What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-05 · 158 added, 75 removed, 206 unchanged (53% of the section changed)

61 unchanged sentences

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 kitchens).

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.

At September 25, 2022, our restaurant system, excluding virtual kitchens, consisted of 234 Nathan’s franchised units, including 119 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 17 states, and 12 foreign countries (including 2 Branded Menu units in Ukraine which are temporarily closed as a result of the Russia-Ukraine conflict.) Our virtual kitchens in operation consisted of 229 units located in 18 states and four foreign countries.

At September 26, 2021, our restaurant system, excluding virtual kitchens, consisted of 224 Nathan’s franchised units, including 109 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 18 states, and 12 foreign countries.

Our virtual kitchens in operation consisted of 246 units located in 20 states and six 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.

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

Impact of COVID-19 Pandemic and Inflation

Impact of COVID-19 Pandemic

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.

COVID-19 related pressures have continued during the twenty-six weeks ended September 25, 2022 (“fiscal 2023 period”), although to a lesser extent than during the twenty-six weeks ended September 26, 2021 (“fiscal 2022 period”).

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.

Despite the fact that vaccines are now widely available across the country, there have been increases in diagnosed cases reported due to the spread of additional COVID-19 variants.

Customer traffic at our Company-owned restaurants, in particular at Coney Island, during the fiscal 2023 period increased by approximately 27% over the fiscal 2022 period.

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.

The increase in customer traffic translated into higher Company-owned restaurant sales and higher franchise fees and royalties during the fiscal 2023 period than during the fiscal 2022 period.

Additionally, as the level of comfort of consumers gathering in social settings increases 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.

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.

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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.

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

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

Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to implement further price increases in the future.

Critical Accounting Policies and Estimates

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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.

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

New Accounting Standard Not Yet Adopted          

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(ii) provision for income taxes and (iii) depreciation and amortization expense.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding share-based compensation that the Company believes will impact the comparability of its results of operations.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding (i) the gain on disposal of property and equipment and (ii) share-based compensation that the Company believes will impact the comparability of its results of operations.

EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income or other measures of financial performance or liquidity in conformity with US GAAP.

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

Thirteen weeks ended

June 26, 2022

June 27, 2021

Twenty-six weeks ended

September 25,

September 26,

September 25,

September 26,

Interest expense

1 unchanged sentence

Depreciation and amortization

Gain on disposal of property and equipment

Share-based compensation

Adjusted EBITDA

Our routine business pattern is affected by seasonal fluctuations, including the effects of weather and economic conditions.

Historically, sales from our Company-owned locations, principally at Coney Island, and franchised restaurants from which franchised royalties are earned and the Company’s earnings have been highest during our first two fiscal quarters, with the fourth quarter representing the slowest period.

Additionally, revenues from our Branded Product Program and retail licensing program generally follow similar seasonal fluctuations, although not to the same degree.

Working capital requirements may vary throughout the year to support these seasonal patterns.

Due to the above seasonal factors, as well as the COVID-19 pandemic and inflationary pressures, our results of operations for the thirteen and twenty-six weeks ended September 25, 2022 are not necessarily indicative of those for a full fiscal year.

Results of Operations

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.

Thirteen weeks ended September 25, 2022 compared to thirteen weeks ended September 26, 2021

Total revenues increased by 14% to $37,497,000 for the thirteen weeks ended September 25, 2022 (“second quarter fiscal 2023”) as compared to $32,878,000 for the thirteen weeks ended September 26, 2021 (“second quarter fiscal 2022”).

Total sales increased by 16% to $27,301,000 for the second quarter fiscal 2023 as compared to $23,500,000 for the second quarter fiscal 2022 which included foodservice sales from the Branded Product Program increasing by 16% to $22,030,000 for the second quarter fiscal 2023 as compared to sales of $19,063,000 for the second quarter fiscal 2022.

During the second quarter fiscal 2023, the volume of hot dogs sold increased by approximately 9% as compared to the second quarter fiscal 2022.

Our average selling prices increased by approximately 4% as compared to the second quarter fiscal 2022.

