What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-02-01 · 124 added, 186 removed, 145 unchanged (68% of the section changed)

18 unchanged sentences

the status of our licensing and supply agreements, including our licensing revenue and overall profitability being substantially dependent on our agreement with Smithfield Foods, Inc.;

the impact of our debt service and repayment obligations under the 2025 Notes (as defined below), including the effect on our ability to fund working capital, operations and make investments;

the impact of our debt service and repayment obligations under our debt instruments, including the effect on our ability to fund working capital, operations and make investments;

economic (including inflationary pressures like those currently being experienced);

21 unchanged sentences

Our Company-owned and franchised restaurants operate under the name “Nathan’s Famous,” the name first used at our original Coney Island restaurant opened in 1916.

Nathan’s product licensing program sells packaged hot dogs, frozen crinkle-cut French fries and additional products to retail customers through supermarkets, grocery channels and club stores for off-site consumption.

Nathan’s product licensing program sells packaged hot dogs;

frozen crinkle-cut French fries and additional products to retail customers through supermarkets, grocery channels and club stores for off-site consumption.

Our Branded Product Program enables foodservice retailers and others to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship.

2 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, grocery stores and club stores, the sale of Nathan’s products directly to other foodservice operators, 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 December 24, 2023, our restaurant system, excluding virtual kitchens, consisted of 238 locations, including 117 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

At December 25, 2022, our restaurant system, excluding virtual kitchens, consisted of 233 locations, including 120 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 12 foreign countries.

At June 30, 2024, our restaurant system, excluding virtual kitchens, consisted of 231 locations, including 118 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

At June 25, 2023, our restaurant system, excluding virtual kitchens, consisted of 235 locations, including 121 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 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 restaurants and franchised locations, including virtual kitchens.

5 unchanged sentences

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, March 21, 2023 and December 19, 2023, the Company redeemed $40,000,000, $30,000,000 and $20,000,000, respectively, in aggregate principal amount of its 2025 Notes.

$60,000,000 principal amount of the 2025 Notes were outstanding as of December 24, 2023.

On May 1, 2023 and November 1, 2023, the Company paid its semi-annual interest payments for fiscal 2024.

On December 19, 2023, in connection with the redemption of $20,000,000 principal amount of its 2025 Notes, the Company paid its required interest payment accrued on the redeemed 2025 Notes.

Our future results may be impacted by our interest obligations under the 2025 Notes.

As a result of the $60,000,000 outstanding principal amount of the 2025 Notes as of December 24, 2023, the Company expects to incur annual interest expense of $3,975,000 and annual amortization costs of approximately $276,000.

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 a special $5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital.

Over the past three years, we redeemed $90,000,000 of the 2025 Notes reducing the outstanding balance to $60,000,000 at June 30, 2024.

We believe that our multi-channel asset light business model will continue to generate consistent free cash flow to manage our current debt service levels and may enable us to further reduce our debt service levels in the future.

On May 1, 2024, the Company paid its first semi-annual interest payment on the 2025 Notes of $1,987,500 for fiscal 2025.

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

1 unchanged sentence

Recent events

Refinancing of Senior Secured Notes due 2025

On July 10, 2024, the Company entered into a five-year unsecured Credit Agreement with Citibank, N.A.

and borrowed $60,000,000 in Term Loan borrowings to refinance and redeem the 2025 Notes.

See NOTE T – SUBSEQUENT EVENTS to the accompanying consolidated financial statements and “Liquidity and Capital Resources” for additional information on the Credit Agreement and refinancing.

Our future results may be impacted by our debt service and repayment obligations under our debt instruments.

Inflationary Factors

Inflationary pressures negatively impacted our earnings during the first nine months of fiscal 2024, including (i) rising labor costs and (ii) higher commodity prices, including beef and beef trimmings.

This trend may continue throughout the remainder of fiscal year 2024.

Inflationary pressures impacted our results of operations during the first three months of fiscal 2025, including higher commodity prices on beef and beef trimmings.

We expect this trend to continue throughout the remainder of fiscal year 2025.

In general, we have been able to offset cost increases resulting from inflation by increasing prices and adjusting product mix.

6 unchanged sentences

These judgments can be subjective and complex, and consequently, actual results could differ from those estimates.

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

impairment of intangible assets;

Our most critical accounting policies and estimates relate to impairment of intangible assets;

impairment of long-lived assets;

and income taxes (including uncertain tax positions).

As discussed in Note B, the Company adopted ASU 2016-13, “ Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, ” effective March 27, 2023.

There have been no other significant changes to the Company’s accounting policies subsequent to March 26, 2023.

Adoption of New Accounting Standard

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

current expected credit losses and income taxes (including uncertain tax positions).

There have been no changes to our critical accounting estimates or significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024.

New Accounting Standards Not Yet Adopted

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

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

EBITDA and Adjusted EBITDA

4 unchanged sentences

(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 (i) the loss on disposal of property and equipment;

(ii) loss on debt extinguishment;

and (iii) share-based compensation that the Company believes will impact the comparability of its results of operations.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding share-based compensation 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.

