What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-16 compared with 2021-02-18 · 67 added, 113 removed, 225 unchanged (44% of the section changed)

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We generate revenues by charging royalties, advertising fees and franchise fees to our franchisees and by operating a number of our own restaurants.

Historically, the Company had two reporting segments:

franchise operations and company restaurant operations.

In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments.

The management approach is based upon the way management reviews performance and allocates resources.

During the second fiscal quarter of 2020, the Company reevaluated its operating segments and determined it has one operating segment and one reporting segment due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources.

We plan to grow our business by opening new franchised restaurants and increasing our same store sales, while leveraging our franchise model to create shareholder value.

Domestic same store sales have increased for 18 consecutive years beginning in 2004, which includes 5-year cumulative domestic same stores sales growth of 49.6% since the beginning of fiscal year 2017.

We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating shareholder value through strong and consistent free cash flow and capital-efficient growth.

Change in Presentation

Beginning in the first quarter of 2021, headcount related expenses that support our national advertising fund are presented within “Advertising expenses” on the Consolidated Statements of Comprehensive Income.

Prior to the first quarter of 2021, these expenses were presented within “Selling, general and administrative.” Prior period amounts have been reclassified to conform to the current presentation.

This reclassification had no impact on operating income, balance sheets or statements of cash flows.

Impact of COVID-19

In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing.

This pandemic led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world.

As of March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only.

Several of our international franchisees also closed their dining rooms as a result of the outbreak.

Our domestic business was well-positioned for the transition to largely off-premise dining that has resulted from the outbreak.

As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we experienced an increase in domestic same store sales growth through the end of the fourth quarter of 2020.

Our international markets, which have historically had a higher mix of dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and, in some cases, temporary restaurant closures.

The COVID-19 pandemic has continued to have varying degrees of disruption on our business.

Throughout the pandemic, substantially all of our domestic restaurants have remained open, with the majority of our dining rooms closed and locations operating in an off-premise capacity, leveraging our carryout and delivery capabilities.

Our carryout and delivery capabilities have positioned us to continue our strong domestic same store sales growth through the end of the fourth quarter of 2021;

however, our business has been challenged by COVID-19-related labor availability and wage inflation, and while we have not had significant disruptions in our supply chain, we have experienced higher product costs and inflationary pressures.

While we do not know the future impact COVID-19 will have on our business, we expect labor and supply chain challenges and inflation to continue into at least fiscal year 2022.

Highlights for Fiscal Year 2021:

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• Domestic same store sales increased 8.0% over the prior fiscal year;

• Two-year domestic same store sales increased 29.4%

• Company-owned restaurant same store sales increased 3.4% over the prior fiscal year;

• Digital sales increased to 62.5% over the prior fiscal year;

• Domestic restaurant AUV increased to approximately $1.5 million;

• Digital sales continue to exceed 60%;

• Domestic AUV increased to approximately $1.6 million;

• System-wide sales increased 20.2% over the prior fiscal year to approximately $2.3 billion;

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• Net income increased 83.0% over the prior fiscal year to $42.7 million, or $1.42 per diluted share, compared to $23.3 million, or $0.78 per diluted share in the prior fiscal year;

Adjusted net income and adjusted earnings per diluted share

increased 49.7% over the prior fiscal year to $32.5 million, or $1.09 per diluted share, compared to $21.7 million and $0.73 per diluted share in the prior fiscal year.

• Adjusted EBITDA increased 23.0% over the prior fiscal year to $88.4 million.

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This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and closures.

We review same store sales for

domestic company-owned restaurants as well as system-wide domestic restaurants.

We review same store sales for domestic company-owned restaurants as well as system-wide domestic restaurants.

Domestic same store sales growth is driven by increases in transactions and average transaction size.

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We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization.

We define Adjusted EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense.

Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation.

We define Adjusted EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization, further adjusted for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense.

For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.

Adjusted Net Income and Adjusted Earnings Per Diluted Share.