Total Company-owned restaurant sales increased by 19% to $5,271,000 during the second quarter fiscal 2023 as compared to $4,437,000 during the second quarter fiscal 2022.

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

License royalties increased by 10% to $8,413,000 in the second quarter fiscal 2023 as compared to $7,658,000 in the second quarter fiscal 2022.

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

at retail and foodservice, including sales of hot dogs to WalMart, increased 9% to $7,655,000 for the second quarter fiscal 2023 as compared to $7,042,000 in the second quarter fiscal 2022.

The increase is due to a 10% increase in average net selling price as compared to the second quarter fiscal 2022, which was offset by a 2% decrease in retail volume.

The foodservice business earned higher royalties of $71,000 as compared to the second quarter fiscal 2022.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $142,000 during the second quarter fiscal 2023 as compared to the second quarter fiscal 2022 primarily due to additional royalties earned on sales of French fries, cocktail franks, mozzarella sticks and seasonings.

Franchise fees and royalties were $1,199,000 in the second quarter fiscal 2023 as compared to $1,167,000 in the second quarter fiscal 2022.

Total royalties were $1,055,000 in the second quarter fiscal 2023 as compared to $1,037,000 in the second quarter fiscal 2022.

Royalties earned under the Branded Menu Program were $178,000 in the second quarter fiscal 2023 as compared to $207,000 in the second quarter fiscal 2022.

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

Virtual kitchen royalties were $37,000 in the second quarter fiscal 2023 as compared to $97,000 in the second quarter fiscal 2022.

Traditional franchise royalties were $840,000 in the second quarter fiscal 2023 as compared to $733,000 in the second quarter fiscal 2022.

Franchise restaurant sales increased to $18,595,000 in the second quarter fiscal 2023 as compared to $15,644,000 in the second quarter fiscal 2022 primarily due to higher sales at airport locations;

highway travel plazas;

shopping malls;

movie theaters;

and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 63 Nathan’s outlets, excluding sales under the Branded Menu Program) were $15,338,000 in the second quarter fiscal 2023 as compared to $12,318,000 in the second quarter fiscal 2022.         

At September 25, 2022, 234 franchised units, including domestic, international and Branded Menu Program units were operating as compared to 224 franchised units, including domestic, international and Branded Menu Program units at September 26, 2021.

Total franchise fee income was $144,000 in the second quarter fiscal 2023 compared to $130,000 in the second quarter fiscal 2022.

Domestic franchise fee income was $28,000 in the second quarter fiscal 2023 compared to $38,000 in the second quarter fiscal 2022.

International franchise fee income was $61,000 in the second quarter fiscal 2023 compared to $56,000 during the second quarter fiscal 2022.

We recognized $55,000 and $36,000 in forfeited fees in the second quarter fiscal 2023 and the second quarter fiscal 2022, respectively.

During the second quarter fiscal 2023, one new traditional franchised unit opened.

Additionally, 43 new virtual kitchens opened.

During the second quarter fiscal 2022, two new traditional franchised units opened, as well as eleven new Branded Menu Program units.

Additionally, 54 new virtual kitchens opened.

Advertising fund revenue, after eliminating Company contributions, was $584,000 during the second quarter fiscal 2023, as compared to $553,000 during the second quarter fiscal 2022.

Costs and Expenses

Overall, our cost of sales increased by 9% to $21,898,000 in the second quarter fiscal 2023 as compared to $20,131,000 in the second quarter fiscal 2022.

Our gross profit (representing the difference between sales and cost of sales) increased to $5,403,000 or 20% of sales during the second quarter fiscal 2023 as compared to $3,369,000 or 14% of sales during the second quarter fiscal 2022.

Cost of sales in the Branded Product Program increased by 9% to $18,975,000 in the second quarter fiscal 2023 as compared to $17,389,000 in the second quarter fiscal 2022, primarily due to the 9% increase in the volume of hot dogs sold as discussed above, partially offset by a 3% decrease 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.

Beef prices began to stabilize and declined slightly during the second quarter fiscal 2023 as compared to the significantly higher commodity costs experienced during the second quarter fiscal 2022.