3 unchanged sentences

Thirteen weeks ended

Thirty-nine weeks ended

December 24, 2023

December 25, 2022

December 24, 2023

December 25, 2022

June 30, 2024

June 25, 2023

Interest expense

1 unchanged sentence

Depreciation and amortization

Loss on disposal of property and equipment

Loss on debt extinguishment

Share-based compensation

5 unchanged sentences

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

Due to the above seasonal factors, as well as inflationary pressures, our results of operations for the thirteen and thirty-nine weeks ended December 24, 2023 are not necessarily indicative of those for a full fiscal year.

Results of Operations

Thirteen weeks ended December 24, 2023 compared to thirteen weeks ended December 25, 2022

Total revenues increased by approximately 10% to $28,890,000 for the thirteen weeks ended December 24, 2023 (“third quarter fiscal 2024”) as compared to $26,154,000 for the thirteen weeks ended December 25, 2022 (“third quarter fiscal 2023”).

Total sales increased by approximately 16% to $21,349,000 for the third quarter fiscal 2024 as compared to $18,340,000 for the third quarter fiscal 2023 which included foodservice sales from the Branded Product Program increasing by 18% to $19,688,000 for the third quarter fiscal 2024 as compared to sales of $16,661,000 for the third quarter fiscal 2023.

During the third quarter fiscal 2024, the volume of hot dogs sold increased by approximately 8% as compared to the third quarter fiscal 2023.

Our average selling prices increased by approximately 9% as compared to the third quarter fiscal 2023.

Total Company-owned restaurant sales decreased by 1% to $1,661,000 during the third quarter fiscal 2024 as compared to $1,679,000 during the third quarter fiscal 2023.

Restaurant sales were impacted by reduced traffic at our Coney Island locations.

License royalties decreased by approximately 4% to $6,078,000 in the third quarter fiscal 2024 as compared to $6,337,000 in the third quarter fiscal 2023.

Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc.

at retail and foodservice decreased 4% to $5,279,000 for the third quarter fiscal 2024 as compared to $5,489,000 in the third quarter fiscal 2023.

The decrease is due to a 12% decrease in retail volume, which was offset, in part, by a 6% increase in average net selling price as compared to the second quarter fiscal 2023.

The foodservice business earned higher royalties of $107,000 as compared to the third quarter fiscal 2023.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $49,000 during the third quarter fiscal 2024 as compared to the third quarter fiscal 2023 primarily due to lower royalties earned on sales of franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties were $955,000 in the third quarter fiscal 2024 as compared to $976,000 in the third quarter fiscal 2023.

Total royalties were $868,000 in the third quarter fiscal 2024 as compared to $829,000 in the third quarter fiscal 2023.

Royalties earned under the Branded Menu program were $150,000 in the third quarter fiscal 2024 as compared to $151,000 in the third quarter fiscal 2023.

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 $14,000 in the third quarter fiscal 2024 as compared to $30,000 in the third quarter fiscal 2023.

Traditional franchise royalties were $704,000 in the third quarter fiscal 2024 as compared to $648,000 in the third quarter fiscal 2023.

Franchise restaurant sales increased to $15,635,000 in the third quarter fiscal 2024 as compared to $14,761,000 in the third quarter fiscal 2023 primarily due to higher sales at airport locations and shopping malls.

Comparable domestic franchise sales (consisting of 61 Nathan’s outlets, excluding sales under the Branded Menu Program) were $12,335,000 in the third quarter fiscal 2024 as compared to $12,410,000 in the third quarter fiscal 2023.

At December 24, 2023, 238 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 233 franchised locations, including domestic, international and Branded Menu Program units at December 25, 2022.

Total franchise fee income was $87,000 in the third quarter fiscal 2024 as compared to $147,000 in the third quarter fiscal 2023.

Domestic franchise fee income was $26,000 in the third quarter fiscal 2024 as compared to $27,000 in the third quarter fiscal 2023.

International franchise fee income was $61,000 in the third quarter fiscal 2024 and the third quarter fiscal 2023.

We did not recognize any forfeited fees in the third quarter fiscal 2024.

We recognized $59,000 in forfeited fees in the third quarter fiscal 2023.

During the third quarter fiscal 2024, three franchised locations opened.

During the third quarter fiscal 2023, four franchise locations opened and five franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $508,000 during the third quarter fiscal 2024 as compared to $501,000 during the third quarter fiscal 2023 period.

Costs and Expenses

Overall, our cost of sales increased by approximately 20% to $17,872,000 in the third quarter fiscal 2024 as compared to $14,925,000 in the third quarter fiscal 2023.

Our gross profit (calculated as total sales less cost of sales) increased to $3,477,000 or 16% of sales during the third quarter fiscal 2024 as compared to $3,415,000 or 19% of sales during the third quarter fiscal 2023.

Cost of sales in the Branded Product Program increased by 22% to $16,688,000 in the third quarter fiscal 2024 as compared to $13,681,000 in the third quarter fiscal 2023, primarily due to the 8% increase in the volume of hot dogs sold as discussed above, as well as a 13% increase in the average cost per pound of our hot dogs.