We define Adjusted net income as net income adjusted for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and related tax adjustments that management believes are not indicative of the Company’s core operating results or business outlook over the long-term.

We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count.

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$ 2,344,728 $ 1,950,570

Domestic restaurant AUV $ 1,489 $ 1,246

Domestic AUV $ 1,592 $ 1,489

Domestic same store sales growth 8.0 % 21.4 %

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Gain on disposal of assets, net (b)

(3,497) (3,093)

Consulting fees (c)

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(a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend;

all transaction costs are included in Loss on debt extinguishment and refinancing transactions on the Consolidated Statements of Operations, with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations.

(b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees, which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations.

(c) Represents costs and expenses related to consulting projects to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations.

all transaction costs are included in Loss on debt extinguishment and refinancing transactions on the Consolidated Statements of Comprehensive Income, with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to consulting projects to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Includes non-cash, stock-based compensation.

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Gain on disposal of assets, net (b)

(3,497) (3,093)

Consulting fees (c)

Tax effect of adjustments (d)

(2,887) (390)

Adjusted net income $ 40,323 $ 32,500

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(a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend;

all transaction costs are included in Loss on debt extinguishment and refinancing transactions with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations.

(b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations.

all transaction costs are included in Loss on debt extinguishment and refinancing transactions with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the periods ended December 25, 2021 and December 26, 2020, which includes provisions for U.S.

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Year ended December 25, 2021 compared to year ended December 26, 2020

The following table sets forth the Consolidated Statements of Operations for fiscal year 2020 and fiscal year 2019 (in thousands, except for percentages):

The following table sets forth certain income and expense items included in the Consolidated Statements of Comprehensive Income for fiscal year 2021 and fiscal year 2020 (in thousands, except for percentages):

Year ended Increase / (Decrease)

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Depreciation and amortization 7,943 7,518 425 5.7 %

Gain on sale of restaurants and other expenses, net (3,093) — (3,093) N/A

Gain on sale of restaurants and other expenses, net (3,497) (3,093) (404) 13.1 %

Total costs and expenses 208,746 191,421 17,325 9.1 %

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Interest expense, net 14,984 16,782 (1,798) (10.7) %

Loss on debt extinguishment and refinancing transactions 13,665 — 13,665 N/A

Loss on debt extinguishment and refinancing transactions — 13,665 (13,665) (100.0) %

Other income (135) — (135) (100.0) %

Income before income tax expense 58,907 26,943 31,964 118.6 %

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Total Revenue.

Total revenue consists of the collection of development fees, franchise fees, royalties, and other fees associated with franchise and development rights, contributions to the Ad Fund, and sales of wings and other food and beverage products by our company-owned restaurants.

Total revenue was $248.8 million in fiscal year 2020, an increase of $49.1 million, or 24.6%, compared to $199.7 million in the prior fiscal year.

These changes in revenues are more fully described below.

Royalty revenue, franchise fees and other.

Royalty revenue and franchise fees were $108.9 million in fiscal year 2020, an increase of $20.6 million, or 23.3%, compared to $88.3 million in the prior fiscal year.

Royalty revenue increased by $23.4 million primarily due to 152 net franchise restaurant openings since December 28, 2019 as well as domestic same store sales growth of 21.4%.

Other revenue decreased $2.4 million primarily due to contributions received for our franchisee convention that occurred in the fourth quarter of 2019.

Advertising fees.

Ad Fund contributions are earned from domestic franchisees based on a percentage of gross sales net of discounts.

Ad Fund contributions were equal to 4% in fiscal years 2019 and 2020.

Advertising fees were $74.9 million in fiscal year 2020, an increase of $19.0 million, or 34.0%, compared to $55.9 million in the comparable period in 2019.

Advertising fees increased primarily due to the increase in domestic system-wide sales in fiscal year 2020 compared to the prior fiscal year.

Company-owned restaurant sales.

Company-owned restaurant sales were $65.0 million in fiscal year 2020, an increase of $9.5 million, or 17.2%, compared to $55.5 million in the prior fiscal year.

