulted in greater challenges retaining adequate staffing levels at our Company-owned restaurants;

our franchised restaurants and Branded Menu Program locations;

as well as for certain vendors in our supply chain that we depend on for our commodities.

We remain in contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain.

We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during the remainder of fiscal 2023.

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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 was phased in differently between New York City and the rest of New York State.

Effective December 31, 2019, the minimum wage was $15.00 in New York City and increased to $13.75 per hour for the remainder of New York State.

The minimum hourly rate of pay for the remainder of New York State increased to $14.50 on December 31, 2020 and increased to $15.00 on July 1, 2021.

All of Nathan’s Company-owned restaurants are within New York State and have been affected by this new legislation.

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.

We must comply with the Fair Labor Standards Act and various federal and state laws governing minimum wages.

Increases in the minimum wage and labor regulations have increased our labor costs.

The minimum wage for New York State increased to $15.00 per hour on December 31, 2021.

All of our Company-owned restaurants operate in New York State.

In addition, the federal government and a number of other states are evaluating various proposals to increase their respective minimum wage.

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.

Continued increases in labor costs, commodity prices and other operating expenses, including healthcare, could adversely affect our operations.

We attempt to manage inflationary pressure, and rising commodity costs, at least in part, through raising prices.

Delays in implementing price increases may limit our ability to offset these rising costs.

Volatility in commodity prices, including beef and beef trimmings could have a significant adverse effect on our results of operations.

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,”

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis