REVENUE FROM CONTRACTS WITH CUSTOMERS

Adoption of Topic 606, “Revenue from Contracts with Customers”

On December 28, 2017, the Company adopted Topic 606 using the modified retrospective method applied to those contracts, which were not fully satisfied as of December 28, 2017. Results for reporting periods beginning after December 28, 2017, are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The cumulative catch-up adjustment recorded to accumulated deficit was approximately $3.5 million, net of taxes, related to franchise and development fees.

Revenue Recognition

Nature of products and services

The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue.

Company-operated restaurant revenue

Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.

The Company offers a loyalty rewards program, which awards a customer one point for every $1 spent. When 100 points are accumulated a $10 reward to be used on future purchases is earned. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a $10 reward and redeemed, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point's terms. As of June 26, 2019 and December 26, 2018, the revenue allocated to loyalty points that have not been redeemed are $1.3 million and $1.0 million, respectively, which are reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

The Company sells gift cards to its customers in the restaurants and through selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of gift cards due to the immateriality of the amount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer.

Franchise and franchise advertising revenue

Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of the following performance obligations:


•	Franchise License - inclusive of advertising services, development agreements, training, access to plans and help desk services.


•	Discounted renewal option.


•	Hardware services.

The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years. Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee. The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.

The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.

In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocated a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20 year renewal. This performance obligation is satisfied over the renewal term, typically 10 or 20 years, while payment is fixed and due at the time the renewal is signed.

The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the Franchisee. As of June 26, 2019, there were no performance obligations, related to hardware services that were unsatisfied or partially satisfied.

Disaggregated revenue

The following table presents our revenues disaggregated by revenue source and market (in thousands):



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 26, 2019		June 27, 2018		June 26, 2019		June 27, 2018
Core Market⁽¹⁾:
Company-operated restaurant revenue	$	88,808	$	86,842	$	174,114	$	169,804
Franchise revenue	4,174		3,609		7,673		6,985
Franchise advertising fee revenue	2,806		2,769		5,523		5,378
Total core market	$	95,788	$	93,220	$	187,310	$	182,167
Non-Core Market⁽²⁾:					—		—
Company-operated restaurant revenue	$	11,331	$	12,785	$	23,175	$	24,376
Franchise revenue	3,744		2,944		6,689		5,674
Franchise advertising fee revenue	2,877		2,684		5,543		5,172
Total non-core market	$	17,952	$	18,413	$	35,407	$	35,222
Total revenue	$	113,740	$	111,633	$	222,717	$	217,389

⁽¹⁾Core Market includes markets with existing company-operated restaurants at the Initial Public Offering (IPO) date.

⁽²⁾Non-Core Market includes markets entered into by the Company subsequent to the IPO date.

The following table presents our revenues disaggregated by geographic market:



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 26, 2019		June 27, 2018		June 26, 2019		June 27, 2018
Greater Los Angeles area market	69.3	%	68.5	%	69.3	%	68.8	%
Other markets	30.7	%	31.5	%	30.7	%	31.2	%
Total	100	%	100	%	100	%	100	%

Contract balances

The following table provides information about the change in the franchise contract liability balances during the twenty-six weeks ended June 26, 2019 and June 27, 2018 (in thousands):



December 26, 2018	$	5,593
Revenue recognized - beginning balance	(203		)
Additional contract liability	1,257
Revenue recognized - additional contract liability	(88		)
June 26, 2019	$	6,559



December 27, 2017	$	5,799
Revenue recognized - beginning balance	(174		)
Additional contract liability	141
Revenue recognized - additional contract liability	(4		)
June 27, 2018	$	5,762

The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or franchise renewal fees, are received from franchisees upon the execution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as the underlying performance obligation is satisfied, which is over the term of the agreement.

For the thirteen and twenty-six weeks ended June 26, 2019, there was an increase to the contract liability balance due to the Company's completion of the sale of four company-operated restaurants within the San Francisco area to an existing franchisee and seven company-operated restaurants in the Phoenix area to another existing franchisee. This resulted in an additional contract liability of $0.7 million, relating to allocation of the transaction price to various performance obligations under the contract of the sale.

The following table illustrates the estimated revenue to be recognized in the future related to performance obligations that are unsatisfied as of June 26, 2019:



Franchise revenues (in thousands):
2019	$	414
2020	701
2021	491
2022	411
2023	385
Thereafter	4,157
Total	$	6,559

Contract Costs

The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606.