NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1.	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.

2.	Fiscal Year

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

March,

which results in a

-week reporting period. The fiscal year ended

March 29, 2020

is on the basis of a

-week reporting period. The fiscal year ended

March 31, 2019

is on the basis of a

-week reporting period.

3 .	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.

4 .	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

March 29, 2020.

Cash equivalents at

March 31, 2019

were

$20,000.

March 29, 2020

and

March 31, 2019

substantially all of the Company’s cash balances are in excess of Federal government insurance limits. The Company does

not

believe that it is exposed to any significant risk on these balances.

5 .	Inventories

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

first

-in,

first

-out method.

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

7 .	Goodwill and Intangible Asset s

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

$1,269

in connection with Arthur Treacher’s.

As of

March 29, 2020

and

March 31, 2019,

the Company performed its annual impairment of goodwill based upon qualitative analysis and has determined that

impairment is deemed to exist.

March 31, 2019,

the Company’s intangible asset had a carrying amount of

$1,353

for the trademarks, trade names and other intellectual property in connection with Arthur Treacher’s.

During the fiscal year ended

March 29, 2020,

the Company subsequently determined its indefinite-lived intangible asset to have a finite useful life based on the expected future use of this intangible asset. Based upon the review of the current Arthur Treacher’s co-branding agreements, the Company determined that the remaining useful lives of these agreements is

twelve

years and the intangible asset is subject to annual amortization. The Company has recorded amortization expense of

$84

for the year ending

March 29, 2020.

Annual amortization of the intangible asset for the next

five

years and thereafter will approximate the following:

	Estimate for fiscal year
2021		113
2022		113
2023		113
2024		113
2025		113
Thereafter		704
Total	$	1,269

8 .	Lon g-lived Assets

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

may

not

be recoverable.

Each reporting period, management reviews the carrying value of its investments based upon the financial information provided by the investment’s management and considers whether indicators of an other-than-temporary impairment exists. If an impairment indicator exists, management evaluates the fair value of its investment to determine if an, other-than-temporary impairment in value has occurred. We are required to recognize an impairment on the investment if such impairment is considered to be other-than-temporary.

Impairment losses are recorded on long-lived assets on a restaurant-by-restaurant basis whenever impairment factors are determined to be present. The Company tests the recoverability of its long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset

may

not

be recoverable. The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such asset. If the projected undiscounted future cash flows are less than the carrying value of the asset, the Company will record 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 asset. 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 impairments in future periods and such impairments could be material. 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 to be permanently impaired during the fiscal years ended

March 29, 2020

and

March 31, 2019

based upon quantitative analysis.

9 .	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

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

●

Level

- 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

- 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 29, 2020

and

March 31, 2019,

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

$150,000

as of

March 29, 2020

and a fair value of

$138,000

as of

March 29, 2020.

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 and 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.

Revenue Recognition

We adopted Topic

606

at the beginning of the fiscal year ended

March 31, 2019.

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.

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.

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.

evenue 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.

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

●

Approval of all site selections to be developed.

●

Provision of architectural plans suitable for restaurants to be developed.

●

Assistance in establishing building design specifications, reviewing construction compliance and equipping the restaurant.

●

Provision of appropriate menus to coordinate with the restaurant design and locations to be developed.

●

Provision of management training for the new franchisee and selected staff.

●

Assistance with the initial operations of restaurants being developed.

The Company determined that the services provided in exchange for these upfront restaurant franchise fees do

not

contain separate and distinct performance obligations from the franchising right and these initial franchise fees, renewal fees and transfer fees shall be deferred and recognized over the term of each respective agreement, or upon termination of the franchise agreement.

The Company determined that the services provided in exchange for these international development fees do

not

contain separate and distinct performance obligations from the franchise right and these international development fees are recognized over the term of each respective agreement. Certain other costs, such as legal expenses, are expensed as incurred.

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

March 29, 2020

and

March 31, 2019:

	March 29,			March 31,
	20 20			2019

Franchised restaurants operating at the beginning of the period		255			276

New franchised restaurants opened during the period		16			13

Franchised restaurants closed during the period		(55	)		(34	)

Franchised restaurants operating at the end of the period		216			255

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 subsequently deemed to be

not

collectible are recorded as bad debts until paid by the franchisee or until collectibility is deemed to be reasonably assured.

