NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies have been applied in the preparation of the consolidated financial statements:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year ends on the last Sunday in

March,

which results in a

-week reporting period. The results of operations and cash flows for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015

are on the basis of a

-week reporting period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates made by management in preparing the consolidated financial statements include revenue recognition, the allowance for doubtful accounts, valuation of stock-based compensation, accounting for income taxes, and the valuation of goodwill, intangible assets and other long-lived assets.

Inventories

Inventories, which are stated at the lower of cost or market value, consist primarily of food items and supplies. Cost is determined using the

first

-in,

first

-out method.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Depreciation and amortization are calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term of the related asset. The estimated useful lives are as follows:

Building and improvements (in years)	5	–	25
Machinery, equipment, furniture and fixtures (in years)	3	–	15
Leasehold improvements (in years)	5	–	20

Goodwill and Intangible Assets

Goodwill and intangible assets consist of (i) goodwill of

$95

resulting from the acquisition of Nathan’s in

1987;

and (ii) trademarks, trade names and other intellectual property of

$1,353

in connection with Arthur Treacher’s.

The Company’s goodwill and intangible assets are deemed to have indefinite lives and, accordingly, are

not

amortized, but are evaluated for impairment at least annually, but more often whenever changes in facts and circumstances occur which

may

indicate that the carrying value

may

not

be recoverable. As of

March 26, 2017

and

March 27, 2016,

the Company performed its required annual impairment test of goodwill and intangible assets and has determined

impairment is deemed to exist.

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value

may

not

be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In instances where impairment is determined to exist, the Company writes down the asset to its fair value based on the present value of estimated future cash flows.

Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis 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.

long-lived assets were deemed impaired during the fiscal years

March 26, 2017,

March 27, 2016

and

March 29, 2015.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

The fair value hierarchy, as outlined in the applicable accounting guidance, is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following

three

levels:

	●	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

The use of observable market inputs (quoted market prices) when measuring fair value and, specifically, the use of Level

quoted prices to measure fair value are required whenever possible. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures quarterly and based on various factors, it is possible that an asset or liability

may

be classified differently from year to year.

March 26, 2017

and

March 27, 2016,

we did

not

have any assets or liabilities that were recorded at fair value.

The Company's long-term debt had a face value of

$135,000

as of

March 26, 2017

and a fair value of

$145,125

as of

March 26, 2017.

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

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

The majority of the Company’s non-financial assets and liabilities are

not

required to be carried at fair value on a recurring basis. However, the Company is required on a non-recurring basis to use fair value measurements when analyzing asset impairment as it relates to goodwill and other indefinite-lived intangible assets and long-lived assets. The Company utilized the income approach (Level

inputs) which utilized cash flow forecasts for future income and were discounted to present value in performing its annual impairment testing of intangible assets.

Start-up Costs

Pre-opening and similar restaurant costs are expensed as incurred.

10.

Revenue Recognition - Branded Product Program

The Company recognizes sales from the Branded Product Program and certain products sold from the Branded Menu Program upon delivery to Nathan’s customers via

third

party common carrier. Rebates provided to customers are classified as a reduction to sales.

11.

Revenue Recognition - Company-owned Restaurants

Sales by Company-owned restaurants, which are typically paid in cash or credit card by the customer, are recognized at the point of sale. Sales are presented net of sales tax.

12.

Revenue Recognition - Franchising Operations

In connection with its franchising operations, the Company receives initial franchise fees, international development fees, royalties, and in certain cases, revenue from sub-leasing restaurant properties to franchisees.

Franchise and international development fees, which are typically received prior to completion of the revenue recognition process, are initially recorded as deferred revenue. Initial franchise fees, which are non-refundable, are recognized as income when substantially all services to be performed by Nathan’s and conditions relating to the sale of the franchise have been performed or satisfied, which generally occurs when the franchised restaurant commences operations.

The following services are typically provided by the Company prior to the opening of a franchised restaurant:

	o	Approval of all site selections to be developed.
	o	Provision of architectural plans suitable for restaurants to be developed.
	o	Assistance in establishing building design specifications, reviewing construction compliance and equipping the restaurant.
	o	Provision of appropriate menus to coordinate with the restaurant design and location to be developed.
	o	Provision of management training for the new franchisee and selected staff.
	o	Assistance with the initial operations of restaurants being developed.

