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UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 24, 2023.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the transition period from                    to                   .

 

Commission File No. 001-35962

 

NATHAN'S FAMOUS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

11-3166443

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

One Jericho Plaza, Second Floor – Wing A, Jericho, New York 11753

(Address and Zip Code of principal executive offices)

 

(516) 338-8500

(Registrant's telephone number, including area code)

________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $.01 per share

 

NATH

 

The NASDAQ Global Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

     

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No ☒

 

At January 26, 2024, an aggregate of 4,084,615 shares of the registrant's common stock, par value of $.01, were outstanding.

 

-1-

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

 

INDEX

 

   

Page

Number

     

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements.

3

     

 

Consolidated Balance Sheets – December 24, 2023 (Unaudited) and March 26, 2023 3
     

 

Consolidated Statements of Earnings (Unaudited) – Thirteen and Thirty-nine Weeks Ended December 24, 2023 and December 25, 2022 4
     

 

Consolidated Statements of Stockholders’ Deficit (Unaudited) – Thirteen Weeks Ended December 24, 2023 and December 25, 2022 5
     

 

Consolidated Statements of Stockholders’ Deficit (Unaudited) – Thirty-nine Weeks Ended December 24, 2023 and December 25, 2022 6
     

 

Consolidated Statements of Cash Flows (Unaudited) – Thirty-nine Weeks Ended December 24, 2023 and December 25, 2022 7
     

 

Notes to Consolidated Financial Statements

8
     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

20
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

30

     

Item 4.

Controls and Procedures.

31

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings.

32

     

Item 1A.

Risk Factors.

32

     

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

32
     

Item 3.

Defaults Upon Senior Securities.

32

     

Item 4.

Mine Safety Disclosures.

32

     

Item 5.

Other Information.

32

     

Item 6.

Exhibits.

33

     

SIGNATURES

34

 

-2-

 
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Nathans Famous, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

December 24, 2023

   

March 26, 2023

 
   

(Unaudited)

         
ASSETS                

CURRENT ASSETS

               

Cash

  $ 16,732     $ 29,861  

Accounts and other receivables, net (Note H)

    13,592       15,066  

Inventories

    554       539  

Prepaid expenses and other current assets (Note I)

    1,587       1,895  

Total current assets

    32,465       47,361  
                 

Property and equipment, net of accumulated depreciation of $11,637 and $10,871, respectively

    2,798       3,321  

Operating lease assets (Note R)

    6,393       6,421  

Goodwill

    95       95  

Intangible asset, net (Note J)

    739       869  

Deferred income taxes

    268       375  

Other assets

    148       168  
                 

Total assets

  $ 42,906     $ 58,610  
                 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

               
                 

CURRENT LIABILITIES

               

Accounts payable

  $ 4,681     $ 6,461  

Accrued expenses and other current liabilities (Note L)

    4,516       8,130  

Current portion of operating lease liabilities (Note R)

    1,880       1,782  

Deferred franchise fees

    338       336  

Total current liabilities

    11,415       16,709  
                 

Long-term debt, net of unamortized debt issuance costs of $507 and $952, respectively (Note Q)

    59,493       79,048  

Operating lease liabilities (Note R)

    5,169       5,406  

Other liabilities

    794       737  

Deferred franchise fees

    1,014       1,272  
                 

Total liabilities

    77,885       103,172  
                 

COMMITMENTS AND CONTINGENCIES (Note S)

           
                 

STOCKHOLDERS’ DEFICIT

               

Common stock, $.01 par value; 30,000,000 shares authorized; 9,374,130 and 9,369,235 shares issued; and 4,084,615 and 4,079,720 shares outstanding at December 24, 2023 and March 26, 2023, respectively

    94       94  

Additional paid-in capital

    62,749       62,565  

Accumulated deficit

    (11,160 )     (20,559 )

Stockholders’ equity before treasury stock

    51,683       42,100  
                 

Treasury stock, at cost, 5,289,515 shares at December 24, 2023 and March 26, 2023, respectively

    (86,662 )     (86,662 )

Total stockholders’ deficit

    (34,979 )     (44,562 )
                 

Total liabilities and stockholders’ deficit

  $ 42,906     $ 58,610  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-3-

 
 

 

Nathans Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share amounts)

(Unaudited)

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24,

2023

   

December 25,

2022

   

December 24,

2023

   

December 25,

2022

 
                                 

REVENUES

                               

Sales

  $ 21,349     $ 18,340     $ 78,722     $ 72,535  

License royalties

    6,078       6,337       26,075       26,064  

Franchise fees and royalties

    955       976       3,321       3,268  

Advertising fund revenue

    508       501       1,501       1,504  

Total revenues

    28,890       26,154       109,619       103,371  
                                 

COSTS AND EXPENSES

                               

Cost of sales

    17,872       14,925       66,743       59,490  

Restaurant operating expenses

    896       932       3,279       3,217  

Depreciation and amortization

    268       303       896       837  

General and administrative expenses

    4,209       3,161       11,496       10,122  

Advertising fund expense

    508       501       1,501       1,679  

Total costs and expenses

    23,753       19,822       83,915       75,345  
                                 

Income from operations

    5,137       6,332       25,704       28,026  
                                 

Interest expense

    (1,392 )     (1,944 )     (4,219 )     (5,831 )

