NATHANS FAMOUS, INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “projects,” “may,” “would,” “should,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this Form 10-Q are based upon information available to us on the date of this Form 10-Q. Statements in this Form 10-Q quarterly report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties, many of which are not within our control, include but are not limited to: the impact of disease epidemics such as the COVID-19 pandemic; increases in the cost of food and paper products; the impact of price increases on customer visits; 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 our Credit Agreement, including the effect on our ability to fund working capital, operations and make investments; economic (including inflationary pressures like those currently being experienced); weather (including the impact on sales at our restaurants particularly during the summer months); changes in the price of beef and beef trimmings; our ability to pass on the cost of any price increases in beef and beef trimmings; legislative and business conditions; potential changes in U.S. income tax or tariff policies; the collectability of receivables; changes in consumer tastes; the continued viability of Coney Island as a destination location for visitors; the ability to attract franchisees; the impact of the minimum wage legislation on labor costs in New York State or other changes in labor laws, including regulations which could render a franchisor as a “joint employer” or the impact of our union contracts; our ability to attract competent restaurant and managerial personnel; the enforceability of international franchising agreements; the future effects of any food borne illness such as bovine spongiform encephalopathy, BSE or e-coli; as well as those risks discussed from time to time in this Form 10-Q and our Form 10-K annual report for the year ended March 30, 2025, and in other documents we file with the U.S. Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements with the words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “will,” “should” and similar expressions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Introduction As used in this Report, the terms “we,” “us,” “our,” “Nathan’s” or the “Company” mean Nathan’s Famous, Inc. and its subsidiaries (unless the context indicates a different meaning). We are engaged primarily in the marketing of the “Nathan’s Famous” brand and the sale of products bearing the “Nathan’s Famous” trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan’s World Famous Beef Hot Dogs, crinkle-cut French fries, and a variety of other menu offerings. 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. Our Branded Product Program enables foodservice retailers and others to sell some of Nathan’s proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan’s products are granted a limited use of the Nathan’s Famous trademark with respect to the sale of the purchased products, including Nathan’s World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. Our Branded Menu Program is a limited franchise program, under which foodservice operators may sell a greater variety of Nathan’s Famous menu items than under the Branded Product Program. -22- Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, licensing agreements for the sale of Nathan’s products within supermarkets, 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 September 28, 2025, our restaurant system, excluding virtual kitchens, was comprised of 227 locations, including 112 franchise locations, and 115 Branded Menu Program locations, as well as four Company-owned restaurants (including one seasonal unit), located in 19 states, and 12 foreign countries. At September 29, 2024, our restaurant system, excluding virtual kitchens, was comprised of 243 locations, including 115 franchise locations, and 128 Branded Menu Program locations, as well as 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. The primary drivers of our growth have been our Licensing and Branded Product Programs which have been the largest contributors to the Company’s revenues and profits. While we do not expect to significantly increase the number of Company-owned restaurants, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system. We continue to seek opportunities to drive sales in a variety of ways as we adapt to the ever-changing consumer and business climate. As described in our Annual Report on Form 10-K for the year ended March 30, 2025, our future results could be materially impacted by many developments including our dependence on Smithfield Foods, Inc. as our principal supplier and the dependence of our licensing revenue and overall profitability on our agreement with Smithfield Foods, Inc. 