The increase was primarily due to an increase in company-owned same store sales of 14.2%, which was driven by both an increase in transaction size and transactions, as well as an

increase in the number of company-owned restaurants.

Since the beginning of the prior fiscal year period, we acquired seven company-owned restaurants from franchisees, opened three new company-owned restaurants, and refranchised seven company-owned restaurants to franchisees.

During fiscal year 2021, total revenue was $282.5 million, an increase of $33.7 million, or 13.5%, compared to $248.8 million in the prior fiscal year.

Royalty revenue, franchise fees and other increased $21.8 million primarily due to domestic same store sales growth of 8.0% as well as 189 net franchise restaurant openings since December 26, 2020.

Advertising fees increased $6.6 million primarily due to the 20.2% increase in system-wide sales during fiscal year 2021.

This was partially offset by a $6.9 million rebate of advertising surplus that was returned to franchisees during the third quarter of 2021 in an effort to mitigate record high wing price inflation.

Company-owned restaurant sales increased $5.3 million primarily due to the opening of seven new company-owned restaurants since the prior year comparable period, resulting in additional sales of $2.7 million.

Also contributing to the increase was company-owned same store sales growth of 3.4%, which was driven by an increase in average ticket.

Cost of sales.

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Vendor rebates (1,559) (2.2) % (1,342) (2.1) %

Cost of sales (excluding pre-opening expenses) 56,932 81.0 % 48,568 74.7 %

Pre-opening expenses 484 0.7 % 15 — %

Total cost of sales $ 57,416 81.7 % $ 48,583 74.7 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 44.8% in fiscal year 2021 compared to 35.9% in the prior fiscal year.

The decrease is primarily due to a 3.3% decrease in the cost of bone-in chicken wings compared to the prior fiscal year.

The increase is primarily due to a 40.9% increase in the cost of bone-in chicken wings, representing record-high wing inflation as compared to the prior fiscal year.

Labor costs as a percentage of company-owned restaurant sales were 22.8% in fiscal year 2021 compared to 24.3% in the prior fiscal year.

The increase as a percentage of company-owned restaurant sales was primarily due to incentive pay provided to team members in response to the COVID-19 pandemic.

This increase was partially offset by the increase in company-owned domestic same store sales of 14.2%.

The decrease as a percentage of company-owned restaurant sales was primarily due to incentive pay provided to team members in response to the COVID-19 pandemic during the prior fiscal year, partially offset by a highly competitive labor market that resulted in increases in company-owned restaurant wages and hiring and training costs during the current fiscal year.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.6% in fiscal year 2021 compared to 16.6% in the prior fiscal year.

The decrease as a percentage of company-owned restaurant sales was due to sales leverage achieved as a result of the increase in company-owned same store sales of 14.2%.

This decrease was slightly offset by an increase in delivery fees payable to third-party delivery providers due to the growth in delivery mix as a percent of total sales during fiscal year 2020.

The decrease as a percentage of company-owned restaurant sales was primarily due to a decrease in delivery fees and other operating expenses.

Pre-opening expenses as a percentage of company-owned restaurant sales were 0.7% in fiscal year 2021 due to our investment in opening company-owned restaurants in Manhattan during the current fiscal year.

Advertising expenses.

Advertising expenses were $69.4 million in fiscal year 2020, an increase of $16.5 million, or 31.3%, compared to $52.9 million in the prior fiscal year, primarily due to domestic system-wide sales growth.

Advertising expenses were $84.0 million in fiscal year 2021 compared to $77.3 million in the prior fiscal year.

Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative ("SG&A").

SG&A expense was $69.0 million in fiscal year 2020, an increase of $11.7 million, or 20.4%, compared to $57.3 million in the prior fiscal year.

The increase in SG&A expense was primarily due to approximately $5.5 million in higher variable performance-based compensation expense, inclusive of stock-based compensation expense, and $1.9 million in headcount-related expenses to support the growth in our business, and an increase of $1.4 million associated with additional expenses to support our national advertising campaign, which has an equal and offsetting contribution in revenue.