Loss on debt extinguishment (Note Q)

    (169 )     -       (169 )     -  

Interest income

    138       158       350       260  

Other income (expense), net

    21       (60 )     65       (4 )
                                 

Income before provision for income taxes

    3,735       4,486       21,731       22,451  

Provision for income taxes

    1,128       1,223       6,025       6,093  

Net income

  $ 2,607     $ 3,263     $ 15,706     $ 16,358  
                                 

PER SHARE INFORMATION

                               

Weighted average shares used in computing income per share:

                               

Basic

    4,080       4,080       4,080       4,092  

Diluted

    4,080       4,116       4,087       4,104  
                                 

Income per share:

                               

Basic

  $ 0.64     $ 0.80     $ 3.85     $ 4.00  

Diluted

  $ 0.64     $ 0.79     $ 3.84     $ 3.99  
                                 

Dividends declared per share

  $ 0.50     $ 0.45     $ 1.50     $ 1.35  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-4-

 
 

 

Nathans Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

Thirteen weeks ended December 24, 2023 and December 25, 2022

(in thousands, except share amounts)

(Unaudited)

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, September 24, 2023

    9,369,235     $ 94     $ 62,924     $ (11,727 )     5,289,515     $ (86,662 )   $ (35,371 )
                                                         

Shares issued in connection with share-based compensation plans

    4,895       -       -       -       -       -       -  

Withholding tax on net share settlement of share-based compensation plans

    -       -       (362 )     -       -       -       (362 )

Dividends on common stock

    -       -       -       (2,040 )     -       -       (2,040 )

Share-based compensation

    -       -       187       -       -       -       187  

Net income

    -       -       -       2,607       -       -       2,607  

Balance, December 24, 2023

    9,374,130     $ 94     $ 62,749     $ (11,160 )     5,289,515     $ (86,662 )   $ (34,979 )

 

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, September 25, 2022

    9,369,235     $ 94     $ 62,323     $ (23,212 )     5,289,515     $ (86,662 )   $ (47,457 )
                                                         

Dividends on common stock

    -       -       -       (1,836 )     -       -       (1,836 )

Share-based compensation

    -       -       65       -       -       -       65  

Net income

    -       -       -       3,263       -       -       3,263  

Balance, December 25, 2022

    9,369,235     $ 94     $ 62,388     $ (21,785 )     5,289,515     $ (86,662 )   $ (45,965 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-5-

 

 

Nathans Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

Thirty-nine weeks ended December 24, 2023 and December 25, 2022

(in thousands, except share amounts)

(Unaudited)

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, March 26, 2023

    9,369,235     $ 94     $ 62,565     $ (20,559 )     5,289,515     $ (86,662 )   $ (44,562 )
                                                         

Cumulative effect of adoption of ASU 2016-13 (Note B)

    -       -       -       (187 )     -       -       (187 )

Shares issued in connection with share-based compensation plans

    4,895       -       -       -       -       -       -  

Withholding tax on net share settlement of share-based compensation plans

    -       -       (362 )     -       -       -       (362 )

Dividends on common stock

    -       -       -       (6,120 )     -       -       (6,120 )

Share-based compensation

    -       -       546       -       -       -       546  

Net income

    -       -       -       15,706       -       -       15,706  

Balance, December 24, 2023

    9,374,130     $ 94     $ 62,749     $ (11,160 )     5,289,515     $ (86,662 )   $ (34,979 )

 

 

                   

Additional

                           

Total

 
   

Common

   

Common

   

Paid-in

   

Accumulated

   

Treasury Stock, at Cost

   

Stockholders’

 
   

Shares

   

Stock

   

Capital

   

Deficit

   

Shares

   

Amount

   

Deficit

 
                                                         

Balance, March 27, 2022

    9,369,235     $ 94     $ 62,307     $ (32,619 )     5,254,081     $ (84,770 )   $ (54,988 )
                                                         

Repurchase of common stock

    -       -       -       -       35,434       (1,892 )     (1,892 )

Dividends on common stock

    -       -       -       (5,524 )     -       -       (5,524 )

Share-based compensation

    -       -       81       -       -       -       81  

Net income

    -       -       -       16,358       -       -       16,358  

Balance, December 25, 2022

    9,369,235     $ 94     $ 62,388     $ (21,785 )     5,289,515     $ (86,662 )   $ (45,965 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-6-

 

 

Nathans Famous, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Thirty-nine weeks ended December 24, 2023 and December 25, 2022

(in thousands)

(Unaudited)

 

   

December 24, 2023

   

December 25, 2022

 

Cash flows from operating activities:

               

Net income

  $ 15,706     $ 16,358  

Adjustments to reconcile net income to net cash provided by operating activities

               

Depreciation and amortization

    896       837  

Loss on debt extinguishment

    169       -  

Loss on disposal of property and equipment

    -       87  

Amortization of debt issuance costs

    276       381  

Share-based compensation expense

    546       81  

Provision for uncollectible accounts

    75       114  

Deferred income taxes

    172       (2 )