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. As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in this Form 10-Q quarterly report. See “Reconciliation of GAAP and Non-GAAP Measures.” Recent events Inflationary Factors Inflationary pressures impacted our results of operations during the first half of fiscal 2026, and we anticipate continued inflationary pressures on commodity prices, including beef and beef trimmings, as well as labor inflation during the remainder of fiscal 2026. In general, we have been able to offset some of these cost increases resulting from inflation through various actions, such as increasing prices at our Company-owned restaurants and entering into sales agreements with our Branded Product Program customers that are correlated to our cost of beef and beef trimmings. We continue to monitor these inflationary pressures and may need to adjust our prices further to mitigate the impact of these inflationary pressures. Inherent volatility in commodity markets, including beef and beef trimmings, could have a significant impact on our results of operations. Delays in implementing price increases, competitive pressures, a decline in consumer spending levels and other factors may limit our ability to implement further price increases in the future. Uncertainty in the current macroeconomic environment, including the potential impact of tariffs or other changes in U.S. tax policy, may have an adverse impact on our sales or increase our cost of goods sold. -23- Critical Accounting Policies and Estimates As discussed in our Form 10-K for the fiscal year ended March 30, 2025, the discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those condensed consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting estimates relate to impairment of intangible assets; impairment of long-lived assets; current expected credit losses; customer rebates and income taxes (including uncertain tax positions). There have been no changes to our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 30, 2025. New Accounting Standards Not Yet Adopted Please refer to Note B of the preceding condensed consolidated financial statements for our discussion of the New Accounting Standards Not Yet Adopted. EBITDA and Adjusted EBITDA The Company believes that EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, are useful to investors to assist in assessing and understanding the Company's operating performance and underlying trends in the Company's business because EBITDA and Adjusted EBITDA are (i) among the measures used by management in evaluating performance and (ii) are frequently used by securities analysts, investors and other interested parties as a common performance measure. Reconciliation of GAAP and Non-GAAP Measures The following is provided to supplement certain Non-GAAP financial measures. In addition to disclosing results that are determined in accordance with US GAAP, the Company has provided EBITDA, a non-GAAP financial measure, which is defined as net income excluding (i) interest expense; (ii) provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding (i) the loss on debt extinguishment 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. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other companies. Analysis of results and outlook on a non-US GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with US GAAP. The following is a reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands): Thirteen weeks ended Twenty-six weeks ended September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 (unaudited) (unaudited) Net income $ 5,199 $ 6,030 $ 14,127 $ 15,307 Interest expense 739 1,441 1,497 2,501 Provision for income taxes 1,822 2,069 5,151 5,576 Depreciation and amortization 236 247 464 496 EBITDA 7,996 9,787 21,239 23,880 Loss on debt extinguishment - 334 - 334 Share-based compensation 284 229 572 417 Adjusted EBITDA $ 8,280 $ 10,350 $ 21,811 $ 24,631 -24- Seasonality Our routine business pattern is affected by seasonal fluctuations, including the effects of weather and economic conditions. Historically, sales from our Company-owned restaurants, 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, Branded Menu Program and Product Licensing Program generally follow similar seasonal fluctuations, although not to the same degree. We expect that this seasonality will continue. 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 twenty-six weeks ended September 28, 2025 are not necessarily indicative of those for a full fiscal year. Results of Operations Thirteen weeks ended September 28, 2025 compared to thirteen weeks ended September 29, 2024 Revenues Total revenues increased by approximately 11% to $45,687,000 for the thirteen weeks ended September 28, 2025 (“second quarter fiscal 2026”) as compared to $41,109,000 for the thirteen weeks ended September 29, 2024 (“second quarter fiscal 2025”). Foodservice sales from the Branded Product Program increased by approximately 18% to $29,047,000 for the second quarter fiscal 2026 as compared to $24,536,000 for the second quarter fiscal 2025. During the second quarter fiscal 2026, the total volume of hot dogs sold in the Branded Product Program increased by approximately 7% as compared to the second quarter fiscal 2025. Our average selling price increased by approximately 11% as compared to the second quarter fiscal 2025. Total Company-owned restaurant sales increased by approximately 5% to $5,624,000 during the second quarter fiscal 2026 as compared to $5,348,000 during the second quarter fiscal 2025. Restaurant sales were primarily impacted by higher sales at our Coney Island locations due to a 7% increase in customer traffic. License royalties decreased by approximately 3% to $9,227,000 in the second quarter fiscal 2026 as compared to $9,491,000 in the second quarter fiscal 2025. Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc. at retail and foodservice, decreased 2% to $8,389,000 for the second quarter fiscal 2026 as compared to $8,595,000 in the second quarter fiscal 2025. The decrease is due to an 18% decrease in retail volume which was offset, in part, by a 19% increase in net selling price . The price increases year over year led to a reduction in promotional activities contributing to the decline in volume. The foodservice business earned higher royalties of $54,000 as compared to the second quarter fiscal 2025. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $58,000 during the second quarter fiscal 2026 as compared to the second quarter fiscal 2025 primarily due to lower royalties earned on sales of proprietary spices offset, in part, by higher royalties earned on beef sticks. Franchise fees and royalties increased by approximately 4% to $1,223,000 in the second quarter fiscal 2026 period as compared to $1,174,000 in the second quarter fiscal 2025. Total royalties were $1,138,000 in the second quarter fiscal 2026 as compared to $1,066,000 in the second quarter fiscal 2025. Royalties earned under the Branded Menu Program were $249,000 in the second quarter fiscal 2026 as compared to $248,000 in the second quarter fiscal 2025. 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 $21,000 in the second quarter fiscal 2026 as compared to $11,000 in the second quarter fiscal 2025. Traditional franchise royalties were $868,000 in the second quarter fiscal 2026 as compared to $807,000 in the second quarter fiscal 2025. Franchise restaurant sales increased to $19,873,000 in the second quarter fiscal 2026 as compared to $18,681,000 in the second quarter fiscal 2025 principally due to higher sales at travel plazas and international venues offset by lower sales at 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 $15,245,000 in the second quarter fiscal 2026 as compared to $15,286,000 in the second quarter fiscal 2025. At September 28, 2025, 227 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 243 franchised locations, including domestic, international and Branded Menu Program units at September 29, 2024. Total franchise fee income was $85,000 in the second quarter fiscal 2026 as compared to $108,000 in the second quarter fiscal 2025. Domestic franchise fee income was $27,000 in the second quarter fiscal 2026 as compared to $35,000 in the second quarter fiscal 2025. International franchise fee income was $53,000 in the second quarter fiscal 2026 as compared to $59,000 in the second quarter fiscal 2025. We recognized $5,000 and $14,000 in forfeited fees in the second quarter fiscal 2026 and the second quarter fiscal 2025, respectively. During the second quarter fiscal 2026, six franchise locations opened and four franchise locations closed. During the second quarter fiscal 2025, eighteen franchise locations opened and six franchise locations closed. -25- Advertising fund revenue, after eliminating Company contributions, was $566,000 during the second quarter fiscal 2026 as compared to $560,000 during the second quarter fiscal 2025. Costs and Expenses Overall, our cost of sales increased by approximately 24% to $32,378,000 in the second quarter fiscal 2026 as compared to $26,029,000 in the second quarter fiscal 2025. Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $2,293,000 or 7% during the second quarter fiscal 2026 as compared to $3,855,000 or 13% during the second quarter fiscal 2025. Cost of sales in the Branded Product Program increased by approximately 27% to $29,590,000 in the second quarter fiscal 2026 as compared to $23,318,000 in the second quarter fiscal 2025, primarily due to a 7% increase in the volume of hot dogs sold, as well as a 20% increase in the average cost per pound of our hot dogs. A shrinking supply of cattle due to drought conditions and high input costs, combined with strong 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 second quarter fiscal 2026 or the second quarter fiscal 2025 periods. