NATHANS FAMOUS, INC. (NATH) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

Recent Events Affecting Our Results of Operations

Inflationary pressures impacted our results of operations during fiscal 2024, including (i) rising labor costs and (ii) higher commodity prices, including beef and beef trimmings. In general, we are already paying a higher wage rate than the statutory minimum wage rate. We attempt to offset cost increases resulting from inflation by increasing prices and adjusting product mix. We continue to monitor these inflationary pressures and will continue to implement mitigation measures as needed. 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.

Business Overview

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.

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).

The following summary reflects the openings and closings of the Nathan’s franchise system (including the Branded Menu Program) for the fiscal years ended March 31, 2024 and March 26, 2023.

At March 31, 2024, our franchise system consisted of 230 Nathan’s franchised locations, including 116 Branded Menu locations located in 17 states, and 13 foreign countries. We also operate four Company-owned restaurants (including one seasonal unit), within the New York metropolitan area.

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Our primary focus is to expand the market penetration of the Nathan’s Famous brand by increasing the number of distribution points for our products across all of our business platforms, including our Licensing Program for distribution of Nathan’s Famous branded consumer packaged goods, our Branded Products Program for distribution of Nathan’s Famous branded bulk products to the foodservice industry, and our namesake restaurant system comprised of both Company-owned and franchised restaurants, including virtual kitchens. The primary drivers of our growth have been our Licensing and Branded Product Programs, which are 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 Item 1A. “Risk Factors” and other sections in this Annual Report on Form 10-K for the year ended March 31, 2024, our future results could be impacted by many developments including the impact of the inflationary pressures on our business, as well as 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. 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") in a private offering in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).  The 2025 Notes were issued pursuant to an indenture, dated November 1, 2017, (the “Indenture”) by and among the Company, certain of its wholly-owned subsidiaries, as guarantors, and U.S. Bank Trust Company, National Association (formerly U.S. Bank National Association), as trustee and collateral trustee.  The Company used the net proceeds of the 2025 Notes offering to redeem the 2020 Notes, 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 have significantly reduced the outstanding balance of our 2025 Notes from $150,000,000 at March 28, 2021 to $60,000,000 at March 31, 2024 using free cash flow. 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.

The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1st and November 1st of each year. During the fiscal year ended March 31, 2024, the Company made its required semi-annual interest payments on May 1, 2023 and November 1, 2023. On May 1, 2024, the Company paid its first semi-annual interest payment of fiscal 2025.

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

Our future results may be impacted by our interest obligations under the 2025 Notes. As a result of the 2025 Notes, the Company expects to incur annual interest expense of $3,975,000 per annum and annual amortization of debt issuance costs of approximately $277,000.

Critical Accounting Estimates

Our consolidated financial statements and the notes to our consolidated financial statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. These estimates and assumptions are inherently uncertain and require additional management judgment. Results can materially differ when varying assumptions are applied. We consider the following estimates to be the most critical in understanding the assumptions used by management in preparing the consolidated financial statements due to the subjectivity and sensitivity of the methods used in determining the related estimates. The following discussion should be read in conjunction with the consolidated financial statements included in Part IV, Item 15 of this Form 10-K.

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Impairment of Long-Lived Assets

Long-lived assets include property, equipment and right-of-use assets for operating leases with finite useful lives. Impairment losses are recorded on long-lived assets whenever impairment factors are determined to be present. The Company considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations. The Company tests the recoverability of its long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such assets. If the projected undiscounted future cash flows are less than the carrying value of the assets, the Company will record an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the assets. The Company generally measures fair value by considering discounted estimated future cash flows from such assets. Key inputs to determine estimated future cash flows include forecasted Company-owned restaurant sales and a discount rate. We use a weighted average cost of capital discount rate to calculate future cash flows. No long-lived assets were deemed impaired during the fiscal years ended March 31, 2024 and March 26, 2023. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record impairment charges in future periods and such impairments could be material.