Other non-cash items

    (111 )     (114 )

Changes in operating assets and liabilities:

               

Accounts and other receivables, net

    1,147       218  

Inventories

    (15 )     186  

Prepaid expenses and other current assets

    308       332  

Other assets

    20       20  

Accounts payable, accrued expenses and other current liabilities

    (5,394 )     (4,856 )

Deferred franchise fees

    (256 )     (376 )

Other liabilities

    57       63  
                 

Net cash provided by operating activities

    13,596       13,329  
                 

Cash flows from investing activities:

               

Insurance proceeds for property and equipment

    -       42  

Purchase of property and equipment

    (243 )     (564 )
                 

Net cash used in investing activities

    (243 )     (522 )
                 

Cash flows from financing activities:

               

Cash payments for extinguishment of debt

    (20,000 )     -  

Dividends paid to stockholders

    (6,120 )     (5,524 )

Repurchase of treasury stock

    -       (1,892 )

Payments of withholding tax on net share settlement of share-based compensation plans

    (362 )     -  
                 

Net cash used in financing activities

    (26,482 )     (7,416 )
                 

Net (decrease) increase in cash and cash equivalents

    (13,129 )     5,391  
                 

Cash and cash equivalents, beginning of period

    29,861       50,063  
                 

Cash and cash equivalents, end of period

  $ 16,732     $ 55,454  
                 

Cash paid during the period for:

               

Interest

  $ 5,477     $ 7,288  

Income taxes

  $ 6,149     $ 5,041  
                 

Non-cash financing activity:

               

Dividends declared per share

  $ 1.50     $ 1.35  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

-7-

 

 

NATHAN'S FAMOUS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 24, 2023

(Unaudited)

 

 

NOTE A - BASIS OF PRESENTATION

 

The accompanying consolidated financial statements of Nathan's Famous, Inc. and subsidiaries (collectively “Nathan’s,” the “Company,” “we,” “us” or “our”) as of and for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of financial condition, results of operations and cash flows for the periods presented. However, our results of operations are seasonal in nature, and the results of any interim period are not necessarily indicative of results for any other interim period or the full fiscal year.

 

The Company uses a 52-53 week fiscal year ending on the Sunday closest to March 31. The 2024 fiscal year will end on March 31, 2024 and will contain 53 weeks.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the requirements of the U.S. Securities and Exchange Commission (“SEC”).

 

Management believes that the disclosures included in the accompanying consolidated interim financial statements and footnotes are adequate to make the information not misleading, but should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Nathan’s Annual Report on Form 10-K for the fiscal year ended March 26, 2023 as filed with the SEC on June 8, 2023.

 

Our significant interim accounting policies include the recognition of advertising fund expense in proportion to advertising fund revenue, and the recognition of income taxes using an estimated annual effective tax rate.

 

A summary of the Company’s significant accounting policies is identified in Note B of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 26, 2023.

 

 

NOTE B – ADOPTION OF NEW ACCOUNTING STANDARD

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“CECL”) which requires measurement and recognition of expected versus incurred losses for financial assets held. The Company adopted ASU 2016-13 as of March 27, 2023 (the first day of fiscal 2024) under the modified retrospective method. Accordingly, the consolidated financial statements have not been adjusted prior to the date of adoption.

 

Upon adoption, the Company recorded an increase to the allowance for credit losses of $252 and a cumulative effect adjustment to retained earnings of $187, net of $65 of income taxes.

 

 

NOTE C – NEW ACCOUNTING STANDARDS NOT YET ADOPTED

 

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment and contains other disclosure requirements. The purpose of the guidance is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning December 15, 2023, and interim periods within fiscal years beginning December 15, 2024. For us, annual reporting requirements will be effective for our fiscal year 2025 beginning on April 1, 2024 and interim reporting requirements will be effective beginning with our fourth quarter of fiscal year 2025. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

 

-8-

 

 

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures which updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation table and disaggregation of income taxes paid, net of refunds, by jurisdiction. All entities are required to apply the guidance prospectively, with the option to apply it retrospectively. The guidance is effective for fiscal years beginning after December 15, 2024, which for us is our fiscal year 2026 beginning on March 31, 2025. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

 

The Company does not believe that any recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

 

NOTE D – REVENUES

 

The Company’s disaggregated revenues for the thirteen and thirty-nine weeks ended December 24, 2023 and December 25, 2022 are as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Branded Products

  $ 19,688     $ 16,661     $ 68,210     $ 61,862  

Company-owned restaurants

    1,661       1,679       10,512       10,673  

Total sales

    21,349       18,340       78,722       72,535  
                                 

License royalties

    6,078       6,337       26,075       26,064  
                                 

Franchise royalties

    868       829       2,996       2,785  

Franchise fees

    87       147       325       483  

Total franchise fees and royalties

    955       976       3,321       3,268  
                                 

Advertising fund revenue

    508       501       1,501       1,504  
                                 

Total revenues

  $ 28,890     $ 26,154     $ 109,619     $ 103,371  

 

The following table disaggregates revenues by primary geographical market (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

United States

  $ 27,644     $ 24,824     $ 104,970     $ 98,836  

International

    1,246       1,330       4,649       4,535  

Total revenues

  $ 28,890     $ 26,154     $ 109,619     $ 103,371  

 

Contract balances

 

The following table provides information about contract liabilities from contracts with customers (in thousands):

 

   

December 24, 2023

   

March 26, 2023

 

Deferred franchise fees (a)

  $ 1,352     $ 1,608  

Deferred revenues, which are included in

               

“Accrued expenses and other current liabilities” (b)

  $ 250     $ 1,406  

 

 

(a)

Deferred franchise fees of $338 and $1,014 as of December 24, 2023 and $336 and $1,272 as of March 26, 2023 are included in Deferred franchise fees – current and long term, respectively.