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted. With respect to Company-owned restaurants, our cost of sales during the second quarter fiscal 2026 was $2,788,000 or 50% of restaurant sales as compared to $2,711,000 or 51% of restaurant sales during the second quarter fiscal 2025. Food and paper costs as a percentage of Company-owned restaurant sales were 23.8%, down from 24.2% in the comparable period of the prior year primarily as a result of certain menu price increases. Labor and related expenses as a percentage of Company-owned restaurant sales were 25.7%, down from 26.5% in the comparable period of the prior year primarily as a result of certain menu price increases and efforts to improve hourly and management labor efficiency, offset by legislative increases in the New York State minimum wage which became effective January 1, 2025. Restaurant operating expenses were $1,432,000 in the second quarter fiscal 2026 as compared to $1,389,000 in the second quarter fiscal 2025. The increase is due primarily to higher repairs and maintenance expenses of $25,000 and higher utilities expenses of $22,000. As a percentage of Company-owned restaurant sales, restaurant operating expenses were 25% in the second quarter fiscal 2026 as compared to 26% in the second quarter fiscal 2025. Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, and the amortization of a definite-lived intangible asset, was $236,000 in the second quarter fiscal 2026 as compared to $247,000 in the second quarter fiscal 2025. General and administrative expenses increased by $200,000 or 6% to $3,452,000 in the second quarter fiscal 2026 as compared to $3,252,000 in the second quarter fiscal 2025. The increase in general and administrative expenses was primarily attributable to higher professional fees of $23,000, higher share-based compensation expense of $55,000, higher trade show and travel expenses of $25,000 and higher salaries and fringe expenses of $39,000 attributable to annual rate increases. Advertising fund expense, after eliminating Company contributions, was $687,000 during the second quarter fiscal 2026 as compared to $560,000 in the second quarter fiscal 2025. The Company projects that the Advertising Fund normal seasonal deficit will not be fully recovered during the remainder of the fiscal 2026 period and has reflected the projected deficit of $121,000 in the second quarter fiscal 2026 results of operations. Other Items Interest expense of $739,000 in the second quarter fiscal 2026 represented interest expense of $722,000 on the Secured Overnight Financing Rate (“SOFR”) Term Loan borrowings and amortization of debt issuance costs of $17,000. Interest expense of $1,441,000 in the second quarter fiscal 2025 represented interest expense of $458,000 and $930,000 on the 6.625% Secured Notes due 2025 (“2025 Notes”) which were redeemed in August 2024 and the SOFR Term Loan borrowings, respectively, and amortization of debt issuance costs of $35,000 and $18,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively. The reduction in interest expense of $702,000 is due primarily to lower outstanding long-term debt and a lower interest rate associated with our Credit Agreement. -26- In the second quarter fiscal 2025, the Company refinanced and redeemed its outstanding 2025 Notes. In connection with this transaction, the Company recorded a loss on extinguishment of debt of $334,000 that reflected the write-off of the remainder of previously recorded debt issuance costs. Interest and dividend income of $236,000 in the second quarter fiscal 2026 represented amounts earned by the Company on its interest bearing money market accounts and money market funds, as compared to $219,000 in the second quarter fiscal 2025 period. The increase is due to higher levels of invested cash earning interest at higher rates in the second quarter fiscal 2026 as compared to the second quarter fiscal 2025. Other income, net was $22,000 and $23,000 in the second quarter fiscal 2026 and the second quarter fiscal 2025, respectively, which primarily relates to sublease income. Provision for Income Taxes The effective income tax rate for the second quarter fiscal 2026 was 26.0% compared to 25.5% in the second quarter fiscal 2025. The effective income tax rate for the second quarter fiscal 2026 reflected income tax expense of $1,822,000 recorded on $7,021,000 of pre-tax income. The effective income tax rate for the second quarter fiscal 2025 reflected income tax expense of $2,069,000 recorded on $8,099,000 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 compensation under the Internal Revenue Code Section 162(m). The effective tax rate for the second quarter fiscal 2026 included a favorable discrete adjustment of 0.6%. The American Rescue Plan Act of 2021 (“ARPA”), among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting after December 31, 2026 (March 29, 2027 for the Company), ARPA expands the limitations to cover the next five most highly compensated employees. We continue to evaluate the potential impact ARPA may have on our operations and condensed consolidated financial statements in future periods. On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the United States. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The OBBBA did not have a material impact to our provision for income taxes for the second quarter fiscal 2026. The amount of unrecognized tax benefits at September 28, 2025 was $462,000 all of which would impact the Company’s effective tax rate, if recognized. As of September 28, 2025, the Company had approximately $418,000 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 $55,000 during the fiscal year ending March 29, 2026 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. Results of Operations Twenty-six weeks ended September 28, 2025 compared to twenty-six weeks ended September 29, 2024 Revenues Total revenues increased by approximately 8% to $92,685,000 for the twenty-six weeks ended September 28, 2025 (“fiscal 2026 period”) as compared to $85,876,000 for the twenty-six weeks ended September 29, 2024 (“fiscal 2025 period”). Foodservice sales from the Branded Product Program increased by approximately 15% to $58,122,000 for the fiscal 2026 period as compared to $50,682,000 for the fiscal 2025 period. During the fiscal 2026 period, the total volume of hot dogs sold in the Branded Product Program increased by approximately 3% as compared to the fiscal 2025 period. Our average selling price increased by approximately 10% as compared to the fiscal 2025 period. Total Company-owned restaurant sales increased by approximately 1% to $9,610,000 during the fiscal 2026 period as compared to $9,547,000 during the fiscal 2025 period. Restaurant sales were primarily impacted by higher sales at our Coney Island locations which were offset by lower sales at our locations in Oceanside and Yonkers, New York. -27- License royalties decreased by approximately 4% to $21,608,000 in the fiscal 2026 period as compared to $22,412,000 in the fiscal 2025 period. Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc. at retail and foodservice, decreased 4% to $19,853,000 for the fiscal 2026 period as compared to $20,605,000 in the fiscal 2025 period. The decrease is due to a 17% decrease in retail volume which was offset, in part, by a 15% increase in net selling price. The price increases year over year led to a reduction in promotional activities contributing to the decline in volume. The foodservice business earned higher royalties of $109,000 as compared to the fiscal 2025 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products decreased by $52,000 during the fiscal 2026 period as compared to the fiscal 2025 period primarily due to lower royalties earned on sales of pickles and proprietary spices offset, in part, by higher royalties earned on French fries, onion rings and beef sticks. Franchise fees and royalties increased by approximately 5% to $2,352,000 in the fiscal 2026 period as compared to $2,247,000 in the fiscal 2025 period. Total royalties were $2,139,000 in the fiscal 2026 period as compared to $2,047,000 in the fiscal 2025 period. Royalties earned under the Branded Menu Program were $425,000 in the fiscal 2026 period as compared to $423,000 in the fiscal 2025 period. 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 $36,000 in the fiscal 2026 period as compared to $25,000 in the fiscal 2025 period. Traditional franchise royalties were $1,678,000 in the fiscal 2026 period as compared to $1,599,000 in the fiscal 2025 period. Franchise restaurant sales increased to $38,316,000 in the fiscal 2026 period as compared to $36,334,000 in the fiscal 2025 period principally due to higher sales at travel plazas and international venues offset by lower sales at casino locations, primarily in Las Vegas, Nevada. Comparable domestic franchise sales (consisting of 61 Nathan’s franchised restaurants, excluding sales under the Branded Menu Program) were $28,957,000 in the fiscal 2026 period as compared to $29,379,000 in the fiscal 2025 period. At September 28, 2025, 227 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 243 franchised locations, including domestic, international and Branded Menu Program units at September 29, 2024. Total franchise fee income was $213,000 in the fiscal 2026 period as compared to $200,000 in the fiscal 2025 period. Domestic franchise fee income was $50,000 in the fiscal 2026 period as compared to $58,000 in the fiscal 2025 period. International franchise fee income was $107,000 in the fiscal 2026 period as compared to $119,000 in the fiscal 2025 period. We recognized $56,000 and $23,000 in forfeited fees in the fiscal 2026 period and fiscal 2025 period, respectively. During the fiscal 2026 period, fourteen franchise locations opened and seventeen franchise locations closed. During the fiscal 2025 period, twenty-one franchise locations opened and eight franchise locations closed. Advertising fund revenue, after eliminating Company contributions, was $993,000 during the fiscal 2026 period as compared to $988,000 during the fiscal 2025 period. Costs and Expenses Overall, our cost of sales increased by approximately 19% to $60,801,000 in the fiscal 2026 period as compared to $51,270,000 in the fiscal 2025 period. Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $6,931,000 or 10% during the fiscal 2026 period as compared to $8,959,000 or 15% during the fiscal 2025 period. Cost of sales in the Branded Product Program increased by 21% to $55,823,000 during the fiscal 2026 period as compared to $46,290,000 during the fiscal 2025 period, primarily due to a 3% increase in the volume of hot dogs sold, as well as a 16% increase in the average cost per pound of our hot dogs. A shrinking supply of cattle due to drought conditions and high input costs, combined with strong 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 2026 and 2025 periods. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted. With respect to Company-owned restaurants, our cost of sales during the fiscal 2026 period was $4,978,000 or 52% of restaurant sales which was comparable to $4,980,000 or 52% of restaurant sales in the fiscal 2025 period. Food and paper costs as a percentage of Company-owned restaurant sales were 23.8%, down from 24.8% in the comparable period of the prior year primarily as a result of certain menu price increases. Labor and related expenses as a percentage of Company-owned restaurant sales were 28.0%, up from 27.4% primarily as a result of legislative increases in the New York State minimum wage which became effective January 1, 2025. Restaurant operating expenses were $2,611,000 in the fiscal 2026 period as compared to $2,518,000 in the fiscal 2025 period. The increase is due primarily to higher repairs and maintenance expenses of $27,000, higher utilities expenses of $16,000 and higher credit card processing fees of $48,000. As a percentage of Company-owned restaurant sales, restaurant operating expenses were 27.1% in the fiscal 2026 period as compared to 26.4% in the fiscal 2025 period. Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, and the amortization of a definite-lived intangible asset, was $464,000 in the fiscal 2026 period as compared to $496,000 in the fiscal 2025 period. -28- General and administrative expenses increased by approximately $175,000 or 2% to $7,402,000 in the fiscal 2026 period as compared to $7,227,000 in the fiscal 2025 period. The increase in general and administrative expenses was primarily attributable to higher professional fees of $120,000 and higher share-based compensation expense of $155,000 which were offset, in part, by lower trade show and travel expenses of $150,000. Advertising fund expense, after eliminating Company contributions, was $1,114,000 during the fiscal 2026 period as compared to $988,000 in the fiscal 2025 period. The Company projects that the Advertising Fund normal seasonal deficit will not be fully recovered during the remainder of the fiscal 2026 period and has reflected the projected deficit of $121,000 in the second quarter fiscal 2026 results of operations. Other Items Interest expense of $1,497,000 in the fiscal 2026 period represented interest expense of $1,461,000 on the SOFR Term Loan borrowings and amortization of debt issuance costs of $36,000. Interest expense of $2,501,000 in the fiscal 2025 period represented interest expense of $1,449,000 and $930,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively, and amortization of debt issuance costs of $104,000 and $18,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively. The reduction in interest expense of $1,004,000 is due primarily to lower outstanding long-term debt and a lower interest rate associated with our Credit Agreement. During the fiscal 2025 period, the Company refinanced and redeemed its outstanding 2025 Notes. In connection with this transaction, the Company recorded a loss on extinguishment of debt of $334,000 that reflected the write-off of the remainder of previously recorded debt issuance costs. Interest and dividend income of $439,000 in the fiscal 2026 period represented amounts earned by the Company on its interest bearing money market accounts and money market funds, as compared to $297,000 in the fiscal 2025 period. The increase is due to higher levels of invested cash earning interest at higher rates in the fiscal 2026 period as compared to the fiscal 2025 period. Other income, net was $43,000 and $44,000 in the fiscal 2026 and fiscal 2025 periods, respectively, which primarily relates to sublease income. Provision for Income Taxes The effective income tax rate for the fiscal 2026 period was 26.7% which was comparable to the fiscal 2025 period. The effective income tax rate for the fiscal 2026 period reflected income tax expense of $5,151,000 recorded on $19,278,000 of pre-tax income. The effective income tax rate for the fiscal 2025 period reflected income tax expense of $5,576,000 recorded on $20,883,000 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 compensation under the Internal Revenue Code Section 162(m). The American Rescue Plan Act of 2021 (“ARPA”), among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting after December 31, 2026 (March 29, 2027 for the Company), ARPA expands the limitations to cover the next five most highly compensated employees. We continue to evaluate the potential impact ARPA may have on our operations and condensed consolidated financial statements in future periods. On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted in the United States. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, and the restoration of favorable tax treatment for certain business provisions. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The OBBBA did not have a material impact to our provision for income taxes for the fiscal 2026 period. The amount of unrecognized tax benefits at September 28, 2025 was $462,000 all of which would impact the Company’s effective tax rate, if recognized. As of September 28, 2025, the Company had approximately $418,000 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 $55,000 during the fiscal year ending March 29, 2026 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. -29- Off-Balance Sheet Arrangements At September 28, 2025 and September 29, 2024, 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 Sources and uses of cash Cash and cash equivalents at September 28, 2025 aggregated $32,175,000, a $4,373,000 increase during the fiscal 2026 period as compared to cash of $27,802,000 at March 30, 2025. Net working capital increased to $37,681,000 at September 28, 2025 as compared to $28,371,000 at March 30, 2025. Our primary sources of liquidity and capital resources are cash flows from operations and our cash and cash equivalents. Our primary cash requirements are to fund our quarterly dividends, to satisfy the debt service under our credit facility, capital expenditures, lease obligations, working capital and general corporate needs. Cash flows for the fiscal year 2026 will be impacted by various factors, including, (i) mandatory debt repayments on our Term Loan borrowings under our Credit Agreement, (ii) interest payments on our Term Loan borrowings under our Credit Agreement and (iii) expected dividend payments. Summary of Cash Flows The following table presents summary cash flow information for the periods indicated (in thousands): Twenty-six weeks ended September 28, September 29, 2025 2024 Net cash provided by operating activities $ 9,938 $ 14,826 Net cash used in investing activities (276 ) (130 ) Net cash used in financing activities (5,289 ) (4,516 ) Net increase in cash and cash equivalents $ 4,373 $ 10,180 Operating activities Cash provided by operations of $9,938,000 in the fiscal 2026 period is primarily attributable to net income of $14,127,000 in addition to other non-cash operating items of $1,075,000, offset by changes in other operating assets and liabilities of $5,264,000. Non-cash operating expenses consist principally of depreciation and amortization of $464,000, amortization of debt issuance costs of $36,000, share-based compensation expense of $572,000, and a provision for credit losses of $63,000. In the fiscal 2026 period, accounts and other receivables increased by $7,612,000 due primarily to higher Branded Product Program receivables of $6,705,000, and higher receivables due to the Advertising Fund of $1,164,000. Prepaid expenses and other current assets decreased by $1,365,000 due principally to a decrease in prepaid income taxes of $493,000, a decrease in prepaid insurance of $288,000 and a decrease in prepaid marketing and other expenses of $588,000. Accounts payable, accrued expenses and other current liabilities increased by $1,020,000 due primarily to an increase in accounts payable of $1,979,000 due to the timing of seasonal product purchases for our Branded Product Program, an increase in accrued rebates of $319,000, and an increase in accrued corporate taxes of $639,000 due to the timing of estimated tax payments. Offsetting these increases was a reduction in accrued payroll and other benefits of $1,326,000 resulting from the payment of year-end compensation as well as the recognition of $677,000 of deferred revenue. Investing activities Cash used in investing activities of $276,000 is primarily attributable to capital expenditures incurred for our Branded Product Program and our Coney Island restaurants. Financing activities During fiscal 2026, we made $1,200,000 of mandatory principal repayments on our Term Loan borrowings under the Credit Agreement. Additionally, the Company paid its first and second quarterly cash dividends of $0.50 per share totaling $4,089,000. -30- Subsequent to the fiscal 2026 period, we paid our next quarterly mandatory principal repayment on our Term Loan borrowings of $600,000 on September 30, 2025. Credit Agreement 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. As of September 28, 2025, there were no outstanding borrowings under the Revolving Loan. See Note P – LONG TERM DEBT in the accompanying condensed 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 September 28, 2025, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan. At September 28, 2025, 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. Purchases under the Company’s stock repurchase program may be made from time to time, depending on market conditions, in open