Impairment Intangible Asset

The Company’s intangible asset consists of the trademarks, and the trade name and other intellectual property in connection with the Arthur Treacher’s Fish & Chips brand.

The Company determined its intangible asset to have a finite useful life based on the expected future use of this intangible asset. Based upon the review of its Arthur Treacher’s Fish & Chips co-branding agreements, the Company determined that the remaining useful lives of these agreements is four years concluding in fiscal 2028 and the intangible asset is subject to annual amortization. The Company’s definite-lived intangible asset is tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company tested for recoverability of its definite-lived intangible asset based on the projected undiscounted cash flows to be derived from such co-branding agreements. Assumptions used to determine projected undiscounted cash flows include future trends and projected sales. Based on the quantitative test performed, the Company determined that the definite-lived intangible asset was recoverable and no impairment charge was recorded for the fiscal years ended March 31, 2024 and March 26, 2023. Cash flow and sales projections require significant estimates and assumptions by management. Should the estimates and assumptions prove to be incorrect, the Company may be required to record an impairment charge in future periods and such impairment could be material.

Current Expected Credit Losses (“CECL”)

The CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under CECL, reserves may be established against financial asset balances even if the risk of loss is remote.

The Company calculates an allowance for credit losses by pooling financial assets based on similar risk characteristics and delinquency status under an aging method at the measurement date. The risk characteristics the Company generally reviews when analyzing its trade accounts receivable pools include the type of receivable (for example, franchise receivable, license receivable, Branded Product Program receivable), payment terms, the Company’s previous loss history, current and future economic conditions and the length of time accounts receivables are past due. For those trade accounts receivable that no longer share similar risk characteristics with its pool and potential loss is evident, a specific reserve is recorded.

Reserves can be subject to a degree of judgment and can be subject to macroeconomic factors, including inflation and forecasts of future economic conditions. A change in these factors could have a material impact on the allowance for credit losses.

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Income Taxes

The Company’s current provision for income taxes is based upon its estimated taxable income in each of the jurisdictions in which it operates, after considering the impact on taxable income of temporary differences resulting from different treatment of items for tax and financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and any operating loss or tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible. Should management determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made. We believe that the judgments and estimates made are reasonable. However, if actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made.

Uncertain Tax Positions

The Company has recorded liabilities for underpayment of income taxes and related interest and penalties for uncertain tax positions based on the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Nathan’s recognizes accrued interest and penalties associated with unrecognized tax benefits as part of the income tax provision.

New Accounting Standards Not Yet Adopted

See Note B item 23 to the consolidated financial statements included in Part IV, Item 15 of this Form 10-K for a summary of new accounting standards applicable to us.

Results of Operations

Fiscal year ended March 31, 2024 compared to fiscal year ended March 26, 2023

Revenues

Total revenues increased by approximately 6% to $138,610,000 for the fifty-three weeks ended March 31, 2024 (“fiscal 2024”) as compared to $130,785,000 for the fifty-two weeks ended March 26, 2023 (“fiscal 2023”).

Foodservice sales from the Branded Product Program were $86,489,000 for the fiscal 2024 period as compared to $78,884,000 for the fiscal 2023 period. We estimate that the additional week of operations during fiscal 2024 represented approximately $1,202,000 of additional Branded Product Program sales. During the fiscal 2024 period, the total 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 increased by approximately 7% as compared to the fiscal 2023 period.

Total Company-owned restaurant sales decreased by approximately $58,000 to $12,103,000 during the fiscal 2024 period as compared to $12,161,000 during the fiscal 2023 period. Restaurant sales were impacted by reduced traffic due primarily to unfavorable summer weather conditions.