Inflationary pressures eased slightly in December 2023, yet pricing pressures on commodities, including beef and beef trimmings remain.

We did not make any purchase commitments of beef during the third quarter fiscal 2024 or the third quarter fiscal 2023.

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 2024 was $1,184,000 or 71% of restaurant sales as compared to $1,244,000 or 74% of restaurant sales in the third quarter fiscal 2023.

The decrease in the cost of sales during the third quarter of fiscal 2024 was primarily due to the 1% decrease in sales as discussed above.

Food and paper costs as a percentage of Company-owned restaurant sales were 29%, down from 31% in the comparable period of the prior year.

Labor and related expenses as a percentage of Company-owned restaurant sales were 42%, down from 43% in the comparable period in the prior year due to tighter management and staffing stabilization.

Restaurant operating expenses were $896,000 in the third quarter fiscal 2024 as compared to $932,000 in the third quarter fiscal 2023.

We incurred higher occupancy expenses of $18,000, higher insurance costs of $6,000, and higher credit card and bank fees of $9,000, which were offset by lower utilities expenses of $36,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $268,000 in the third quarter fiscal 2024 as compared to $303,000 in the third quarter fiscal 2023.

General and administrative expenses increased by $1,048,000 or 33% to $4,209,000 in the third quarter fiscal 2024 as compared to $3,161,000 in the third quarter fiscal 2023.

The increase in general and administrative expenses was primarily attributable to a cash bonus payment of $500,000 to Howard M.

Lorber, Executive Chairman of the Board, higher share-based compensation expense of $122,000, higher professional fees of $170,000, higher travel expenses of $66,000, and higher marketing and tradeshow expenses of $43,000.

Advertising fund expense, after eliminating Company contributions, was $508,000 during the third quarter fiscal 2024 as compared to $501,000 in the third quarter fiscal 2023.

Interest expense of $1,392,000 in the third quarter fiscal 2024 represented interest expense of $1,300,000 on the 2025 Notes and amortization of debt issuance costs of $92,000.

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

The reduction in interest expense of $552,000 is due to the reduction in the outstanding principal amount of the Company’s 2025 Notes as a result of the partial redemptions of $30,000,000 principal amount of its 2025 Notes completed in March 2023 and $20,000,000 principal amount of its 2025 Notes completed in December 2023.

On December 19, 2023, the Company completed the partial redemption, in the principal amount of $20,000,000 of the 2025 Notes.

In connection with the partial redemption, the Company recorded a loss on early extinguishment of debt of $169,000 that reflected the write-off of a portion of previously recorded debt issuance costs.

Interest income of $138,000 in the third quarter fiscal 2024 represented amounts earned by the Company on its certificates of deposit, as well as its interest bearing bank and money market accounts, as compared to $158,000 in the third quarter fiscal 2023.

Other income, net was $21,000 in the third quarter fiscal 2024, which primarily relates to sublease income from a franchised restaurant.

Other expense, net was $60,000 in the third quarter fiscal 2023, which primarily relates to a loss on disposal of assets for capitalized software no longer in use of $101,000 offset by sublease income from a franchised restaurant.

Provision for Income Taxes

The effective income tax rate for the third quarter fiscal 2024 was 30.2% as compared to 27.3% in the third quarter fiscal 2023.

The effective income tax rate for the third quarter fiscal 2024 reflected income tax expense of $1,128,000 recorded on $3,735,000 of pre-tax income.

The effective income tax rate for the third quarter fiscal 2023 reflected income tax expense of $1,223,000 recorded on $4,486,000 of pre-tax income.

The effective tax rates are higher than the U.S.

Federal statutory rates primarily due to state and local taxes, as well as non-deductible executive compensation under the Internal Revenue Code Section 162(m).

The amount of unrecognized tax benefits at December 24, 2023 was $465,000 all of which would impact the Company’s effective tax rate, if recognized.

As of December 24, 2023, the Company had approximately $343,000 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 $19,000 during the fiscal year ending March 31, 2024 due primarily to the lapse of statutes of limitations which would favorably impact the Company’s effective tax rate, although no assurances can be given in this regard.

Due to the above seasonal factors, as well as inflationary pressures, our results of operations for the thirteen weeks ended June 30, 2024 are not necessarily indicative of those for a full fiscal year.

Results of Operations

Thirty-nine weeks ended December 24, 2023 compared to thirty-nine weeks ended December 25, 2022

Total revenues increased by 6% to $109,619,000 for the thirty-nine weeks ended December 24, 2023 (“fiscal 2024 period”) as compared to $103,371,000 for the thirty-nine weeks ended December 25, 2022 (“fiscal 2023 period”).

Total sales increased by approximately 9% to $78,722,000 for the fiscal 2024 period as compared to $72,535,000 for the fiscal 2023 period which included foodservice sales from the Branded Product Program increasing by 10% to $68,210,000 for the fiscal 2024 period as compared to sales of $61,862,000 for the fiscal 2023 period.