market or privately negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases. There were no stock repurchases during the fiscal 2026 period. We may return capital to our stockholders through stock repurchases, subject to any restrictions in our 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 September 28, 2025 aggregating $32,175,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. The Company paid its first and second quarterly cash dividends of fiscal 2026 on July 1, 2025 and September 5, 2025 aggregating $4,089,000. Effective November 6, 2025, the Company declared its third quarter fiscal 2026 dividend of $0.50 per common share to stockholders of record as of the close of business on November 24, 2025, which is payable on December 5, 2025. Additionally, effective November 6, 2025, the Board also declared a special cash dividend of $2.50 per share to stockholders of record as of the close of business on November 24, 2025 of approximately $10,224,000 payable on December 5, 2025. If the Company pays regular quarterly cash dividends for the remainder of fiscal 2026 at the same rate as declared in the first and second quarter of fiscal 2026, the Company’s total cash requirement for dividends for all of fiscal 2026, inclusive of the special cash dividend of $2.50 per share, would be approximately $18,403,000 based on the number of shares of common stock outstanding at November 3, 2025. 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 our Credit Agreement. 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 Credit Agreement. -31- 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. While our Credit Agreement bears interest at a fluctuating interest rate based on the SOFR plus a spread adjustment, if the Company makes cash interest payments on the Term Loan borrowings at the interest rate effective at November 6, 2025, then for the remainder of the fiscal year ended March 26, 2026, we expect to make cash interest payments of approximately $1,384,000 on the Term Loan borrowings. We may from time to time seek to make voluntary prepayments of our Term Loan borrowings under our Credit Agreement. Such voluntary prepayments, if any, will depend on market conditions, our liquidity requirements, satisfactory compliance of covenants and conditions pursuant to our Credit Agreement and other factors. Management believes that available cash and cash equivalents and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements, fund dividend distributions and, if any, stock repurchases for at least the next 12 months. Contractual Obligations At September 28, 2025, we sublet one property 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. At September 28, 2025, our contractual obligations primarily consist of the Term Loan borrowings under our Credit Agreement and the mandatory debt principal repayments 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. See Note P – LONG TERM DEBT and Note Q – LEASES in the accompanying condensed consolidated financial statements included in Part I, Item 1. for additional information and as disclosed in our Form 10-K for the fiscal year ended March 30, 2025 as filed with the SEC on June 10, 2025. 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 2026 period, and this trend may continue through the remainder of fiscal 2026. Our average cost of hot dogs during the fiscal 2026 period was approximately 16% higher than during the fiscal 2025 period. Our average cost of hot dogs during the fiscal year ended March 30, 2025 was approximately 7% higher than during the fiscal year ended March 31, 2024. 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 an adverse effect on our results of operations. This impact will depend on our ability to manage such volatility through price increases and product mix. 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 2026. 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, 2025, the minimum wage increased from $16.00 to $16.50 in New York City, Long Island and Westchester which will be followed by a $0.50 increase to $17.00 starting January 1, 2026. Further, beginning in 2027, the minimum wage across New York State will increase annually according to the Consumer Price Index. 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, as well as volatile insurance costs resulting from rising rates. -32- Continued increases in labor costs, commodity prices and other operating expenses, including health care, could adversely affect our operations. We attempt to manage inflationary pressure, and rising commodity costs, at least in part, through raising prices. Delays in implementing price increases, competitive pressures, a decline in 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. The Company’s business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, also see the discussions in “Forward-Looking Statements” and “Notes to Condensed Consolidated Financial Statements” in this Form 10-Q and “Risk Factors” in our Form 10-K for our fiscal year ended March 30, 2025.