 

(b)

Includes $250 of deferred advertising fund revenue as of December 24, 2023 and $906 of deferred license royalties and $500 of deferred advertising fund revenue as of March 26, 2023.

 

-9-

 

 

Significant changes in deferred franchise fees are as follows (in thousands):

 

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

 

Deferred franchise fees at beginning of period

  $ 1,608     $ 2,097  

New deferrals due to cash received and other

    69       107  

Revenue recognized during the period

    (325 )     (483 )

Deferred franchise fees at end of period

  $ 1,352     $ 1,721  

 

Significant changes in deferred revenues are as follows (in thousands):

 

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

 

Deferred revenues at beginning of period

  $ 1,406     $ 876  

New deferrals due to cash received and other

    500       -  

Revenue recognized during the period

    (1,656 )     (876 )

Deferred revenues at end of period

  $ 250     $ -  

 

Anticipated future recognition of deferred franchise fees

 

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands):

 

   

Estimate for fiscal year

 

2024 (a)

  $ 86  

2025

    336  

2026

    304  

2027

    191  

2028

    99  

Thereafter

    336  

Total

  $ 1,352  

 

 

(a)

Represents franchise fees expected to be recognized for the remainder of the 2024 fiscal year, which includes international development fees expected to be recognized over the duration of one year or less. Amount does not include $325 of franchise fee revenue recognized for the thirty-nine weeks ended December 24, 2023.

 

We have applied the optional exemption, as provided for under ASC Topic 606 “Revenues from Contracts with Customers,” which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.

 

 

NOTE E – INCOME PER SHARE                  

 

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding and excludes any dilutive effect of share-based awards. Diluted income per common share gives effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares used in the computation of diluted income per common share result from the assumed exercise of stock options as determined using the treasury stock method.

 

-10-

 

 

The following chart provides a reconciliation of information used in calculating the per-share amounts for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022, respectively.

 

Thirteen weeks

                                               
                                   

Net Income

 
   

Net Income

   

Number of Shares

   

Per Share

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 
   

(in thousands)

   

(in thousands)

                 

Basic EPS

                                               

Basic calculation

  $ 2,607     $ 3,263       4,080       4,080     $ 0.64     $ 0.80  

Effect of dilutive share-based awards

    -       -       -       36       -       (0.01 )

Diluted EPS

                                               

Diluted calculation

  $ 2,607     $ 3,263       4,080       4,116     $ 0.64     $ 0.79  

 

Thirty-nine weeks

                                               
                                   

Net Income

 
   

Net Income

   

Number of Shares

   

Per Share

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 
   

(in thousands)

   

(in thousands)

                 

Basic EPS

                                               

Basic calculation

  $ 15,706     $ 16,358       4,080       4,092     $ 3.85     $ 4.00  

Effect of dilutive share-based awards

    -       -       7       12       (0.01 )     (0.01 )

Diluted EPS

                                               

Diluted calculation

  $ 15,706     $ 16,358       4,087       4,104     $ 3.84     $ 3.99  

 

Options to purchase 20,000 shares of common stock in the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 were excluded in the computation of diluted earnings per share because the exercise price exceeded the average market price of common shares during these periods.

 

 

NOTE F – CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at December 24, 2023 and March 26, 2023. The Company’s cash balances principally consist of cash in bank and money market accounts.

 

At December 24, 2023 and March 26, 2023, substantially all of the Company’s cash balances are in excess of Federal government insurance limits. The Company has not experienced any losses in such accounts.

 

 

NOTE G – FAIR VALUE MEASUREMENTS

 

Nathan’s follows a three-level fair value hierarchy that prioritizes the inputs to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

 

●         Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market

 

●         Level 2 - inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model-derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability

 

●         Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability

 

-11-

 

 

The face value and fair value of long-term debt as of December 24, 2023 and March 26, 2023 were as follows (in thousands):

 

   

December 24, 2023

   

March 26, 2023

 
   

Face value

   

Fair value

   

Face value

   

Fair value

 
                                 

Long-term debt

  $ 60,000     $ 59,700     $ 80,000     $ 80,080  

 

The Company estimates the fair value of its long-term debt based upon review of observable pricing in secondary markets as of the last trading day of the fiscal period. Accordingly, the Company classifies its long-term debt as Level 2.

 

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of the instruments.

 

Certain non-financial assets and liabilities are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances, such as when evidence of impairment exists. At December 24, 2023, no fair value adjustment or material fair value measurements were required for non-financial assets or liabilities.