During the fiscal 2024 period, the volume of hot dogs sold in the Branded Product Program increased by approximately 2% as compared to the fiscal 2023 period.

Our average selling prices, which are partially correlated to the beef markets, increased by approximately 8% as compared to the fiscal 2023 period.

Total Company-owned restaurant sales decreased by approximately 2% to $10,512,000 during the fiscal 2024 period as compared to $10,673,000 during the fiscal 2023 period.

Restaurant sales were impacted by reduced traffic at our Coney Island locations as a result of unfavorable weather conditions during the summer season.

License royalties increased to $26,075,000 in the fiscal 2024 period as compared to $26,064,000 in the fiscal 2023 period.

Thirteen weeks ended June 30, 2024 compared to thirteen weeks ended June 25, 2023

Total revenues increased by approximately 7% to $44,767,000 for the thirteen weeks ended June 30, 2024 (“fiscal 2025 period”) as compared to $41,985,000 for the thirteen weeks ended June 25, 2023 (“fiscal 2024 period”).

Foodservice sales from the Branded Product Program increased by approximately $976,000 to $26,146,000 during the fiscal 2025 period as compared to $25,170,000 for the fiscal 2024 period.

During the fiscal 2025 period, the total volume of hot dogs sold in the Branded Product Program was comparable to the fiscal 2024 period.

Our average selling price increased by approximately 3.5% as compared to the fiscal 2024 period.

Total Company-owned restaurant sales increased by approximately $541,000 to $4,199,000 during the fiscal 2025 period as compared to $3,658,000 during the fiscal 2024 period.

Restaurant sales were impacted by an increase in our average check, as well as higher traffic at our two Company-owned restaurants in Coney Island.

License royalties increased by approximately 11% to $12,921,000 in the fiscal 2025 period as compared to $11,658,000 in the fiscal 2024 period.

Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc.

at retail and foodservice, were $23,582,000 for the fiscal 2024 period as compared to $23,594,000 in the fiscal 2023 period.

The nominal decline is due to a 4% decrease in retail volume as compared to the fiscal 2023 period which was offset, in part, by a 3% increase in average net selling price.

at retail and foodservice, increased 11% to $12,010,000 in the fiscal 2025 period as compared to $10,796,000 in the fiscal 2024 period.

The increase is due to an 11% increase in retail volume which was offset, in part, by a 0.5% decrease in net selling price.

The foodservice business earned higher royalties of $67,000 as compared to the fiscal 2024 period.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $23,000 during the fiscal 2024 period as compared to the fiscal 2023 period primarily due to higher royalties earned on sales of french fries and onion rings, offset, in part, by lower royalties on the sales of franks-in-a-blanket, mozzarella sticks, and other hors d’oeuvres.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $49,000 during the fiscal 2025 period as compared to the fiscal 2024 period primarily due to higher royalties earned on sales of French fries, onion rings, and proprietary spices offset, in part, by lower royalties earned on sales of franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties were $1,073,000 in the fiscal 2025 period as compared to $1,075,000 in the fiscal 2024 period.

4 unchanged sentences

Traditional franchise royalties were $792,000 in the fiscal 2025 period as compared to $767,000 in the fiscal 2024 period.

Franchise restaurant sales increased to $52,068,000 in the fiscal 2024 period as compared to $49,302,000 in the fiscal 2023 period primarily due to higher sales at airport locations, shopping malls and movie theaters.

Comparable domestic franchise sales (consisting of 64 Nathan’s units, excluding sales under the Branded Menu Program) were $42,456,000 in the fiscal 2024 period as compared to $40,847,000 in the fiscal 2023 period.

Franchise restaurant sales increased to $17,653,000 in the fiscal 2025 period as compared to $17,263,000 in the fiscal 2024 period primarily due to higher sales at airport locations, shopping malls, and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 57 Nathan’s franchised restaurants, excluding sales under the Branded Menu Program) were $14,147,000 in the fiscal 2025 period as compared to $14,199,000 in the fiscal 2024 period.

At June 30, 2024, 231 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 235 franchised locations, including domestic, international and Branded Menu Program units at June 25, 2023.

Total franchise fee income was $92,000 in the fiscal 2025 period as compared to $95,000 in the fiscal 2024 period.

Domestic franchise fee income was $23,000 in the fiscal 2025 period as compared to $27,000 in the fiscal 2024 period.

International franchise fee income was $181,000 in the fiscal 2024 period as compared to $191,000 during the fiscal 2023 period.

We recognized $63,000 and $208,000 in forfeited fees in the fiscal 2024 period and fiscal 2023 period, respectively.

During the fiscal 2024 period, seventeen franchise locations opened and eleven franchise locations closed.

During the fiscal 2023 period, eight franchise locations opened and fourteen franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $1,501,000 in the fiscal 2024 period, as compared to $1,504,000 during the fiscal 2023 period.

International franchise fee income was $60,000 in the fiscal 2025 period and the fiscal 2024 period.