We also incurred expenses of $2.8 million related to COVID-19 and support provided to international franchisees, $1.4 million in consulting fees related to support for strategic initiatives, and a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need.

These increases were slightly offset by a $2.1 million decrease in travel expenses, as well as a $1.8 million decrease in convention expenses related to the franchisee convention that occurred in the fourth quarter of 2019.

SG&A was $62.9 million in fiscal year 2021, an increase of $1.8 million, or 3.0%, compared to $61.1 million in the prior fiscal year.

The increase in SG&A was primarily due to an increase of $2.9 million in headcount-related expenses to support the growth in our business, inclusive of stock-based compensation expense, an increase of $1.4 million in travel expense, and an increase of $0.9 million in technology expenses.

These increases were partially offset by a decrease of $2.5 million related to COVID-19 and support provided to international franchisees in the prior year period, as well as $0.9 million related to strategic investments made in the prior year period.

Depreciation and amortization.

Depreciation and amortization was $7.9 million in fiscal year 2021, an increase of $0.4 million, or 5.7%, compared to $7.5 million in the prior fiscal year.

The increase in depreciation and amortization expense was primarily due to accelerated depreciation on certain assets.

Gain on sale of restaurants and other expense, net.

Gain on sale of restaurants and other expense, net increased primarily due to the gain recognized due to the sale of seven company-owned restaurants to franchisees.

Interest expense, net.

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Loss on debt extinguishment and refinancing transactions.

Loss on debt extinguishment and refinancing transactions was $13.7 million due to costs and fees associated with the refinancing of our securitized financing facility on October 30, 2020.

Loss on debt extinguishment and refinancing transactions was $13.7 million during fiscal year 2020 due to costs and fees associated with the refinancing of our securitized financing facility on October 30, 2020.

Income tax expense.

Income tax expense was $16.2 million in fiscal year 2021, yielding an effective tax rate of 27.6%, compared to an effective tax rate of 13.5% in the prior fiscal year.

The decrease in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options exercised during fiscal year 2020.

The increase in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options exercised during fiscal year 2020.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and proceeds from the incurrence of debt.

Our primary requirements for liquidity and capital are working capital and general corporate needs.

Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and borrowings available under our securitized financing facility.

Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, and dividend payments.

Historically, we have operated with minimal positive working capital or with negative working capital.

We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and utilize a portion of borrowings to return capital to our stockholders.

We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months.

We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, and pay dividends.

Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our Variable Funding Notes.

As of December 25, 2021, the Company had $54.9 million of cash and restricted cash on its balance sheet and $46.5 million of borrowing availability under its Variable Funding Notes.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our Variable Funding Notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.

The following table shows summary cash flows information for the fiscal years 2021 and 2020 (in thousands):

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Financing activities (23,389) (19,448)

Net change in cash and cash equivalents $ 38,095 $ 235

Net change in cash, cash equivalents and restricted cash $ (4,364) $ 38,095

Operating activities .

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Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flows from operating activities.

Net cash provided by operating activities was $65.5 million in fiscal year 2020, an increase of $26.9 million from cash provided by operating activities of $38.6 million in the prior fiscal year.

The increase is primarily due to the timing of changes in working capital as well as an increase in royalties and advertising fees due to the increase in system-wide sales.

Net cash provided by operating activities was $48.9 million in fiscal year 2021, a decrease of $16.7 million from cash provided by operating activities of $65.5 million in the prior fiscal year.

The decrease is primarily due to changes in Ad Fund cash and cash equivalents, directly related to the timing of payments for expenses incurred for national advertising, which is offset by an increase in operating income.

Investing activities .

Our net cash used in investing activities was $8.0 million in fiscal year 2020, a decrease of $15.7 million, from $23.7 million in fiscal year 2019.

The decrease in cash used in investing activities was primarily due to the purchase of a new corporate headquarters building for $18.3 million during fiscal year 2019.

Our net cash used in investing activities was $29.9 million in fiscal year 2021, an increase of $21.9 million, from $8.0 million in fiscal year 2020.