We did not make any purchase commitments of beef during the second quarter fiscal 2023 or the second quarter fiscal 2022.

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 second quarter fiscal 2023 was $2,923,000 or 55% of restaurant sales as compared to $2,742,000 or 62% of restaurant sales during the second quarter fiscal 2022.

The increase in cost of sales during the second quarter of fiscal 2023 was primarily due to the 19% increase in sales as 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 28%, 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 27%, down from 32% 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 $1,253,000 in the second quarter fiscal 2023 as compared to $1,216,000 in the second quarter fiscal 2022.

We incurred lower occupancy expenses of $87,000, offset by higher utility expenses of $15,000, higher marketing expenses of $47,000, and higher insurance costs of $30,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $301,000 in the second quarter fiscal 2023 as compared to $270,000 in the second quarter fiscal 2022.

General and administrative expenses increased by $103,000 or 3% to $3,372,000 in the second quarter fiscal 2023 as compared to $3,269,000 in the second quarter fiscal 2022.

The increase in general and administrative expenses was primarily attributable to higher compensation expenses of $93,000 and professional fees of $30,000.

Advertising fund expense, after eliminating Company contributions, was $759,000 during the second quarter fiscal 2023, as compared to $553,000 in the second quarter fiscal 2022.

The Company has determined that the Advertising Fund normal seasonal deficit is not to be fully recovered during the remainder of the fiscal 2023 period and has reflected the projected deficit of $175,000 in its second quarter fiscal 2023 results of operations.

Interest expense of $1,943,000 in the second quarter fiscal 2023 represented interest expense of $1,816,000 on the 2025 Notes and amortization of debt issuance costs of $127,000.

Interest expense of $2,651,000 in the second quarter fiscal 2022 represented interest expense of $2,478,000 on the 2025 Notes and amortization of debt issuance costs of $173,000.

Interest income was $80,000 in the second quarter fiscal 2023 as compared to $28,000 in the second quarter fiscal 2022 due primarily to higher interest rates.

Other income, net was $34,000 and $5,000 in the second quarter fiscal 2023 and the second quarter fiscal 2022, respectively, which primarily relates to sublease income from a franchised restaurant.

Provision for Income Taxes

The effective income tax rate for the second quarter fiscal 2023 was 26.3% compared to 26.5% in the second quarter fiscal 2022.

The effective income tax rate for the second quarter fiscal 2023 reflected income tax expense of $2,127,000 recorded on $8,085,000 of pre-tax income.

The effective income tax rate for the second quarter fiscal 2022 reflected income tax expense of $1,276,000 recorded on $4,821,000 of pre-tax income.

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

The amount of unrecognized tax benefits at September 25, 2022 was $430,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 25, 2022, the Company had approximately $305,000 accrued for the payment of 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.

Results of Operations

Twenty-six weeks ended September 25, 2022 compared to twenty-six weeks ended September 26, 2021

Total revenues increased by 20% to $77,217,000 for the twenty-six weeks ended September 25, 2022 (“fiscal 2023 period”) as compared to $64,197,000 for the twenty-six weeks ended September 26, 2021 (“fiscal 2022 period”).

Total sales increased by 26% to $54,195,000 for the fiscal 2023 period as compared to $42,825,000 for the fiscal 2022 period which included foodservice sales from the Branded Product Program increasing by 29% to $45,201,000 for the fiscal 2023 period as compared to sales of $35,059,000 for the fiscal 2022 period.

During the fiscal 2023 period, the volume of hot dogs sold increased by approximately 19% as compared to the fiscal 2022 period.

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

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.

at retail and foodservice, including sales of hot dogs to WalMart, increased 7% to $18,105,000 for the fiscal 2023 period as compared to $16,922,000 in the fiscal 2022 period.

The increase is due to a 13% increase in average net selling price as compared to the fiscal 2022 period, which was offset by a 6% decrease in retail volume.

The foodservice business earned higher royalties of $133,000 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 $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.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $204,000 during the fiscal 2023 period as compared to the fiscal 2022 period primarily due to additional royalties earned on sales of French fries, cocktail franks, mozzarella sticks and seasonings.