International development fees are recognized, net of direct expenses, upon the opening of the

first

restaurant within the territory. In each case, this is when the Company has performed substantially all initial services required by the agreements.

March 26, 2017

and

March 27, 2016,

$98

and

$137,

respectively, of deferred franchise fees are included in the accompanying consolidated balance sheets. For the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

the Company earned franchise fees of

$778,

$751

and

$1,043,

respectively, from new unit openings, transfers, co-branding and forfeitures.

Development fees are non-refundable and the related agreements require the franchisee to open a specified number of restaurants in the development area within a specified time period or the agreements

may

be canceled by the Company. Revenue from development agreements is deferred and shall be recognized, with an appropriate provision for estimated uncollectible amounts, when all material services or conditions to the sale have been substantially performed by the franchisor.

If substantial obligations under the development agreement are

not

dependent on the number of individual franchise locations to be opened, substantial performance shall be determined using the same criteria applicable to an individual franchise, which is generally the opening of the

first

location pursuant to the development agreement. If substantial performance is dependent on the number of locations, then the development fee is deferred and recognized ratably over the term of the agreement, as restaurants in the development area commence operations on a pro rata basis to the minimum number of restaurants required to be open, or at the time the development agreement is effectively canceled. At

March 26, 2017

and

March 27, 2016,

$67

and

$129,

respectively, of deferred development fee revenue is included in other liabilities in the accompanying consolidated balance sheets.

The following is a summary of franchise openings and closings for the Nathan’s franchise restaurant system for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015:

	March 26			March 27,			March 29,
	2017			2016			2015

Franchised restaurants operating at the beginning of the period		259			296			324

New franchised restaurants opened during the period		53			56			36

Franchised restaurants closed during the period		(33	)		(93	)		(64	)

Franchised restaurants operating at the end of the period		279			259			296

The Company recognizes franchise royalties on a monthly basis, which are generally based upon a percentage of sales made by the Company’s franchisees, when they are earned and deemed collectible. The Company recognizes royalty revenue from its Branded Menu Program directly from the sale of Nathan’s products by its primary distributor or directly from the manufacturers.

Franchise fees and royalties that are

not

deemed to be collectible are

not

recognized as revenue until paid by the franchisee or until collectibility is deemed to be reasonably assured.

13.

Revenue Recognition – License Royalties

The Company earns revenue from royalties on the licensing of the use of its intellectual property in connection with certain products produced and sold by outside vendors. The use of the Company’s intellectual property must be approved by the Company prior to each specific application to ensure proper quality and a consistent image. Revenue from license royalties is generally based on a percentage of sales, subject to certain annual minimum royalties, recognized on a monthly basis when it is earned and deemed collectible.

14.

Business Concentrations and Geographical Information

The Company’s accounts receivable consist principally of receivables from franchisees for royalties and advertising contributions, from sales under the Branded Product Program, and from royalties from retail licensees. At

March 26, 2017,

four

Branded Product customers represented

21%,

15%,

12%

and

8%,

of accounts receivable. At

March 27, 2016,

four

Branded Product customers represented

19%,

14%,

and

8%,

of accounts receivable. One Branded Products customer accounted for

12%,

14%

and

17%

of total revenue for the years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

respectively. One retail licensee accounted for

20%,

19%

and

17%

of the total revenue for the years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

respectively.

The Company’s primary supplier of hot dogs represented

78%,

81%

and

83%

of product purchases for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

respectively. The Company’s distributor of products to its Company-owned restaurants represented

of product purchases for each of the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

respectively.

The Company’s revenues for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015

were derived from the following geographic areas:

	March 26, 2017		March 27, 2016		March 29, 2015

Domestic (United States)	$	90,466	$	95,655	$	95,682
Non-domestic		6,186		5,235		3,430
	$	96,652	$	100,890	$	99,112

The Company’s sales for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015

were derived from the following:

	March 26, 2017		March 27, 2016		March 29, 2015

Branded Products	$	55,960	$	58,545	$	58,948
Company-owned restaurants		15,042		16,664		15,874
Other		214		822		698
	$	71,216	$	76,031	$	75,520

15.

Advertising

The Company administers an advertising fund on behalf of its restaurant system to coordinate the marketing efforts of the Company. Under this arrangement, the Company collects and disburses fees paid by manufacturers, franchisees and Company-owned stores for national and regional advertising, promotional and public relations programs. Contributions to the advertising fund are based on specified percentages of net sales, generally ranging up to

2%.

Company-owned store advertising expense, which is expensed as incurred, was

$182,

$191

and

$175,

for the fiscal years ended

March 26, 2017,

March 27, 2016

and

March 29, 2015,

respectively, and have been included within restaurant operating expenses in the accompanying consolidated statements of earnings.

16.

Stock-Based Compensation

March 26, 2017,

the Company had

one

stock-based compensation plan in effect which is more fully described in Note M.

The cost of all share-based payments, including grants of restricted stock and stock options, is recognized in the financial statements based on their fair values measured at the grant date, or the date of any later modification, over the requisite service period. The Company recognizes compensation cost for unvested stock awards on a straight-line basis over the requisite vesting period.

17.

Classification of Operating Expenses

Cost of sales consists of the following:

	o	The cost of food and other products sold by Company-operated restaurants, through the Branded Product Program and through other distribution channels.
	o	The cost of labor and associated costs of in-store restaurant management and crew.
	o	The cost of paper products used in Company-operated restaurants.
	o	Other direct costs such as fulfillment, commissions, freight and samples.

Restaurant operating expenses consist of the following:

	o	Occupancy costs of Company-operated restaurants.
	o	Utility costs of Company-operated restaurants.
	o	Repair and maintenance expenses of Company-operated restaurant facilities.
	o	Marketing and advertising expenses done locally and contributions to advertising funds for Company-operated restaurants.
	o	Insurance costs directly related to Company-operated restaurants.

18.

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 and income tax benefits from share-based payments, as fully described in Note

B.19.

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.

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 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 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.

. Adoption of New Accounting Pronouncements

March 2016,

the Financial Accounting Standards Board (the “FASB”), issued new guidance which addresses how companies account for certain aspects of its share-based payments to employees. The update simplifies the accounting for the tax consequences. It also amends how excess tax benefits and a company’s payments to cover the tax bills for the shares’ recipients should be classified on the statement of cash flows related to share-based payments to employees. The amendments allow companies to estimate the number of stock awards they expect to vest, and the amendments revised the withholding requirements for classifying stock awards as equity. Previously, tax withholding was permitted only at the minimum statutory tax rates, which is being amended to permit higher income tax withholding as long as it does

not

exceed the maximum statutory tax rate for an employee in the applicable jurisdictions. This new standard is effective for public companies with fiscal years beginning after

December 15, 2016

which will be Nathan’s

first

quarter ending (

June 2017)

of our fiscal year ending on

March 25, 2018.

However, early adoption is permitted.

The Company elected to early adopt this standard in the quarter ended

June 26, 2016.

The impact of the early adoption resulted in the Company recording tax benefits of

$659

within income tax expense for the year ended

March 26, 2017,

related to the excess tax benefit on stock incentive awards that settled during the period. Prior to adoption of this guidance, this amount would have increased additional paid-in capital. These items shall

not

be factored into the projected annual income tax rate, but will be treated as discrete items when they occur. Accordingly, this new treatment will add additional volatility in the Company’s effective tax rate.

The excess tax benefits for the years ended

March 27, 2016

and

March 29, 2015

were

$228

and

$4,572,

respectively which increased additional paid-in-capital.

The Company accounts for forfeitures as they occur. Under the new guidance, excess tax benefits related to employee share-based payments of

$659

are classified as operating activities in the statement of cash flows for the

fifty-two

weeks ended

March 26, 2017.

The Company applied the effect of the guidance to the presentation of excess tax benefits in the statement of cash flows prospectively and

prior periods have been adjusted. The Company did

not

record any cumulative-effect adjustment to accumulated deficit or net assets as a result of adopting this new accounting standard. The Company also modified its diluted earnings per share calculation by excluding the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the

thirteen

and

fifty-two

weeks ended

March 26, 2017.