We recognized $9,000 and $8,000 in forfeited fees in the fiscal 2025 and fiscal 2024 periods, respectively.

During the fiscal 2025 period, three franchise locations opened and two franchise locations closed.

During the fiscal 2024 period, seven franchise locations opened and four franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $428,000 in the fiscal 2025 period as compared to $424,000 in the fiscal 2024 period.

Costs and Expenses

Overall, our cost of sales increased by 2.3% to $25,241,000 in the fiscal 2025 period as compared to $24,684,000 in the fiscal 2024 period.

Our gross profit (calculated as total sales less cost of sales) decreased to $11,979,000 or 15% of sales during the fiscal 2024 period as compared to $13,045,000 or 18% of sales during the fiscal 2023 period.

Cost of sales in the Branded Product Program increased by 14% to $60,698,000 during the fiscal 2024 period as compared to $53,056,000 during the fiscal 2023 period, primarily due to the 2% increase in the volume of hot dogs sold as discussed above, as well as a 12% increase in the average cost per pound of our hot dogs.

Inflationary pressures eased slightly in December 2023, yet pricing pressures on commodities, including beef and beef trimmings remain.

Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $5,104,000 during the fiscal 2025 period as compared to $4,144,000 during the fiscal 2024 period.

Cost of sales in the Branded Product Program increased by approximately 2% to $22,972,000 in the fiscal 2025 period as compared to $22,568,000 in the fiscal 2024 period, primarily due to a 0.4% increase in the volume of hot dogs sold, as well as a 1.1% increase in the average cost per pound of our hot dogs.

A shrinking supply of cattle, combined with drought conditions, industry demand and inflationary pressures have resulted in higher commodity prices, including beef and beef trimmings, contributing to the increase in the average cost per pound of our hot dogs.

We did not make any purchase commitments of beef during the fiscal 2025 and 2024 periods.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2024 period was $6,045,000 or 58% of restaurant sales as compared to $6,434,000 or 60% of restaurant sales in the fiscal 2023 period.

The decrease in cost of sales during the fiscal 2024 period was primarily due to the 2% decrease in sales discussed above.

Food and paper costs as a percentage of Company-owned restaurant sales were 28%, down from 29% in the comparable period of the prior year.

Labor and related expenses as a percentage of Company-owned restaurant sales were 29%, down from 31% in the comparable period in the prior year due to tighter management and staffing stabilization.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2025 period was $2,269,000 or 54% of restaurant sales, as compared to $2,116,000 or 58% of restaurant sales during the fiscal 2024 period.

Food and paper costs as a percentage of Company-owned restaurant sales were 25%, down from 28% in the comparable period of the prior year, driven, in part, by price increases across most menu offerings.

Labor and related expenses as a percentage of Company-owned restaurant sales were 29%, down from 30% in the comparable period in the prior year due to increases in our average check and tighter management and staffing stabilization.

Restaurant operating expenses were $1,129,000 in the fiscal 2025 period as compared to $1,043,000 in the fiscal 2024 period.

We incurred higher occupancy expenses of $43,000, higher credit card and bank fees of $73,000, which were offset, in part, by lower utilities expenses of $38,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $896,000 in the fiscal 2024 period as compared to $837,000 in the fiscal 2023 period.

General and administrative expenses increased by $1,374,000 or 14% to $11,496,000 in the fiscal 2024 period as compared to $10,122,000 in the fiscal 2023 period.

The increase in general and administrative expenses was primarily attributable to a cash bonus payment of $500,000 to Howard M.

Lorber, Executive Chairman of the Board, higher share-based compensation expenses of $466,000 and higher professional fees of $272,000.

The increase is due primarily to higher occupancy expenses of $44,000, higher insurance costs of $28,000, and higher maintenance costs of $18,000.

As a percentage of Company-owned restaurant sales, restaurant operating expenses were 26.9% in the fiscal 2025 period as compared to 28.5% in the fiscal 2024 period.

Depreciation and amortization, which primarily consist of the depreciation of fixed assets, including leasehold improvements and equipment and the amortization of a definite-lived intangible asset, was $249,000 in the fiscal 2025 period as compared to $313,000 in the fiscal 2024 period.

General and administrative expenses decreased by $83,000 or 2% to $3,975,000 in the fiscal 2025 period as compared to $4,058,000 in the fiscal 2024 period.

The decrease in general and administrative expenses was primarily attributable to lower professional fees of $103,000, which were offset, in part, by higher salaries expense of $38,000 attributable to annual rate increases.

Advertising fund expense, after eliminating Company contributions, was $428,000 in the fiscal 2025 period as compared to $424,000 in the fiscal 2024 period.

1 unchanged sentence

Interest expense of $1,414,000 in the fiscal 2024 period represented interest expense of $1,322,000 on the 2025 Notes and amortization of debt issuance costs of $92,000.

The reduction in interest expense of $1,612,000 is due to the reduction in the outstanding principal amount of the Company’s 2025 Notes as a result of the partial redemptions of $30,000,000 principal amount of its 2025 Notes completed in March 2023 and $20,000,000 principal amount of its 2025 Notes completed in December 2023.