 

 

NOTE H – ACCOUNTS AND OTHER RECEIVABLES, NET                  

 

Accounts and other receivables, net, consist of the following (in thousands):

 

   

December 24,

   

March 26,

 
   

2023

   

2023

 
                 

Branded product sales

  $ 10,211     $ 11,106  

Franchise and license royalties

    3,025       3,817  

Other

    709       623  
      13,945       15,546  
                 

Less: allowance for credit losses

    (353 )     (480 )

Accounts and other receivables, net

  $ 13,592     $ 15,066  

 

The Company is exposed to credit losses through its trade accounts receivable. Trade accounts receivable are generally due within 30 days and are stated at amounts due from franchisees, including virtual kitchens, retail licensees and Branded Product Program customers, net of an allowance for credit losses. Accounts that are outstanding longer than the contractual payment terms are generally considered past due.

 

An allowance for credit losses is determined 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 versus license 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.

 

For pooled trade account receivables, the Company develops its allowance for credit losses by applying a historical loss rate to each pool based on historical account write-off trends. The Company believes that the past five years provide a reasonable representation of the Company’s operations and performance through various business cycles, both favorable and unfavorable. The allowance for credit losses is then adjusted for current macroeconomic factors, including the effects of inflation and reasonable and supportable forecasts of future economic conditions. The Company provides for expected credit losses through a charge to earnings. After the Company has used reasonable collection efforts, it writes off accounts receivable through a charge to the allowance for credit losses.

 

-12-

 

 

Changes in the Company’s allowance for credit losses for the thirty-nine week period ended December 24, 2023 and the fiscal year ended March 26, 2023 are as follows (in thousands):

 

   

December 24,

2023

   

March 26,

2023

 
                 

Beginning balance

  $ 480     $ 258  

Cumulative effect of adoption of ASU 2016-13

    252       -  

Bad debt expense

    75       457  

Write offs and other

    (454 )     (235 )

Ending balance

  $ 353     $ 480  

 

 

NOTE I – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

December 24,

   

March 26,

 
   

2023

   

2023

 
                 

Income taxes

  $ 499     $ 146  

Real estate taxes

    158       78  

Insurance

    244       389  

Marketing

    409       814  

Other

    277       468  

Total prepaid expenses and other current assets

  $ 1,587     $ 1,895  

 

 

NOTE J – INTANGIBLE ASSET

 

The Company’s definite-lived intangible asset consists of trademarks, and the trade name and other intellectual property in connection with its Arthur Treacher’s co-branding agreements. Based upon review of the current Arthur Treacher’s co-branding agreements, the Company determined that the remaining useful lives of these agreements is five years concluding in fiscal year 2028, and the intangible asset is subject to annual amortization. The Company performs an annual impairment test, or more frequently if events or changes in circumstances indicate that the intangible asset may be impaired. The Company tests for recoverability of its definite-lived intangible asset based on the projected undiscounted cash flows to be derived from such co-branding agreements. Cash flow 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.

 

There have been no significant events or changes in circumstances during the thirteen and thirty-nine week periods ended December 24, 2023 that would indicate that the carrying amount of the Company’s intangible asset may be impaired as of December 24, 2023.

 

 

NOTE K - LONG LIVED ASSETS

 

Long-lived assets on a restaurant-by-restaurant basis are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Long-lived assets include property, equipment and right-of-use assets for operating leases with finite useful lives. Assets are grouped at the individual restaurant level which represents the lowest level for which cash flows can be identified largely independent of the cash flows of other assets and liabilities. The Company generally considers a history of restaurant operating losses to be its primary indicator of potential impairment for individual restaurant locations.

 

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 asset, the Company will record on a restaurant-by-restaurant basis, an impairment loss, if any, based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair value by considering discounted estimated future cash flows from such assets. 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.

 

There have been no significant events or changes in circumstances during the thirteen and thirty-nine week periods ended December 24, 2023 that would indicate that the carrying amount of the Company’s long-lived assets may be impaired as of December 24, 2023.

 

-13-

 

 

 

NOTE L – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following (in thousands):         

 

   

December 24,

   

March 26,

 
   

2023

   

2023

 

Payroll and other benefits

  $ 2,357     $ 3,410  

Accrued rebates

    748       698  

Rent and occupancy costs

    77       70  

Deferred revenue

    250       1,406  

Interest

    608       2,143  

Professional fees

    57       99  

Sales, use and other taxes

    71       76  

Other

    348       228  

Total accrued expenses and other current liabilities

  $ 4,516     $ 8,130  

 

 

NOTE M – INCOME TAXES

 

The effective income tax rates for the thirteen weeks ended December 24, 2023 and December 25, 2022 were 30.2% and 27.3%, respectively. The effective income tax rate for the thirteen weeks ended December 24, 2023 reflected $1,128 of income tax expense recorded on $3,735 of pre-tax income. The effective income tax rate for the thirteen weeks ended December 25, 2022 reflected $1,223 of income tax expense recorded on $4,486 of pre-tax income.