Franchise fees and royalties were $2,292,000 in the fiscal 2023 period as compared to $2,074,000 in the fiscal 2022 period.

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highway travel plazas;

shopping malls;

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.

Comparable domestic franchise sales (consisting of 64 Nathan’s outlets, excluding sales under the Branded Menu Program) were $28,448,000 in the fiscal 2023 period as compared to $22,191,000 in the fiscal 2022 period.         

Total franchise fee income was $336,000 in the fiscal 2023 period as compared to $237,000 in the fiscal 2022 period.

Domestic franchise fee income was $29,000 in the fiscal 2023 period as compared to $35,000 in the fiscal 2022 period.

Domestic franchise fee income was $57,000 in the fiscal 2023 period compared to $73,000 in the fiscal 2022 period.

International franchise fee income was $130,000 in the fiscal 2023 period as compared to $110,000 during the fiscal 2022 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.

We recognized $149,000 and $54,000 in forfeited fees in the fiscal 2023 period and fiscal 2022 period, respectively.

During the fiscal 2023 period, four new franchised units opened.

Additionally, 58 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.

During the fiscal 2022 period, three new franchised outlets opened, as well as eighteen new Branded Menu Program outlets.

Additionally, 125 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.

Advertising fund revenue, after eliminating Company contributions, was $1,003,000 during the fiscal 2023 period as compared to $958,000 during 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 $9,630,000 or 18% of sales during the fiscal 2023 period as compared to $7,329,000 or 17% of sales during the fiscal 2022 period.

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.

Cost of sales in the Branded Product Program increased by 29% to $39,375,000 during the fiscal 2023 period as compared to $30,619,000 during the fiscal 2022 period, primarily due to the 19% increase in the volume of hot dogs sold as discussed above, as well as an 8% increase in the average cost per pound of our hot dogs.

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

We did not make any purchase commitments of beef during the fiscal 2023 period or the fiscal 2022 period.

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Restaurant operating expenses were $2,285,000 in the fiscal 2023 period as compared to $2,327,000 in the fiscal 2022 period.

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

We incurred lower occupancy expenses of $206,000, offset by higher utility expenses of $35,000, higher marketing expenses of $48,000 and higher insurance costs of $55,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $534,000 in the fiscal 2023 period as compared to $548,000 in the fiscal 2022 period.

General and administrative expenses increased by $234,000 or 3% to $6,961,000 in the fiscal 2023 period as compared to $6,727,000 in the fiscal 2022 period.

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 $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.

The increase in general and administrative expenses was primarily attributable to higher marketing and trade show related expenses of $307,000, offset in part by lower compensation expenses of $55,000.

Advertising fund expense, after eliminating Company contributions, was $1,178,000 during the fiscal 2023 period as compared to $958,000 in the fiscal 2022 period.

Interest expense of $3,887,000 in the fiscal 2023 period represented interest expense of $3,633,000 on the 2025 Notes and amortization of debt issuance costs of $254,000.

Interest expense of $5,301,000 in the fiscal 2022 period represented interest expense of $4,955,000 on the 2025 Notes and amortization of debt issuance costs of $346,000.

Interest income was $102,000 in the fiscal 2023 period as compared to $64,000 in the fiscal 2022 period due primarily to higher interest rates.

Other income, net was $56,000 and $21,000 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 thirteen week periods ended June 26, 2022 and June 27, 2021 reflect effective tax rates of 27.8% and 28.9%, respectively.

The effective income tax rate for the fiscal 2023 period was 27.1% compared to 28.0% in the fiscal 2022 period.

The effective income tax rate for the fiscal 2023 period reflected income tax expense of $4,870,000 recorded on $17,965,000 of pre-tax income.

The effective income tax rate for the fiscal 2022 period reflected income tax expense of $3,617,000 recorded on $12,925,000 of pre-tax income.

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.

The amount of unrecognized tax benefits at September 25, 2022 was $430,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 25, 2022, the Company had approximately $305,000 accrued for the payment of 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 June 26, 2022 and June 27, 2021, Nathan’s did not have any open purchase commitments for hot dogs.