On December 19, 2023, the Company completed the partial redemption, in the principal amount of $20,000,000 of the 2025 Notes.

Interest income of $350,000 in the fiscal 2024 period represented amounts earned by the Company on its certificates of deposit, as well as interest bearing bank and money market accounts, as compared to $260,000 in the fiscal 2023 period.

Other income, net was $65,000 in the fiscal 2024 period, which primarily relates to sublease income from a franchised restaurant.

Other expense, net was $4,000 in the fiscal 2023 period, which primarily relates to a net loss on disposal of assets for capitalized software no longer in use of $87,000, offset by sublease income from a franchised restaurant.

The reduction in interest expense of $354,000 is due to the reduction in the outstanding balance of the Company’s 2025 Notes from $80,000,000 at June 25, 2023 to $60,000,000 at June 30, 2024, as a result of the $20,000,000 partial redemption completed in December 2023.

Interest and dividend income of $78,000 in the fiscal 2025 period represented amounts earned by the Company on its interest bearing bank and money market accounts and mutual funds, as compared to $62,000 in the fiscal 2024 period.

Other income, net was $21,000 in the fiscal 2025 period and the fiscal 2024 period, which primarily relates to sublease income from a franchised restaurant.

Provision for Income Taxes

The effective income tax rate for the fiscal 2024 period was 27.7% compared to 27.1% in the fiscal 2023 period.

The effective income tax rate for the fiscal 2025 period was 27.4% as compared to 27.1% in the fiscal 2024 period.

The effective income tax rate for the fiscal 2025 period reflected income tax expense of $3,507,000 recorded on $12,784,000 of pre-tax income.

The effective income tax rate for the fiscal 2024 period reflected income tax expense of $2,744,000 recorded on $10,132,000 of pre-tax income.

The effective tax rates are higher than the U.S.

Federal statutory rates primarily due to state and local taxes, as well as non-deductible executive compensation under the Internal Revenue Code Section 162(m).

The amount of unrecognized tax benefits at December 24, 2023 was $465,000 all of which would impact the Company’s effective tax rate, if recognized.

As of December 24, 2023, the Company had approximately $343,000 accrued for the payment of interest and penalties in connection with unrecognized tax benefits.

The effective tax rates are higher than the statutory rates primarily due to state and local taxes, as well as non-deductible compensation under the Internal Revenue Code Section 162(m).

The amount of unrecognized tax benefits at June 30, 2024 was $485,000 all of which would impact the Company’s effective tax rate, if recognized.

As of June 30, 2024, the Company had approximately $367,000 accrued for the payment of interest and penalties in conjunction with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to $46,000 during the fiscal year ending March 30, 2025 due primarily to the lapse of statutes of limitations which would favorably impact the Company’s effective tax rate, although no assurances can be given in this regard.

Off-Balance Sheet Arrangements

At December 24, 2023 and December 25, 2022, Nathan’s did not have any open purchase commitments for hot dogs.

At June 30, 2024 and June 25, 2023, 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 at December 24, 2023 aggregated $16,732,000, a $13,129,000 decrease during the fiscal 2024 period as compared to cash of $29,861,000 at March 26, 2023.

Net working capital decreased to $21,050,000 from $30,652,000 at March 26, 2023, primarily due to the redemption of $20,000,000 of the Company’s 2025 Notes.

We paid our semi-annual interest payments for fiscal 2024 of $2,650,000 on May 1, 2023 and November 1, 2023, as well as our required interest payment of $177,000 on December 19, 2023 in connection with the partial redemption of $20,000,000 principal amount of our 2025 Notes.

We paid our first, second and third quarter fiscal 2024 dividend payments of $2,040,000 each on June 28, 2023, September 1, 2023 and December 1, 2023, respectively.

We expect to pay our fourth quarter dividend on March 1, 2024.

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

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

Sources and uses of cash

Cash and cash equivalents at June 30, 2024 aggregated $25,979,000, a $4,952,000 increase during the fiscal 2025 period as compared to cash of $21,027,000 at March 31, 2024.

Net working capital increased to $30,763,000 at June 30, 2024 as compared to $23,203,000 at March 31, 2024.

Our primary sources of liquidity are cash flows from operations.

Our primary cash requirements are to fund our quarterly dividends, to satisfy the debt service under our debt instruments, capital expenditures, working capital and general corporate needs.

On May 1, 2024, we paid our first semi-annual interest payment on the 2025 Notes of $1,987,500 for the fiscal 2025 period.

On July 2, 2024, we paid our first quarterly cash dividend of fiscal 2025 of $2,043,000.