 

The effective income tax rates for the thirty-nine weeks ended December 24, 2023 and December 25, 2022 were 27.7% and 27.1%, respectively. The effective income tax rate for the thirty-nine weeks ended December 24, 2023 reflected $6,025 of income tax expense recorded on $21,731 of pre-tax income. The effective income tax rate for the thirty-nine weeks ended December 25, 2022 reflected $6,093 of income tax expense recorded on $22,451 of pre-tax income.

 

The effective income tax rates for the thirteen and thirty-nine weeks ended December 24, 2023 and December 25, 2022 were higher than the United States statutory income tax rate 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 included in Other liabilities at December 24, 2023 and March 26, 2023 was $465 and $432, respectively, all of which would impact the Company’s effective tax rate, if recognized. As of December 24, 2023 and March 26, 2023, the Company had approximately $343 and $305, respectively, accrued for the payment of interest and penalties in connection with unrecognized tax benefits.

 

 

NOTE N – SEGMENT INFORMATION

 

Nathan’s considers itself to be a brand marketer of the Nathan’s Famous signature products to the foodservice industry pursuant to its various business structures. Nathan’s sells its products directly to consumers through its restaurant operations segment consisting of Company-owned and franchised restaurants, including virtual kitchens, to distributors that resell our products to the foodservice industry through the Branded Product Program and by third party manufacturers pursuant to license agreements that sell our products to supermarkets, club stores and grocery stores nationwide. The Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”) who regularly reviews operating results, evaluates performance and allocates resources for the Branded Product Program, Product Licensing and Restaurant Operations segments based upon a number of factors, the primary profit measure being income from operations. Certain administrative expenses are not allocated to the segments and are reported within the Corporate segment.

 

Branded Product Program – This segment derives revenue principally from the sale of hot dog products either directly to foodservice operators or to various foodservice distributors who resell the products to foodservice operators.

 

Product licensing – This segment derives revenue, primarily in the form of royalties, from licensing a broad variety of Nathan’s Famous branded products, including our hot dogs, sausages, frozen crinkle-cut French fries and additional products through retail supermarkets, grocery channels and club stores throughout the United States.

 

-14-

 

 

Restaurant operations – This segment derives revenue from the sale of our products at Company-owned restaurants and earns fees and royalties from its franchised restaurants, including its virtual kitchens.

 

Revenues from operating segments are from transactions with unaffiliated third parties and do not include any intersegment revenues.

 

Income from operations attributable to Corporate consists principally of administrative expenses not allocated to the operating segments such as executive management, finance, information technology, legal, insurance, corporate office costs, corporate incentive compensation and compliance costs and expenses of the Advertising Fund.

 

Interest expense, loss on debt extinguishment, interest income, and other income (expense), net, are managed centrally at the corporate level, and, accordingly, such items are not presented by segment since they are excluded from the measure of profitability reviewed by the CODM.

 

Operating segment information is as follows (in thousands):

 

   

Thirteen weeks ended

    Thirty-nine weeks ended  
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Revenues

                               

Branded Product Program

  $ 19,688     $ 16,661     $ 68,210     $ 61,862  

Product licensing

    6,078       6,337       26,075       26,064  

Restaurant operations

    2,616       2,655       13,833       13,941  

Corporate (1)

    508       501       1,501       1,504  

Total revenues

  $ 28,890     $ 26,154     $ 109,619     $ 103,371  
                                 

Income from operations

                               

Branded Product Program

  $ 2,421     $ 2,451     $ 5,769     $ 7,003  

Product licensing

    6,033       6,292       25,939       25,928  

Restaurant operations

    (308 )     (238 )     2,000       1,879  

Corporate

    (3,009 )     (2,173 )     (8,004 )     (6,784 )

Income from operations

  $ 5,137     $ 6,332     $ 25,704     $ 28,026  
                                 

Interest expense

    (1,392 )     (1,944 )     (4,219 )     (5,831 )

Loss on debt extinguishment

    (169 )     -       (169 )     -  

Interest income

    138       158       350       260  

Other income (expense), net

    21       (60 )     65       (4 )

Income before provision for income taxes

  $ 3,735     $ 4,486     $ 21,731     $ 22,451  

 

 

(1)

Represents advertising fund revenue.

 

 

NOTE O – SHARE-BASED COMPENSATION

 

Total share-based compensation during each of the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 was $187 and $65, and $546 and $81, respectively. Total share-based compensation is included in general and administrative expenses in our accompanying Consolidated Statements of Earnings. As of December 24, 2023, there was $2,848 of unamortized compensation expense related to share-based awards. We expect to recognize this expense over approximately forty-two months, which represents the weighted average remaining requisite service periods for such awards.

 

The Company recognizes compensation cost for unvested share-based awards on a straight-line basis over the requisite service period. Compensation expense under all share-based awards is as follows (in thousands):

         

    Thirteen weeks ended     Thirty-nine weeks ended  
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Stock options

  $ 18     $ 8     $ 39     $ 24  

Restricted stock units

    169       57       507       57  

Total compensation cost

  $ 187     $ 65     $ 546     $ 81  

 

-15-

 

 

Stock options:

 

During the thirty-nine week period ended December 24, 2023, the Company granted options to purchase 10,000 shares at an exercise price of $78.00 per share, all of which expire five years from the date of grant. All such options vest ratably over a four-year period commencing August 11, 2023.

