Revenues

Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channels and types of goods or services.



	Quarter Ended
	March 28, 2018		March 29, 2017 ⁽¹⁾
	(Dollars in thousands)
Company restaurant sales	$	101,193	$	93,779
Franchise and license revenue:
Royalties	25,165		24,544
Advertising revenue	19,310		—
Initial and other fees	1,417		484
Occupancy revenue	8,188		9,103
Franchise and license revenue	54,080		34,131
Total operating revenue	$	155,273	$	127,910


(1)	As disclosed in Note 2, prior period amounts have not been adjusted under the modified retrospective method of adoption of Topic 606.

Company Restaurant Revenue

Company restaurant revenue is recognized at the point in time when food and beverage products are sold at company restaurants. We present company restaurant sales net of sales-related taxes collected from customers and remitted to governmental taxing authorities. The adoption of Topic 606 did not impact the recognition of company restaurant sales.

Franchise Revenue

Franchise and license revenues consist primarily of royalties, advertising revenue, initial and other fees and occupancy revenue.

Our performance obligations under franchise agreements consist of a license of our brand’s symbolic intellectual property, administration of advertising programs (including local co-operatives), and other ongoing support services. These performance obligations are highly interrelated so we do not consider them to be individually distinct, and therefore account for them under Topic 606 as a single performance obligation. Revenue from franchise agreements is recognized evenly over the term of the agreement with the exception of sales-based royalties and revenue allocated to goods and services distinct from the franchise right.

Royalty and advertising revenues represent sales-based royalties that are recognized in the period in which the sales occur. Sales-based royalties are variable consideration related to our performance obligations to our franchisees to maintain the intellectual property being licensed. Under our franchise agreements, franchisee advertising contributions must be spent on marketing and related activities. The adoption of Topic 606 did not impact the recognition of royalties. Upon adoption of Topic 606, advertising revenues and expenditures are recorded on a gross basis within the Consolidated Statements of Income. Under the previous guidance of Topic 605, we recorded franchise advertising expense net of contributions from franchisees to our advertising programs, including local co-operatives. While this change materially impacts the gross amount of reported franchise and license revenue and costs of franchise and license revenue, the impact is generally an offsetting increase to both revenue and expense with little, if any, impact on operating income and net income.

Initial and other fees consist of initial, successor and assignment franchise fees (“initial franchise fees”), training fees and other franchise services fees. Initial franchise fees are billed and received upon the signing of the franchise agreement. Under Topic 606, recognition of these fees is deferred until the commencement date of the agreement and occurs over time based on the term of the underlying franchise agreement. In the event a franchise agreement is terminated, any remaining deferred fees are recognized in the period of termination. Under the previous guidance, initial franchise fees were recognized upon the opening of a franchise restaurant. Training and other franchise services fees are billed and recognized at a point in time as services are rendered. Similar to advertising revenue, upon adoption of Topic 606, other franchise services fees are recorded on a gross basis within the Consolidated Statements of Income, whereas, under previous guidance, they were netted against the related expenses.

Occupancy revenue results from leasing or subleasing restaurants to franchisees and is recognized over the term of the lease agreement.

With the exception of initial and other franchise fees, revenues are typically billed and collected on a weekly basis.

Gift Card Breakage

Under previous guidance, we recorded gift card breakage when the likelihood of redemption was remote. Breakage was recorded as a benefit to our advertising fund or reduction to other operating expenses, depending on where the gift cards were sold. Upon adoption of Topic 606, gift card breakage is recognized proportionally as redemptions occur. Our gift card breakage primarily relates to cards sold by third parties. Breakage revenue related to third party sales is recorded as advertising revenue (included as a component of franchise and license revenue) with an offsetting amount recorded as advertising expense (included as a component of costs of franchise and license revenue).

Financial Statement Impact of Adoption

The following tables summarize the impact of adopting Topic 606 on our financial statement line items as of March 28, 2018 and for the quarter ended March 28, 2018.