Cash flow for the fiscal year 2025 will be impacted by various factors, including, as discussed further below in this “Liquidity and Capital Resources” section, (i) debt issuance costs incurred in connection with our new Credit Agreement, (ii) mandatory debt repayments on our Term Loan borrowings under our new Credit Agreement, (iii) interest payments on our 2025 Notes and our Term Loan borrowings under our new Credit Agreement and (iv) expected dividend payments.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating and investing activities:

(In thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net increase in cash and cash equivalents

Operating activities

Cash provided by operations of $4,993,000 in the fiscal 2025 period is primarily attributable to net income of $9,277,000 in addition to other non-cash operating items of $503,000, offset by changes in other operating assets and liabilities of $4,787,000.

Non-cash operating expenses consist principally of depreciation and amortization of $896,000, amortization of debt issuance costs of $276,000, share-based compensation expense of $546,000, a loss on debt extinguishment of $169,000 and a provision for uncollectible accounts of $75,000.

In the fiscal 2024 period, accounts and other receivables decreased by $1,147,000 due primarily to lower Branded Product Program receivables of $895,000 and lower franchise and license royalty receivables of $792,000 .

Prepaid expenses and other current assets decreased by $308,000 due principally to a decrease in prepaid marketing and other expenses of $596,000 which were offset, in part, by an increase in prepaid income taxes of $353,000.

Accounts payable, accrued expenses and other current liabilities decreased by $5,394,000 due to lower accrued interest expense of $1,535,000 as a result of the partial redemption of our 2025 Notes;

a decline in accrued payroll and other benefits of $1,053,000 resulting primarily from the payment of year-end fiscal 2023 incentive compensation;

earned deferred revenue of $1,156,000;

and a decline in accounts payable of $1,780,000 due to the timing of product purchases for our Branded Product Program and Company-owned restaurants.

Cash used in investing activities was $243,000 in the fiscal 2024 period primarily in connection with capital expenditures incurred for our Branded Product Program and our Coney Island restaurants.

Cash used in financing activities of $26,482,000 in the fiscal 2024 period relates primarily to the payment of $20,000,000 in connection with the partial redemption of the 2025 Notes and the payments of the Company’s quarterly $0.50 per share cash dividends totaling $6,120,000.

The Company also paid $362,000 for withholding taxes on the net share vesting of 10,000 restricted stock units.

Non-cash operating expenses consist principally of depreciation and amortization of $249,000, amortization of debt issuance costs of $69,000, share-based compensation expense of $188,000, and a provision for credit losses of $65,000.

In the fiscal 2025 period, accounts and other receivables increased by $5,805,000 due primarily to higher Branded Product Program receivables of $2,131,000, higher franchise and license royalties receivable of $3,031,000 and higher receivables due to the Advertising Fund of $730,000.

Prepaid expenses and other current assets decreased by $578,000 due principally to a decrease in prepaid income taxes of $858,000 which was offset by an increase in prepaid real estate taxes of $61,000 and an increase in deferred financing costs of $265,000.

Accounts payable, accrued expenses and other current liabilities increased by $568,000 due principally to an increase in accounts payable 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 of $187,000 as a result of higher sales.

Additionally, there was an increase in accrued corporate taxes of $2,483,000 due to the timing of estimated tax payments and higher earnings, as well as an increase in dividends payable of $2,043,000 due to the timing of our first quarter fiscal 2025 dividend payment.

Offsetting these increases was a reduction in accrued payroll and other benefits of $2,027,000 resulting from the payment of year-end fiscal 2024 compensation as well as a reduction in accrued interest expense of $997,000 resulting from our May 2024 semi-annual interest payment on our 2025 Notes.

Investing activities

Cash used in investing activities of $41,000 is primarily comprised of capital expenditures incurred for our Branded Product Program and our Coney Island restaurants.

Financing activities

Credit Facility

On July 10, 2024 (the “Effective Date”), the Company entered into a five-year unsecured Credit Agreement (the “Credit Agreement”) among the Company, as borrower, direct and indirect subsidiaries of the Company, as guarantors, the lenders from time to time party thereto (the “Lenders”) and Citibank, N.A., as administrative agent, swing line lender, L/C issuer and a Lender.

The Credit Agreement provides for a term loan facility (“Term Loan”) of $60,000,000 and a revolving credit facility (“Revolving Loan”) of up to $10,000,000.

The Credit Agreement also provides that the Company has the right from time to time during the term of the Credit Agreement to request the Lenders for incremental revolving loan borrowing increases of up to an additional $10,000,000 in the aggregate, subject to, among other items, the Lenders agreeing to lend any such additional amounts and compliance with terms specified in the Credit Agreement.

The Credit Agreement matures on July 10, 2029.

The Company borrowed $60,000,000 in Term Loan borrowings on the Effective Date to refinance and redeem its 2025 Notes.

The Company will use any Revolving Loan borrowings under the Credit Agreement for working capital and general corporate purposes.

See NOTE T – SUBSEQUENT EVENTS in the accompanying consolidated financial statements for additional information on the Credit Agreement.

Share Repurchases

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 24, 2023, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At December 24, 2023, there were 98,116 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

As of June 30, 2024, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At June 30, 2024, 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.

2 unchanged sentences

There were no stock repurchases during the fiscal 2025 period.

As discussed above, we had cash at December 24, 2023 aggregating $16,732,000.