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License royalties increased by approximately $126,000 to $33,581,000 in the fiscal 2024 period as compared to $33,455,000 in the fiscal 2023 period. We do not believe that the additional week of operations had a significant impact on license royalties as our licensees continued to report based upon their fiscal reporting periods. Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc. at retail and foodservice, increased to $30,068,000 for the fiscal 2024 period as compared to $29,998,000 for the fiscal 2023 period. The increase is due to a 3% increase in average net selling price which was offset, in part, by a 3% decrease in retail volume. The foodservice business earned higher royalties of $301,000 as compared to the fiscal 2023 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $56,000 during the fiscal 2024 period as compared to the fiscal 2023 period primarily due to higher royalties earned on sales of French fries, onion rings, and proprietary spices offset, in part, by lower royalties on the sales of franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties increased by $64,000 to $4,356,000 in the fiscal 2024 period as compared to $4,292,000 in the fiscal 2023 period. Total royalties were $3,886,000 in the fiscal 2024 period as compared to $3,636,000 in the fiscal 2023 period. Royalties earned under the Branded Menu Program were $744,000 in the fiscal 2024 period as compared to $630,000 in the fiscal 2023 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 $81,000 in the fiscal 2024 period as compared to $149,000 in the fiscal 2023 period. Traditional franchise royalties were $3,061,000 in the fiscal 2024 period as compared to $2,857,000 in the fiscal 2023 period. Franchise restaurant sales increased to $68,417,000 in the fiscal 2024 period as compared to $63,739,000 in the fiscal 2023 period primarily due to higher sales at airport locations, movie theaters and shopping malls. We estimate that the additional week of operations during fiscal 2024 resulted in $1,215,000 of additional franchise restaurant sales or royalties of approximately $60,000. Comparable domestic franchise sales (consisting of 59 Nathan’s locations, excluding sales under the Branded Menu Program and excluding the impact of the additional week of operations) were $54,031,000 during the fiscal 2024 period as compared to $51,607,000 during the fiscal 2023 period.

At March 31, 2024, 230 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 232 franchised locations, including domestic, international and Branded Menu Program units at March 26, 2023. Total franchise fee income was $470,000 in the fiscal 2024 period as compared to $656,000 in the fiscal 2023 period. Domestic franchise fee income was $106,000 in the fiscal 2024 period as compared to $110,000 in the fiscal 2023 period. International franchise fee income was $241,000 in the fiscal 2024 period as compared to $280,000 in the fiscal 2023 period. We recognized $123,000 and $266,000 of forfeited fees in the fiscal 2024 and fiscal 2023 periods, respectively. During the fiscal 2024 period, 17 franchised locations opened and 19 franchised locations closed. During the fiscal 2023 period, 11 franchise locations opened and 18 franchised locations closed.

Advertising fund revenue, after eliminating Company contributions, was $2,081,000 in the fiscal 2024 period and $1,993,000 during the fiscal 2023 period.

Costs and Expenses

Overall, our cost of sales increased by approximately 11% to $83,182,000 in the fiscal 2024 period as compared to $75,172,000 in the fiscal 2023 period. Our gross profit (calculated as total Branded Product sales plus total Company-owned restaurants sales less cost of sales) was $15,410,000 during the fiscal 2024 period as compared to $15,873,000 during the fiscal 2023 period.

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Cost of sales in the Branded Product Program increased by approximately 12% to $75,966,000 during the fiscal 2024 period as compared to $67,646,000 in the fiscal 2023 period, primarily due to the 2% increase in the volume of hot dogs sold as discussed above, as well as a 10% increase in the average cost per pound of our hot dogs. A shrinking supply of cattle, combined with drought conditions and inflationary pressures have resulted in higher commodity prices, including beef and beef trimmings, driving the increase in the average cost per pound of our hot dogs. We did not make any purchase commitments for beef during the fiscal 2024 period or the fiscal 2023 period. 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 2024 period was $7,216,000 or 60% of restaurant sales, as compared to $7,526,000 or 62% of restaurant sales in the fiscal 2023 period. 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 32%, down from 33% in the comparable period in the prior year due to tighter management and staffing stabilization.