 

The weighted average option fair value, as determined using the Black-Scholes option valuation model, and the assumptions used to estimate these values for stock options granted during the thirty-nine week period ended December 24, 2023 are as follows:

 

Weighted average option fair values

  $ 16.23  

Expected life (years)

    4.4  

Interest rate

    4.31 %

Volatility

    24.29 %

Dividend yield

    2.56 %

 

The expected dividend yield is based on historical and projected dividend yields. The Company estimates volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life of the option. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise based on expected historical exercise patterns and employment termination behavior.

 

Transactions with respect to stock options for the thirty-nine weeks ended December 24, 2023 are as follows:

 

           

Weighted-

   

Weighted-

   

Aggregate

 
           

Average

   

Average

   

Intrinsic

 
           

Exercise

   

Remaining

   

Value

 
   

Shares

   

Price

   

Contractual Life

   

(in thousands)

 
                                 

Options outstanding at March 26, 2023

    20,000     $ 79.20       1.92     $ 40  

Granted

    10,000     $ 78.00       4.64       -  

Expired

    (10,000 )   $ 89.90       -       -  

Options outstanding at December 24, 2023

    20,000     $ 73.25       3.63     $ 88  
                                 

Options exercisable at December 24, 2023

    5,000     $ 68.50       2.63     $ 44  

 

Restricted stock units:

 

Transactions with respect to restricted stock units for the thirty-nine weeks ended December 24, 2023 are as follows:

 

           

Weighted

 
           

Average

 
           

Grant-date

Fair value

 
   

Shares

   

Per share

 
                 

Unvested restricted stock units at March 26, 2023

    50,000     $ 67.59  

Granted

    -     $ -  

Vested

    (10,000 )   $ 67.59  

Unvested restricted stock units at December 24, 2023

    40,000     $ 67.59  

 

-16-

 

 

 

NOTE P– STOCKHOLDERS’ EQUITY

 

1. Dividends

 

On June 28, 2023, September 1, 2023 and December 1, 2023, the Company paid quarterly dividends of $0.50 per share. Through December 24, 2023, the Company paid quarterly dividends aggregating $6,120.

 

Effective February 1, 2024, the Company’s Board of Directors (the “Board”) declared its fourth quarterly cash dividend of $0.50 per share for fiscal 2024 payable on March 1, 2024 to stockholders of record as of the close of business on February 20, 2024.

 

Our ability to pay future dividends is limited by the terms of the Indenture with U.S. Bank Trust Company, National Association, as trustee and collateral trustee. In addition to the terms of the Indenture, the declaration and payment of any cash dividends in the future is subject to final determination of the Board and will be dependent upon our earnings and financial requirements.

 

2. Stock Repurchase Program

 

In 2016, the Board authorized increases to the sixth stock repurchase plan for the purchase of up to 1,200,000 shares of its common stock on behalf of the Company. As of December 24, 2023, Nathan’s had repurchased 1,101,884 shares at a cost of $39,000 under the sixth stock repurchase plan. At December 24, 2023 there were 98,116 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. 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.

 

 

NOTE Q – LONG-TERM DEBT

 

Long-term debt consists of the following (in thousands):

 

   

December 24,

   

March 26,

 
   

2023

   

2023

 
                 

6.625% Senior Secured Notes due 2025

  $ 60,000     $ 80,000  

Less: unamortized debt issuance costs

    (507 )     (952 )

Long-term debt, net

  $ 59,493     $ 79,048  

 

On November 14, 2023, the Company announced its intent to complete the partial redemption, in the principal amount of $20,000, of the 2025 Notes in accordance with the terms and conditions of the Indenture. 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. On December 19, 2023, the Company completed the partial redemption by paying cash of $20,177, inclusive of accrued interest of $177, and recognized a loss on early extinguishment of $169 that reflected the write-off of a portion of previously recorded debt issuance costs.

 

 

NOTE R – LEASES

 

The Company is party as lessee to various leases for its Company-owned restaurants and lessee/sublessor to one franchised location property, including land and buildings, as well as leases for its corporate office and certain office equipment.

 

Company as lessee

 

The components of the net lease cost for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Operating lease cost

  $ 389     $ 378     $ 1,238     $ 1,214  

Variable lease cost

    424       396       1,311       1,246  

Less: Sublease income, net

    (21 )     (22 )     (65 )     (64 )
                                 

Total net lease cost

  $ 792     $ 752     $ 2,484     $ 2,396  

 

-17-

 

The following table presents the components of the net lease cost on the Consolidated Statement of Earnings for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 (in thousands):

 

   

Thirteen weeks ended

    Thirty-nine weeks ended  
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Restaurant operating expenses

  $ 613     $ 589     $ 1,960     $ 1,908  

General and administrative expenses

    200       185       589       552  

Less: Other income, net

    (21 )     (22 )     (65 )     (64 )
                                 

Total net lease cost

  $ 792     $ 752     $ 2,484     $ 2,396  

 