We may return capital to our stockholders through stock repurchases, subject to any restrictions in our debt instruments including our new Credit Agreement, although there is no assurance that the Company will make any repurchases under its existing stock repurchase plan.

Common Stock Dividends

As discussed above, we had cash and cash equivalents at June 30, 2024 aggregating $25,979,000.

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

The Company paid its first quarter fiscal 2024 dividend of $2,040,000 on June 28, 2023, its second quarter fiscal 2024 dividend of $2,040,000 on September 1, 2023 and its third quarter fiscal 2024 dividend of $2,040,000 on December 1, 2023.

Effective February 1, 2024, the Company declared its fourth quarter dividend of $0.50 per common share to stockholders of record as of the close of business on February 20, 2024, which is payable on March 1, 2024.

The Company’s total cash requirement for dividends for all of fiscal 2024 would be approximately $8,162,000 based on the number of shares of common stock outstanding at January 26, 2024.

The Company paid its first quarterly cash dividend of fiscal 2025 of $2,043,000 on July 2, 2024.

Effective August 8, 2024, the Company declared its second quarter fiscal 2025 dividend of $0.50 per common share to stockholders of record as of the close of business on August 26, 2024, which is payable on September 6, 2024.

If the Company pays regular quarterly cash dividends for the remainder of fiscal 2025 at the same rate as declared in the first quarter of fiscal 2025, the Company’s total cash requirement for dividends for all of fiscal 2025 would be approximately $8,169,000 based on the number of shares of common stock outstanding at August 8, 2024.

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 may from time to time seek to redeem additional portions of our 2025 Notes, through open market purchases, privately negotiated transactions or otherwise.

Such repurchases, if any, will depend on market conditions, our liquidity requirements, and other factors.

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.

Our ability to pay future dividends is limited by the terms of our debt instruments.

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 and the terms of our debt instruments.

Cash Flow Outlook

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 principal and interest obligations under the Credit Agreement, 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 31, 2024, we will be required to make interest payments of $5,477,000, inclusive of the interest payment in connection with the partial redemption of its 2025 Notes, of which all have been made as of December 19, 2023.

During the fiscal year ending March 30, 2025, we expect to make cash interest payments of $3,125,000 on the 2025 Notes.

While our Credit Agreement bears interest at a fluctuating interest rate based on the Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment, if the Company makes cash interest payments on the Term Loan borrowings at the interest rate established on the Effective Date, then during the fiscal year ended March 30, 2025, we expect to make cash interest payments of approximately $2,000,000 on the Term Loan borrowings.

We may from time to time seek to make voluntary prepayments of our debt instruments.

Such voluntary prepayments, if any, will depend on market conditions, our liquidity requirements, satisfactory compliance of conditions pursuant to our debt instruments and other factors.

Management believes that available cash 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 24, 2023, we sublet one property to a franchisee that we lease from a third party.

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

rent, property taxes and insurance.

Contractual Obligations

At June 30, 2024, we sublet one property to a franchisee that we lease from a third party.

We remain contingently liable for all costs associated with this property including rent, property taxes and insurance.

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

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

At June 30, 2024, our contractual obligations primarily consist of the 2025 Notes and the related interest payments, operating leases, and employment agreements 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 26, 2023 except for the partial redemption of the 2025 Notes on December 19, 2023 discussed above.

See NOTE P – LONG TERM DEBT, NOTE Q – LEASES, AND NOTE T – SUBSEQUENT EVENTS in the accompanying consolidated financial statements included in Part I, Item 1.

for additional information.

Inflationary Pressures

Inflationary pressures on labor and rising commodity prices, most notably for beef and beef trimmings, have impacted our consolidated results of operations during the fiscal 2024 period, and this trend may continue through the remainder of fiscal year 2024.

From April 2023 through September 2023, we experienced significant increases in the cost of beef and beef trimmings.

From October 2023 through December 2023, we began to experience slight declines in beef and beef trimming costs.

Inflationary pressures on commodity prices, most notably for beef and beef trimmings, have impacted our consolidated results of operations during the fiscal 2025 period, and this trend may continue through the remainder of fiscal year 2025.

Our average cost of hot dogs during the fiscal 2025 period was approximately 1.1% higher than during the fiscal 2024 period.

1 unchanged sentence

This impact will depend on our ability to manage such volatility through price increases and product mix.

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.

We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2025.

To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations.

In the past, we entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices.

We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future.

We have experienced competitive pressure on labor rates as a result of the increase in the minimum hourly wage for fast food workers where our Company-owned restaurants are located.

On January 1, 2024, the minimum wage increased to $16.00 in New York City, Long Island and Westchester which will be followed by $0.50 annual increases in 2025 and 2026.

4 unchanged sentences

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 2024.

To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations.

In the past, we entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices.

We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future.

Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets.

We believe that these increases in the minimum wage and other changes in employment laws 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.

We expect to continue experiencing volatility in oil and gas prices on our distribution costs for food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets.

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

5 unchanged sentences

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