Restaurant operating expenses increased by $193,000 to $4,177,000 in the fiscal 2024 period as compared to $3,984,000 in the fiscal 2023 period. The increase is due primarily to higher occupancy expenses of $85,000, higher insurance costs of $35,000, and higher credit card bank fees of $73,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $1,135,000 in the fiscal 2024 period and the fiscal 2023 period.

General and administrative expenses increased by $1,551,000 to $15,612,000 in the fiscal 2024 period as compared to $14,061,000 in the fiscal 2023 period. The increase in general and administrative expenses was primarily attributable to a discretionary bonus payment of $500,000 to our current Chairman of the Board, an incentive compensation accrual of $500,000, higher share-based compensation expense of $475,000, higher professional fees of $251,000, and higher travel expenses of $48,000 which were offset, in part, by lower bad debt expense of $300,000.

Advertising fund expense, after eliminating Company contributions, was $1,998,000 in the fiscal 2024 period as compared to $1,988,000 in the fiscal 2023 period.

Other Items

Interest expense of $5,355,000 in the fiscal 2024 period represented interest expense of $5,010,000 on the 2025 Notes and amortization of debt issuance costs of $345,000.

Interest expense of $7,742,000 in the fiscal 2023 period represented interest expense of $7,234,000 on the 2025 Notes and amortization of debt issuance costs of $508,000.

The reduction in interest expense of $2,387,000 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. In connection with the partial redemptions, the Company recorded a loss on early extinguishment of debt of $169,000 and $357,000 in the fiscal 2024 period and the fiscal 2023 period, respectively, that reflected the write-off of a portion of previously recorded debt issuance costs.

Interest income of $383,000 for 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 $440,000 in the fiscal 2023 period.

Other income, net was $86,000 in the fiscal 2024 period, which primarily relates to sublease income from a franchised restaurant. Other income, net was $18,000 in the fiscal 2023 period, which primarily relates to sublease income from a franchised restaurant, offset by a net loss on disposal of assets for capitalized software no longer in use of $87,000.

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Provision for Income Taxes

The effective income tax rate for the fiscal 2024 period was 28.5% compared to 26.8% for the fiscal 2023 period. The effective income tax rate for the fiscal 2024 period reflected income tax expense of $7,835,000 recorded on $27,451,000 of pre-tax income. The effective income tax rate for the fiscal 2023 period reflected income tax expense of $7,181,000 recorded on $26,804,000 of pre-tax income. The effective tax rates are higher than the 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 March 31, 2024 was $465,000 all of which would impact Nathan’s effective tax rate, if recognized. As of March 31, 2024, Nathan’s had $345,000 of accrued interest and penalties in connection with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to $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.

Reconciliation of GAAP and Non-GAAP Measures

In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles in the United States of America ("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 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 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.

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.

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Liquidity and Capital Resources

Sources and uses of cash

Cash at March 31, 2024 aggregated $21,027,000, a $8,834,000 decrease during the fiscal 2024 period as compared to cash of $29,861,000 at March 26, 2023. Net working capital decreased to $23,203,000 from $30,652,000 at March 26, 2023 due primarily to the partial redemption of $20,000,000 of the Company’s 2025 Notes.

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 on the 2025 Notes, capital expenditures, working capital and general corporate needs.

During the fiscal 2024 period, the Company made its required semi-annual interest payments on the 2025 Notes of $2,650,000 on May 1, 2023 and November 1, 2023, as well as its required interest payment of $177,000 on December 18, 2023 in connection with the partial redemption of its 2025 Notes. On May 1, 2024, we made the first semi-annual interest payment of $1,987,500 for fiscal 2025.

On December 19, 2023, the Company completed the partial redemption, in the principal amount of $20,000,000 of the 2025 Notes. The redemption price of the redeemed notes was 100% of the principal amount, plus accrued and unpaid interest from, and including November 1, 2023 to, but excluding the redemption date of December 19, 2023. The Company completed the partial redemption by paying cash of $20,177,000, inclusive of accrued interest of $177,000, and recognized a loss on early extinguishment of $169,000 that reflected the write-off of a portion of previously recorded debt issuance costs. Please refer to Note J – Long Term Debt in the accompanying consolidated financial statements for a further discussion regarding the Company’s indebtedness.

