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				Three Quarters Ended
	September 26, 2018		September 27, 2017 ⁽¹⁾		September 26, 2018		September 27, 2017 ⁽¹⁾
	(Dollars in thousands)
Company restaurant sales	$	103,609	$	97,915	$	307,543	$	290,049
Franchise and license revenue:
Royalties	25,518		25,174		75,875		75,056
Advertising revenue	19,546		—		58,386		—
Initial and other fees	1,415		507		4,642		1,579
Occupancy revenue	7,935		8,788		24,184		26,986
Franchise and license revenue	54,414		34,469		163,087		103,621
Total operating revenue	$	158,023	$	132,384	$	470,630	$	393,670


(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.

Under franchise agreements we provide franchisees with a license of our brand’s symbolic intellectual property, administration of advertising programs (including local co-operatives), and other ongoing support functions. These services are highly interrelated so we do not consider them to be individually distinct performance obligations, 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.

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 obligation 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”). 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.

Initial and other fees also includes revenue that are distinct from the franchise agreement and are separate performance obligations. 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).

Financial Statement Impact of Adoption

The following tables summarize the impact of adopting Topic 606 on our financial statement line items as of September 26, 2018 and for the quarter and three quarters ended September 26, 2018.



	Quarter ended September 26, 2018
Consolidated Balance Sheet	As Reported			Adjustments			Amounts without adoption of Topic 606
	(In thousands)
Prepaid and other current assets	$	10,495		$	509		$	11,004
Deferred income taxes	15,595			(5,040		)	10,555
Other current liabilities	53,911			(360		)	53,551
Other noncurrent liabilities	43,888			(18,618		)	25,270
Deficit	(317,917		)	14,447			(303,470		)



	Quarter ended September 26, 2018							Three quarters ended September 26, 2018
Consolidated Statement of Income	As Reported		Adjustments			Amounts without adoption of Topic 606		As Reported		Adjustments			Amounts without adoption of Topic 606
	(In thousands, except per share amounts)
Franchise and license revenue	$	54,414	$	(20,397	)	$	34,017	$	163,087	$	(61,653	)	$	101,434
Costs of franchise and license revenue	28,174		(20,007		)	8,167		85,779		(60,306		)	25,473
Provision for income taxes	2,810		(101		)	2,709		7,217		(348		)	6,869
Net income	10,805		(289		)	10,516		32,190		(999		)	31,191
Basic net income per share	$	0.17	$	—		$	0.17	$	0.50	$	(0.01	)	$	0.49
Diluted net income per share	$	0.16	$	—		$	0.16	$	0.49	$	(0.02	)	$	0.47



	Quarter ended September 26, 2018							Three quarters ended September 26, 2018
Consolidated Statement of Comprehensive Income	As Reported		Adjustments			Amounts without adoption of Topic 606		As Reported		Adjustments			Amounts without adoption of Topic 606
	(In thousands)
Net income	$	10,805	$	(289	)	$	10,516	$	32,190	$	(999	)	$	31,191
Total comprehensive income	15,363		(289		)	15,074		37,047		(999		)	36,048



	Three quarters ended September 26, 2018
Consolidated Statement of Cash Flow	As Reported			Adjustments			Amounts without adoption of Topic 606
	(In thousands)
Net income	$	32,190		$	(999	)	$	31,191
Deferred income tax expense	5,044			(348		)	4,696
Changes in assets and liabilities:
Other current assets	1,292			(509		)	783
Other accrued liabilities	(7,733		)	621			(7,112		)
Other noncurrent liabilities	(2,339		)	1,235			(1,104		)
Net cash flows provided by operating activities	46,259			—			46,259

The following significant changes impacted our financial statement line items as of September 26, 2018 and for the quarter and three quarters ended September 26, 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 franchise and license revenue and costs of franchise and license revenue of $19.5 million for the quarter and $58.4 million year-to-date 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 additional franchise and license revenue of $0.4 million for the quarter and $1.4 million year-to-date under Topic 606 than we would have recognized under Topic 605, resulting from the timing of recognition of initial franchise fees.


•	We recognized franchise and license revenue and costs of franchise and license revenue of $0.5 million for the quarter and $1.9 million year-to-date 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 sales-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	795
Revenue recognized ⁽¹⁾	(2,628		)
Balance, September 26, 2018	20,786
Less current portion included in other current liabilities	2,168
Deferred franchise revenue included in other noncurrent liabilities	$	18,618

(1) Of this amount $2.6 million was included in either the deferred franchise revenue balance as of December 27, 2017 or the cumulative effect adjustment.

As of September 26, 2018, the deferred franchise revenue expected to be recognized in the future is as follows:



	(In thousands)
Remainder of 2018	$	546
2019	2,114
2020	1,967
2021	1,783
2022	1,675
Thereafter	12,701
Deferred franchise revenue	$	20,786

Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. We recognize 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 September 26, 2018 and December 27, 2017 was $4.1 million and $6.5 million, respectively. During the three quarters ended September 26, 2018, we recognized revenue of $1.4 million from gift card redemptions at company restaurants.