Cash paid for amounts included in the measurement of lease liabilities for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Operating cash flows from operating leases

  $ 234     $ 216     $ 1,019     $ 950  

 

The weighted average remaining lease term and weighted average discount rate for operating leases as of December 24, 2023 were as follows:

 

Weighted average remaining lease term (years):

    4.7  
         

Weighted average discount rate:

    8.492 %

 

Future lease commitments to be paid and received by the Company as of December 24, 2023 were as follows (in thousands):

 

   

Payments

   

Receipts

         
   

Operating Leases

   

Subleases

   

Net Leases

 
                         

Fiscal year:

                       

2024 (a)

  $ 387     $ 42     $ 345  

2025

    1,884       274       1,610  

2026

    1,919       278       1,641  

2027

    1,928       281       1,647  

2028

    1,778       129       1,649  

Thereafter

    602       495       107  

Total lease commitments

  $ 8,498     $ 1,499     $ 6,999  

Less: Amount representing interest

    (1,449 )                

Present value of lease liabilities (b)

  $ 7,049                  

 

 

(a)

Represents future lease commitments to be paid and received by the Company for the remainder of the 2024 fiscal year. Amount does not include $1,234 of lease commitments paid and received by the Company for the thirty-nine week period ended December 24, 2023.

 

(b)

The present value of minimum operating lease payments of $1,880 and $5,169 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively on the Consolidated Balance Sheet.

 

-18-

 

 

Company as lessor

 

The components of net lease income for the thirteen and thirty-nine week periods ended December 24, 2023 and December 25, 2022 were as follows (in thousands):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
                                 

Operating lease income, net

  $ 21     $ 22     $ 65     $ 64  

 

 

NOTE S – COMMITMENTS AND CONTINGENCIES

 

1. Contingencies

 

The Company and its subsidiaries are from time to time involved in ordinary and routine litigation. Management presently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations. Nevertheless, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include money damages and, in such event, could result in a material adverse impact on the Company’s results of operations for the period in which the ruling occurs.

 

 

NOTE T – SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through the date the Consolidated Financial Statements were issued and filed with the SEC. There were no subsequent events that require recognition or disclosure.

 

-19-

 
 

 

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 1933, as amended, 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 the 2025 Notes (as defined below), 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; 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 employee” 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 26, 2023, 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.

 

-20-

 

Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, licensing agreements for the sale of Nathan’s products within supermarkets, grocery stores and club stores, the sale of Nathan’s products directly to other foodservice operators, the manufacture of certain proprietary spices by third parties and the royalties, fees and other sums we can earn from franchising the Nathan’s restaurant concept (including the Branded Menu Program and virtual kitchens).

 

At December 24, 2023, our restaurant system, excluding virtual kitchens, consisted of 238 locations, including 117 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

 

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

 

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 26, 2023, 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.

 

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the “2025 Notes”) and used the majority of the proceeds of this offering to redeem the Company’s 10.000% Senior Secured Notes due 2020, paid a portion of the special $5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital.

 

On January 26, 2022, March 21, 2023 and December 19, 2023, the Company redeemed $40,000,000, $30,000,000 and $20,000,000, respectively, in aggregate principal amount of its 2025 Notes. $60,000,000 principal amount of the 2025 Notes were outstanding as of December 24, 2023. On May 1, 2023 and November 1, 2023, the Company paid its semi-annual interest payments for fiscal 2024. On December 19, 2023, in connection with the redemption of $20,000,000 principal amount of its 2025 Notes, the Company paid its required interest payment accrued on the redeemed 2025 Notes.

 

Our future results may be impacted by our interest obligations under the 2025 Notes. As a result of the $60,000,000 outstanding principal amount of the 2025 Notes as of December 24, 2023, the Company expects to incur annual interest expense of $3,975,000 and annual amortization costs of approximately $276,000.

 

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 negatively impacted our earnings during the first nine months of fiscal 2024, including (i) rising labor costs and (ii) higher commodity prices, including beef and beef trimmings. This trend may continue throughout the remainder of fiscal year 2024. In general, we have been able 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.

 

-21-

 

 

Critical Accounting Policies and Estimates

 

As discussed in our Form 10-K for the fiscal year ended March 26, 2023, the discussion and analysis of our financial condition and results of operations are based upon our 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 consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; leases; impairment of intangible assets; impairment of long-lived assets; and income taxes (including uncertain tax positions). As discussed in Note B, the Company adopted ASU 2016-13, “Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective March 27, 2023. There have been no other significant changes to the Company’s accounting policies subsequent to March 26, 2023.

 

Adoption of New Accounting Standard         

 

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

 

New Accounting Standards Not Yet Adopted

 

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

 

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 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.

 

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

   

Thirty-nine weeks ended

 
   

December 24, 2023

   

December 25, 2022

   

December 24, 2023

   

December 25, 2022

 
   

(unaudited)

   

(unaudited)

 
                                 

Net income

  $ 2,607     $ 3,263     $ 15,706     $ 16,358  

Interest expense

    1,392       1,944       4,219       5,831  

Provision for income taxes

    1,128       1,223       6,025       6,093  

Depreciation and amortization

    268       303       896       837