The increase in cash used in investing activities was primarily due to an increase in capital expenditures related to our investments in technology and the remodel of our corporate headquarters building, as well as a payment of $4.2 million related to a foreign investment (see Note 10 in the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report).

Financing activities .

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On February 15, 2022, the Company’s board of directors approved a dividend of $0.17 per share, to be paid on March 25, 2022 to stockholders of record as of March 11, 2022, totaling approximately $5.1 million.

Separate from our regular dividend program, in December 2020, we paid a special cash dividend of $5.00 per share in connection with the refinancing of our existing securitized financing facility in October of 2020.

We do not currently expect the restrictions in our debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program.

However, any future declarations of dividends, as well as the amount and timing of such dividends, is subject to capital availability and the discretion of our board of directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.

Impact of Inflation

Historically, inflation has not had a material effect on our results of operations.

However, increases in food and beverage, labor and energy costs, as well as the costs and materials used in the construction of new restaurants could affect our results.

Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits.

Significant numbers of our and our franchisees’ restaurant personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our and our franchisees’ labor costs.

In addition, severe increases in inflation could affect the global and U.S.

economies and could have an adverse impact on our business, financial condition, and results of operations.

Further discussion on the impact of commodities and other cost pressures is included above as well as in “ Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments as of December 26, 2020 (in thousands):

Payments due by period

Fiscal year 2021 Fiscal years 2022-2023 Fiscal years 2024-2025 Thereafter

2020 Notes $ 3,600 $ 9,600 $ 9,600 $ 457,200

Operating leases (a)

2,614 3,636 1,633 594

Interest payments 15,060 27,054 13,323 25,963

Total $ 21,274 $ 40,290 $ 24,556 $ 483,757

Includes base lease terms and certain optional renewal periods that are included in the lease term in accordance with accounting guidance related to leases.

Our cash requirements greater than twelve months from contractual obligations and commitments include:

Debt Obligations and Interest Payments.

Refer to Note 11, Debt Obligations, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Operating Leases.

Refer to Note 12, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Indemnifications.

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We believe the probability of incurring an actual liability under such indemnifications is sufficiently remote so that no liability has been recorded.

Off-Balance Sheet Arrangements

The Company is required to provide standby letters of credit related to our securitized financing facility.

Although the letters of credit are off-balance sheet, the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet.

Outstanding letters of credit totaled $4.9 million at December 26, 2020.

We do not believe that these arrangements have or are likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP.

Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,

revenues and expenses.

These estimates and assumptions are affected by the application of our accounting policies.

Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

These estimates require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.

While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions.

It is possible that materially different amounts would be reported using different assumptions.

Our critical accounting policies and estimates are more fully described in Note 1 to our consolidated financial statements.

Our critical accounting policies and estimates are more fully described in Note 1 to the Consolidated Financial Statements.

However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations.

Revenue Recognition

Revenue from contracts with customers consists primarily of royalties, Ad Fund contributions, initial and renewal franchise fees and upfront fees from development agreements and international territory agreements.

Our performance obligations under franchise agreements consist of (a) a franchise license, (b) pre-opening services, such as training, and (c) ongoing services, such as management of the Ad Fund, development of training materials and menu items and restaurant monitoring.

These performance obligations are highly interrelated, so we do not consider them to be individually distinct and therefore account for them as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the term of each franchise agreement.

Royalties, including franchisee contributions to the Ad Fund, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement.

Initial and renewal franchise fees are payable by the franchisee prior to the restaurant opening or at the time of a renewal of an existing franchise agreement.

Our franchise agreement royalties, inclusive of Ad Fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.

Additionally, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement.

Our performance obligation under development agreements and international territory agreements generally consists of an obligation to grant exclusive development rights over a stated term.

These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for development rights are deferred and apportioned to each franchise restaurant opened by the franchisee.

The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.

The recognition of this revenue is dependent upon the franchise restaurant sales reported by the franchisee through the point of sale system and can require us to make estimates and assumptions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis