NOTE B – ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

Revenue recognition

May 2014,

the Financial Accounting Standards Board (“FASB”) issued guidance codified in ASC

606

which amends the guidance in former ASC

605,

“Revenue Recognition.” The core principle of the standard is to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also requires additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

This adoption of the new standard did

not

impact the Company’s recognition of sales from Company-operated restaurants as those sales are recognized on a cash basis at the time of the underlying sale and are presented net of sales tax. The standard also did

not

impact the recognition of sales from its Branded Product Program or its recognition of royalty income earned from its franchised restaurants or retail licenses, which are based on a percent of sales and recognized at the time the underlying sales occur.

The details of the significant changes in revenue recognition and quantitative impact of the changes are discussed below.

Franchise fees and international development fees

Under previous revenue recognition guidance, franchise fees were recognized as income when substantially all services to be performed by Nathan’s and conditions relating to the sale of the franchise had been performed or satisfied, which generally occurred when the franchised restaurant commenced operations.

Under previous revenue recognition guidance, international development fees were recognized as income, net of direct expenses, upon the opening of the

first

restaurant within the territory.

Under the new guidance, the standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. The services that we provide related to upfront fees we receive from franchisees do

not

contain separate and distinct performance obligations from the franchise right and as of

March 26, 2018,

initial restaurant franchise fees, renewal fees, transfer fees, and international development fees shall be recognized over the term of the respective agreement.

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-operated and franchised restaurants. Previously, the revenue, expenses and cash flows of the Advertising Fund were reported on the Company’s Consolidated Balance Sheets and

not

included in the Company’s Consolidated Statements of Earnings and Statements of Cash Flows because the contributions to the Advertising Fund were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance.

Under the new guidance, which supersedes the previous industry-specific guidance, 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 will impact the gross amount of reported advertising fund revenue and related expenses, the impact is expected to be an offsetting increase to both revenue and expense with

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.

The Company applied the new guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of accumulated deficit at

March 26, 2018

in the amount of

$2,004,000,

net of tax. Therefore, the results of operations from the comparative period have

not

been adjusted and continue to be reported under the previous revenue recognition guidance.

Impacts on

Consolidated Financial S

tatements

The following tables summarize the impact of adopting ASC

606

on the Company’s condensed consolidated financial statements as of and for the

thirteen

and

twenty-six

weeks ended

September 23, 2018 (

in thousands):

				Adjustments
	As Reported			Franchise Fees			Balance Sheet Reclassi fications			Balances Without Adoption
Condensed Consolidated Balance Sheet
September 23, 2018
Deferred income taxes		406			(731	)		325			-
Total assets		86,381			(731	)		325			85,975
Accrued expenses and other current liabilities		11,040			(112	)		-			10,928
Deferred franchise fees		559			(378	)		14			195
Total current liabilities		16,253			(490	)		14			15,777
Deferred income taxes		-			-			325			325
Deferred franchise fees		3,044			(2,219	)		(14	)		811
Total liabilities		165,704			(2,709	)		325			163,320
(Accumulated deficit)		(63,000	)		1,978			-			(61,022	)
Stockholders’ (deficit) before treasury stock		(2,020	)		1,978			-			(42	)
Total stockholders’ (deficit)		(79,323	)		1,978			-			(77,345	)
Total liabilities and stockholders’ (deficit)		86,381			(731	)		325			85,975

			Adjustments
	As Reported		Franchise Fees			Balance Sheet Reclassifications			Balances Without Adoption
Condensed Consolidated Statement of Earnings
Thirteen weeks ended September 23, 2018
Franchise fees and royalties		1,239		(66	)		-			1,173
Advertising fund revenue		772		-			(772	)		-
Total revenues		29,330		(66	)		(772	)		28,492
General and administrative expenses		3,438		(2	)		-			3,436
Advertising fund expense		772		-			(772	)		-
Total costs and expenses		20,850		(2	)		(772	)		20,076
Income from operations		8,480		(64	)		-			8,416
Income before provision for income taxes		6,463		(64	)		-			6,399
Provision for income taxes		1,979		(20	)		-			1,959
Net income		4,484		(44	)		-			4,440

Condensed Consolidated Statement of Earnings
Twenty-six weeks ended September 23, 2018
Franchise fees and royalties		2,343		(138	)		-			2,205
Advertising fund revenue		1,267		-			(1,267	)		-
Total revenues		59,498		(138	)		(1,267	)		58,093
General and administrative expenses		7,323		(98	)		-			7,225
Advertising fund expense		1,267		-			(1,267	)		-
Total costs and expenses		41,931		(98	)		(1,267	)		40,566
Income from operations		17,567		(40	)		-			17,527
Income before provision for income taxes		12,982		(40	)		-			12,942
Provision for income taxes		3,703		(14	)		-			3,689
Net income		9,279		(26	)		-			9,253

				Adjustments
	As Reported			Franchise Fees			Advertising Fund		Balances Without Adoption
Condensed Consolidated Statement of Cash Flows
Twenty-six weeks ended September 23, 2018
Cash flows from operating activities:
Net income		9,279			(26	)		-		9,253
Changes in operating assets and liabilities:
Accounts payable, accrued expenses and other current liabilities		(2,015	)		(112	)		-		(2,127	)
Deferred franchise fees		437			138			-		575
Net cash provided by operating activities		10,003			-			-		10,003
Net cash provided by investing activities		1,096			-			-		1,096
Net cash (used in) financing activities		(2,284	)		-			-		(2,284	)
Net increase in cash		8,815			-			-		8,815

Contract balances

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

	September 2 3 , 2018
Receivables (a)	$	480
Deferred franchise fees (b)	$	3,183

(a)	Receivables of $40 and $440 are included in Accounts and other receivables, net and Long term contractual accounts receivable, respectively.
(b)	Deferred franchise fees of $364 and $2,819 are included in Deferred franchise fees – current and long term, respectively.

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

	T wenty-six Weeks Ended
	September 23 , 2018
Deferred franchise fees at beginning of period (a)	$	3,139
Additions to deferred revenue		706
Revenue recognized during the period		(242	)
Deferred franchise fees at end of period	$	3,603

(a) Includes the cumulative effect of adopting ASC

606

$2,735.

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
2019 (a)	$	163
2020		337
2021		329
2022		318
2023		282
Thereafter		2,174
Total	$	3,603

(a) Represents franchise fees expected to be recognized for the remainder of the

2019

fiscal year, which includes international development fees expected to be recognized over the duration of

one

year or less. Amount does

not

include

$242

of franchise fee revenue recognized for the

twenty-six

weeks ended

September 23, 2018.

We have applied the optional exemption, as provided for under ASC

606,

which allows us

not

to disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.