August 2014,

the FASB issued new guidance that requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within

one

year after the date that the financial statements are issued. If such conditions exist, management is required to include disclosures enabling users to understand those conditions and management’s plans to alleviate or mitigate those conditions. This new standard is effective for annual periods ending after

December 15, 2016

and interim periods within annual periods beginning after

December 16, 2016.

This guidance was effective for the Company beginning in the

fourth

quarter of fiscal

2017

and did

not

have a material impact on the Company’s results of operations or financial position.

New Accounting Pronouncements

Not

Yet

Adopt

May 2014,

the FASB issued a new accounting standard that attempts to establish a uniform basis for recording income to virtually all industries financial statements, under U.S. GAAP as further amended during

2016.

The FASB issued certain updates to the standard, including clarifying reporting revenue between Principle versus Agent and clarification in determining performance obligations and licenses guidance. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.

In order to accomplish this objective, companies must evaluate the following

five

basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

There are

two

basic transition methods that are available – full retrospective, or modified retrospective transition methods. Early adoption is prohibited. Public companies were originally expected to apply the new standard for annual periods beginning after

December 15, 2016,

including interim periods therein, which for Nathan’s would have been its

first

quarter of fiscal

2018,

beginning on

March 27, 2017.

July 9, 2015,

the FASB agreed to delay the standard’s effective date to annual reporting periods beginning after

December 15, 2017

which will now be our

first

quarter (

June 2018)

of our fiscal year ending

March 31, 2019.

The Company does

not

believe that the standard will impact its recognition of revenue for its Branded Product Program, Company-operated restaurants or its recognition of royalties from its franchised restaurants or retail licenses, which are based on a percentage of sales. Currently, franchise and international development fees are recognized when the Company has performed substantially all initial services required by the agreements, which is generally when the franchisee begins operations. Under the new guidance, these fees

may

be recognized over the term of the agreements. The Company is currently evaluating the impact of the pending adoption of the new revenue recognition standard on its consolidated financial statements and has

not

yet selected a transition method. The Company anticipates assigning internal resources to assist with the evaluation and implementation of the new standard, and will continue to provide updates during fiscal year

2018.

July 2015,

the FASB updated U.S. accounting guidance to simplify the ways businesses measure inventory. Companies that use the

first

-in,

first

-out (FIFO) method or the average cost method will measure inventory at the lower of its cost or net realizable value. Net realizable value is the estimated selling price in the normal course of business, minus the cost of completion, disposal, and transportation. Companies will

longer consider replacement cost or net realizable value less a normal profit margin when measuring inventory. This new standard is effective for annual reporting periods beginning after

December 15, 2016

which will be our

first

quarter (

June 2017)

of our fiscal year ending

March 25, 2018.

Nathan’s does

not

expect the adoption of this new guidance to have a material impact on its results of operations or financial position.

February 2016,

the FASB issued a new accounting standard on leases. The new standard, among other changes, will require lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases. The lease liability will be measured at the present value of the lease payments over the lease term. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs (e.g. commissions). The new standard is effective for annual reporting periods beginning after

December 15, 2018,

including interim reporting periods within those annual reporting periods. This standard is required to take effect in Nathan’s

first

quarter ending (

June 2019)

of our fiscal year ending

March 29, 2020.

The adoption will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest period presented. The Company is currently evaluating the impact of this new accounting standard on its consolidated financial position and results of operations.

January 2017,

the FASB issued a new accounting standard that narrows the definition of a business. The concept is fundamental in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU revised the definition of a business to consist of the following key concepts:

	●	A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
	●	To be capable of being conducted and managed for the purposes described above, an integrated set of activities and assets requires two essential elements–inputs and a substantive process(es) applied to those inputs.

The amendments are effective prospectively for public business entities for annual reporting periods beginning after

December 15, 2017.

This standard is required to take effect in Nathan’s

first

quarter ending (

June 2018)

of our fiscal year ending

March 31, 2019.

The Company does

not

expect this new accounting standard will have a material effect on the Company’s results of operations, cash flows or financial position. Early adoption is permitted when certain criteria are met.

The Company does

not

believe that any other recently issued, but

not

yet effective accounting standards, when adopted, will have a material effect on the accompanying financial statements.