Summary of Cash Flows

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

Operating activities

Cash provided by operations is primarily attributable to net income of $19,616,000 in addition to other non-cash operating items of $2,558,000, offset by changes in other operating assets and liabilities of $2,172,000. Non-cash operating expenses consist principally of a loss on debt extinguishment of $169,000, depreciation and amortization of $1,135,000, amortization of debt issuance costs of $345,000, share-based compensation expense of $733,000 and bad debt expense of $157,000. In the fiscal 2024 period, accounts and other receivables decreased by $74,000 due primarily to lower Branded Product and other receivables of $734,000 which were offset, in part, by higher Franchise and license royalty receivables of $322,000. Prepaid expenses and other current assets increased by $281,000 due primarily to an increase in prepaid income taxes of $712,000 which were offset, in part, by a reduction in prepaid marketing and other expenses of $325,000. Accounts payable, accrued expenses and other current liabilities decreased by $1,232,000 due principally to a decrease in accrued interest expense of $467,000 due to the partial redemption of our 2025 Notes and a decrease in accounts payable of $717,000 due to the timing of product purchases for our Branded Products Program. Offsetting these decreases was an increase in accrued payroll and other benefits of $112,000 due primarily to higher incentive compensation accruals.

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Investing activities

Cash used in investing activities of $313,000 is primarily comprised of capital expenditures incurred for our Branded Product Program and our Coney Island restaurants.

Financing activities

Cash used in financing activities of $28,523,000 relates to the payment of $20,000,000 in connection with the partial redemption of our 2025 Notes and the payments of the Company’s quarterly $0.50 per share dividends totaling $8,161,000. The Company also paid $362,000 for withholding taxes on the net share vesting of 10,000 restricted stock units.

At March 31, 2024 and March 26, 2023, Nathan’s did not have any open purchase commitments to purchase hot dogs. Nathan’s may enter into purchase commitments in the future as favorable market conditions become available.

In 2016, the Board authorized increases to the sixth stock repurchase plan for the repurchase of up to 1,200,000 shares of its common stock on behalf of the Company. As of March 31, 2024, Nathan’s has repurchased 1,101,884 shares at a cost of approximately $39,000,000 under the sixth stock repurchase plan. At March 31, 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. 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 2024 period.

As discussed above, we had cash at March 31, 2024 aggregating $21,027,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. During the fiscal 2024 period, the Company declared and paid four quarterly dividends of $0.50 per share aggregating $8,161,000.

Effective June 12, 2024, the Board declared its first quarterly cash dividend of $0.50 per share for fiscal 2025 which is payable on July 2, 2024 to stockholders of record as of the close of business on June 24, 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 June 6, 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 and the terms of any other indebtedness that we may incur in the future. 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.

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We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs, service the outstanding debt, fund our dividend program and may continue our stock repurchase programs, funding those investments from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis. During the fiscal year ending March 30, 2025, we expect to make interest payments of $3,975,000. On May 1, 2024, we made the first semi-annual interest payment of $1,987,500 for fiscal 2025.

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 March 31, 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. 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 as discussed above.

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 into fiscal 2025. 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. However, beef prices began escalating again during our fourth quarter fiscal 2024 and into our first quarter fiscal 2025.

Our average cost of hot dogs during the fiscal 2024 period was approximately 10% higher than during the fiscal 2023 period. 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 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. Further, beginning in 2027, the minimum wage across New York State will increase annually according to the Consumer Price Index. There has also been an increased demand for labor at all levels which has resulted in greater challenges retaining adequate staffing levels at our Company-owned restaurants; our franchised restaurants and Branded Menu Program locations; as well as for certain vendors in our supply chain that we depend on for our commodities. We remain in contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain.

We 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.

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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.

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 discretionary 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”, “Risk Factors”, and “Notes to Consolidated Financial Statements” in this Form 10-K.

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