Contract balances

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

		March 29 , 20 20				March 31, 2019
Deferred franchise fees (a)		$	1,917			$	3,005

(a)

Deferred franchise fees of

$230

and

$1,687

are included in Deferred franchise fees – current and long term as of

March 29, 2020,

respectively and

$318

and

$2,687

as of

March 31, 2019,

respectively.

Significant changes in Deferred franchise fees are as follows:

	Fifty-T wo Weeks Ended			Fifty-Three Weeks Ended
	March 29 , 20 20			March 31, 2019
Deferred franchise fees at beginning of period	$	3,005		$	3,139
Additions to deferred revenue		157			371
Revenue recognized during the period		(1,245	)		(505	)
Deferred franchise fees at end of period	$	1,917		$	3,005

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:

	Estimate for fiscal year
2021		230
2022		219
2023		196
2024		184
2025		177
Thereafter		911
Total	$	1,917

Revenue Recognition – National Advertising Fund

The Company maintains a national advertising fund (the “Advertising Fund”) established to collect and administer funds contributed for use in advertising and promotional programs for Company-owned and franchised restaurants.

The revenue, expenses and cash flows of the Advertising Fund are fully consolidated into the Company’s Consolidated Statements of Earnings and Statements of Cash Flows.

While this treatment impacts the gross amount of reported advertising fund revenue and related expenses, the impact is expected to approximately offset the increase to both revenue and expense, with minimal impact to income from operations or net income because the Company attempts to manage the Advertising Fund to breakeven over the course of the fiscal year. However, any surplus or deficit in the Advertising Fund will impact income from operations and net income.

17 .	Business Concentrations and Geographical Information

The Company’s accounts receivable consists 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 29, 2020,

three

Branded Product customers represented

24%,

11%

and

10%,

of accounts receivable. At

March 31, 2019,

four

Branded Product customers represented

19%,

18%,

17%

and

13%,

of accounts receivable. One Branded Products customer accounted for

12%

and

14%

of total revenue for the years ended

March 29, 2020

and

March 31, 2019,

respectively. One retail licensee accounted for

24%

and

22%

of the total revenue for the years ended

March 29, 2020

and

March 31, 2019,

respectively.

The Company’s primary supplier of hot dogs represented

92%

of product purchases for each of the fiscal years ended

March 29, 2020

and

March 31, 2019.

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

of product purchases for each of the fiscal years ended

March 29, 2020

and

March 31, 2019.

The Company’s revenues for the fiscal years ended

March 29, 2020

and

March 31, 2019

were derived from the following geographic areas:

	March 29, 2020		March 31, 2019

Domestic (United States)	$	98,453	$	97,871
Non-domestic		4,872		3,978
	$	103,325	$	101,849

The Company’s sales for the fiscal years ended

March 29, 2020

and

March 31, 2019

were derived from the following:

	March 29, 2020		March 31, 2019

Branded Products	$	57,586	$	57,960
Company-owned restaurants		12,973		13,601
Total sales	$	70,559	$	71,561

License royalties	$	25,859	$	23,615

Royalties		3,327		3,666
Franchise fees		1,245		505
Total franchise fees and royalties		4,572		4,171

Advertising fund revenue		2,335		2,502

Total revenues	$	103,325	$	101,849

18 .	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

$145

and

$107,

for the fiscal years ended

March 29, 2020

and

March 31, 2019,

respectively, and have been included within restaurant operating expenses in the accompanying Consolidated Statements of Earnings.

19.	Stock-Based Compensation

March 29, 2020,

the Company had

one

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

M.2.

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.

20 .	Classification of Operating Expenses

Cost of sales consists of the following:

The cost of food and other products sold by Company-operated restaurants, through the Branded Product Program and through other distribution channels.

The cost of labor and associated costs of in-store restaurant management and crew.

The cost of paper products used in Company-operated restaurants.