At September 25, 2022 and September 26, 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 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.

Cash and cash equivalents at September 25, 2022 aggregated $53,857,000, a $3,794,000 increase 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 $56,588,000 from $48,988,000 at March 27, 2022.

We paid our semi-annual interest payments for fiscal 2023 of $3,643,750 on May 1, 2022 and November 1, 2022, respectively.

We paid our first and second quarter fiscal 2023 dividend payments of $1,852,000 and $1,836,000 on June 24, 2022 and September 2, 2022, respectively.

We expect to pay our third quarter dividend on December 2, 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 $534,000, amortization of debt issuance costs of $254,000, share-based compensation expense of $16,000, and bad debts of $80,000.

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.

In the fiscal 2023 period, accounts and other receivables increased by $2,877,000 due primarily to higher receivables from Branded Product Program sales of $2,689,000, higher receivables due to the Advertising Fund of $809,000, which were offset, in part, by lower franchise and license royalties receivable of $705,000.

Prepaid expenses and other current assets decreased by $573,000 due primarily to the reduction of prepaid insurance and marketing expenses of $198,000 and $305,000, respectively.

In the fiscal 2023 period, accounts payable, accrued expenses and other current liabilities decreased by $1,384,000 due to a decline in accrued payroll and other benefits of $1,032,000 resulting primarily from the payment of year-end fiscal 2022 incentive compensation;

earned deferred revenue of $676,000 and a decline in accounts payable of $1,436,000 due to the timing of product purchases for our Branded Product Program and Company-owned restaurants.

Offsetting these declines were increases in accrued corporate income taxes of $1,228,000 due to the timing of estimated tax payments and higher earnings;

increases in accrued rebates due under the Branded Product Program of $161,000 as a result of higher sales;

and increases in accrued professional fees of $152,000.

Cash used in investing activities was $398,000 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 $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.

Cash used in financing activities of $5,580,000 in the fiscal 2023 period relates to the payments of the Company’s quarterly $0.45 per share cash dividends on June 24, 2022 and September 2, 2022 totaling $3,688,000.

Additionally, during the fiscal 2023 period, the Company repurchased 35,434 shares of common stock for $1,892,000 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.

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 September 25, 2022, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At September 25, 2022, there were 98,116 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 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.

On June 14, 2022, the Board approved a 10b5-1 stock plan (the “10b5-1 Plan”) which expired on September 13, 2022.

During the fiscal 2023 period, the Company repurchased in open market transactions 35,434 shares of the Company’s common stock at an average price of $53.39 for a total cost of $1,892,000 under the 10b5-1 Plan.

As discussed above, we had cash and cash equivalents at September 25, 2022 aggregating $53,857,000.

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

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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 paid its first quarter fiscal 2023 dividend of $1,852,000 on June 24, 2022 and its second quarter fiscal 2023 dividend of $1,836,000 on September 2, 2022.

Effective November 3, 2022, the Company declared its third quarter dividend of $0.45 per common share to stockholders of record as of the close of business on November 21, 2022, which is payable on December 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 and second quarters of fiscal 2023, the Company’s total cash requirement for dividends for all of fiscal 2023 would be approximately $7,360,000 based on the number of shares of common stock outstanding at November 3, 2022.

The Company intends to declare and pay quarterly cash dividends;

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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 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.

During the fiscal year ending March 26, 2023, we will be required to make interest payments of $7,287,500, of which all have been made as of November 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 June 26, 2022, we sublet one property to a franchisee that we lease from a third party.

At September 25, 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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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.

Our contractual obligations primarily consist of the 2025 Notes and the related interest payments, operating leases, and employment agreements with certain executive officers.

Our contractual obligations primarily consist of the 2025 Notes and the related interest payments, operating leases, and employment agreement with certain executive officers.

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 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.

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

Inflationary Impact

Beginning in fiscal 2022 and continuing into the fiscal 2023 period, 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.

Our average cost of hot dogs during fiscal 2023 was approximately 8% higher than during fiscal 2022.

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;

Additionally, 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;

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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.

Delays in implementing price increases, competitive pressures, consumer spending levels and other factors 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.

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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