	March 28, 2018
Consolidated Balance Sheet	As Reported			Adjustments			Balances without adoption of Topic 606
	(In thousands)
Prepaid and other current assets	$	9,048		$	509		$	9,557
Deferred income taxes	22,294			(5,282		)	17,012
Other current liabilities	51,707			(1,158		)	50,549
Other noncurrent liabilities	51,561			(18,624		)	32,937
Deficit	(340,348		)	15,009			(325,339		)



	Quarter ended March 28, 2018
Consolidated Statement of Income	As Reported		Adjustments			Balances without adoption of Topic 606
	(In thousands, except per share amounts)
Franchise and license revenue	$	54,080	$	(20,307	)	$	33,773
Costs of franchise and license revenue	28,556		(19,764		)	8,792
Provision for income taxes	1,829		(140		)	1,689
Net income	9,759		(403		)	9,356
Basic net income per share	$	0.15	$	(0.01	)	$	0.14
Diluted net income per share	$	0.15	$	(0.01	)	$	0.14



	Quarter ended March 28, 2018
Consolidated Statement of Comprehensive Income	As Reported		Adjustments			Balances without adoption of Topic 606
	(In thousands)
Net income	$	9,759	$	(403	)	$	9,356
Total comprehensive income	6,668		(403		)	6,265



	Quarter ended March 28, 2018
Consolidated Statement of Cash Flow	As Reported			Adjustments			Balances without adoption of Topic 606
	(In thousands)
Net income	$	9,759		$	(403	)	$	9,356
Deferred income tax expense	1,118			(140		)	978
Changes in assets and liabilities:
Other current assets	2,739			(509		)	2,230
Other accrued liabilities	(5,948		)	923			(5,025		)
Other noncurrent liabilities	(413		)	129			(284		)
Net cash flows provided by operating activities	3,450			—			3,450

The following significant changes impacted our financial statement line items as of March 28, 2018 and for the quarter ended March 28, 2018:

•

Upon adoption of Topic 606, we recorded a cumulative effect adjustment related to previously recognized initial franchise fees resulting in a $21.0 million increase to deferred franchise revenue, a $15.6 million increase to opening deficit and a $5.4 million increase to deferred tax assets. The deferred franchise revenue resulting from the cumulative effect adjustment will be amortized over the remaining lives of the individual franchise agreements. Also upon adoption, we recorded a cumulative effect adjustment to recognize breakage in proportion to redemptions that occurred prior to December 28, 2017 resulting in a decrease of $0.6 million to gift card liability (a component of other current liabilities), a $0.5 million increase to accrued advertising (a component of other current liabilities) and a $0.1 million decrease to opening deficit.


•	We recognized $19.2 million of franchise and license revenue and $19.2 million of costs of franchise and license revenue resulting from the recording of advertising revenues and expenditures on a gross basis under Topic 606 versus recording these amounts on a net basis under Topic 605.


•	We recognized an additional $0.5 million of franchise and license revenue under Topic 606 than we would have recognized under Topic 605, resulting from the timing of recognition of initial franchise fees.


•	We recognized $0.5 million of franchise and license revenue and $0.5 million of costs of franchise and license revenue resulting from the recording of other franchise services fees on a gross basis under Topic 606 versus recording these amount on a net basis under Topic 605.

Contract Balances

Contract balances related to contracts with customers consists of receivables, deferred franchise revenue and deferred gift card revenue. See note 4 for details on our receivables.

Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that will begin amortizing into revenue when the related restaurants are opened. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sale-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:



	(In thousands)
Balance, December 27, 2017	$	1,643
Cumulative effect adjustment recognized upon adoption of Topic 606	20,976
Fees received from franchisees	239
Revenue recognized ⁽¹⁾	(930		)
Balance, March 28, 2018	21,928
Less current portion included in other current liabilities	3,303
Deferred franchise revenue included in other noncurrent liabilities	$	18,625

(1) Of this amount $0.9 million was included in either the deferred franchise revenue balance as of December 27, 2017 or the cumulative effect adjustment.

As of March 28, 2018, the deferred franchise revenue expected to be recognized for each of the next five years and in the aggregate is as follows:



	(In thousands)
Remainder of 2018	$	1,646
2019	2,105
2020	1,981
2021	1,769
2022	1,661
Thereafter	11,270
Development agreements and unopened restaurants	1,496
Deferred franchise revenue	$	21,928

Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. We recognize gift card revenue when a gift card is redeemed in one of our company restaurants. Gift card breakage is recognized proportionally as redemptions occur. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of March 28, 2018 and December 27, 2017 was $4.4 million and $6.5 million, respectively. During the quarter ended March 28, 2018, we recognized revenue of $0.7 million from gift card redemptions.