Other direct costs such as fulfillment, commissions, freight and samples.

Restaurant operating expenses consist of the following:

Occupancy costs of Company-operated restaurants.

Utility costs of Company-operated restaurants.

Repair and maintenance expenses of Company-operated restaurant facilities.

Marketing and advertising expenses done locally and contributions to advertising funds for Company-operated restaurants.

Insurance costs directly related to Company-operated restaurants.

21 .	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. 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.

See Note I for a further discussion of our income taxes.

22 .	A doption of New Accounting Standards

Leases

February 2016,

the Financial Accounting Standards Board (“FASB”) issued new guidance on leases, Topic

842,

which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases. The Company adopted the new guidance at the beginning of the fiscal year ended

March 29, 2020

using the effective date of

April 1, 2019

as the date of initial application; therefore, the comparative period has

not

been adjusted and continues to be reported under the previous lease guidance.

The new standard provides for a number of practical expedients upon adoption. The Company elected the package of practical expedients, which permits the Company

not

to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. For those leases that fall under the definition of a short-term lease, the Company elected the short-term lease recognition exemption. Under this practical expedient, for those leases that qualify, we did

not

recognize right-of-use (“ROU”) assets or liabilities. The Company also elected the practical expedient for lessees to account for lease components and non-lease components as a single lease component for all underlying classes of assets. The Company did

not

elect the use-of-hindsight practical expedient.

As a result of adopting this new guidance on the

first

day of fiscal year

2020,

substantially all of the Company's operating lease commitments were subject to the new guidance and were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using the Company’s incremental borrowing rate based on the remaining lease term as of the adoption date. The Company recognized operating lease assets and liabilities of

$7,804

and

$8,533,

respectively, as of the

first

day of fiscal year

2020.

The difference between the assets and liabilities is attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets.

The effects of the changes made to the Company's consolidated balance sheet as of

April 1, 2019

for the adoption of the new lease guidance were as follows (in thousands):

	Balance at March 31 , 20 19		Adjustments due to adoption of the new lease guidance			Reclassi - fications		Balance at April 1, 2019
Other Assets
Operating lease assets		-		7,804			-		7,804
Other assets		465		-			31		496

Current Liabilities
Current portion of operating lease liabilities		-		1,162			-		1,162

Long Term Liabilities
Long-term operating lease liabilities		-		7,371			-		7,371
Other liabilities		1,390		(729	)		31		692

The adoption of the new guidance is non-cash in nature and had

impact on net cash flows from operating, investing, or financing activities.

See Note L

for additional information regarding our lease arrangements and the Company's updated lease accounting policies.

23 .	New Accounting Standards Not Yet Adopted

June 2016,

the FASB issued new guidance on the measurement of credit losses, which significantly changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under the new standard, the Company will be required to use a current expected credit loss model (“CECL”) that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. In

November 2019,

the FASB deferred the effective date for smaller reporting companies for annual reporting periods beginning after

December 15, 2022.

This standard is required to take effect in Nathan’s

first

quarter (

June 2023)

of our fiscal year ending

March 31, 2024.

The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

January 2017,

the FASB issued an update to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the implied fair value of goodwill to measure the amount of impairment loss, if any, under the

second

step of the current goodwill impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value,

not

to exceed the carrying amount of the goodwill. The guidance is effective prospectively for public business entities for annual reporting periods beginning after

December 15, 2019.

This standard is required to take effect in Nathan’s

first

quarter (

June 2020)

of our fiscal year ending

March 28, 2021.

Nathan’s does

not

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

December 2019,

the FASB issued ASU

2019

12,

“

Income Taxes (Topic

740

): Simplifying the Accounting for Income Taxes

,” which is intended to simplify various aspects related to accounting for income taxes. ASU

2019

removes certain exceptions to the general principles in Topic

740

and also clarifies and amends existing guidance to improve consistent application. ASU

2019

is effective for fiscal years beginning after

December 15, 2020.

This standard is required to take effect in Nathan’s

first

quarter (

June 2021)

of our fiscal year ending

March 27, 2022.

The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures.

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 consolidated financial statements.