Annual report pursuant to Section 13 and 15(d)

Note 3 - Revenue Disclosures

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Note 3 - Revenue Disclosures
12 Months Ended
Dec. 31, 2018
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]
Note
3:
Revenue Disclosures
 
Company-owned or Managed Clinics
 
The Company earns revenues from clinics that it owns and operates or manages throughout the United States.  In those states where the Company owns and operates the clinic, revenues are recognized when services are performed. The Company offers a variety of membership and wellness packages which feature discounted pricing as compared with its single-visit pricing.  Amounts collected in advance for membership and wellness packages are recorded as deferred revenue and recognized when the service is performed.  In other states where state law requires the chiropractic practice to be owned by a licensed chiropractor, the Company enters into a management agreement with the doctor’s PC.  Under the management agreement, the Company provides administrative and business management services to the doctor’s PC in return for a monthly management fee.  Due to certain implicit variable consideration in these management agreement contracts, and based on past practices between the parties, the Company determined that it cannot meet the probable threshold if it includes all of the variable consideration in the transaction price. Therefore, the Company recognizes revenue under these contracts only when it has a high degree of confidence that revenue will
not
be reversed in a subsequent reporting period.
 
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
 
The Company currently franchises its concept across
32
states. The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do
not
directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The intellectual property subject to the franchise license is symbolic intellectual property as it does
not
have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the franchise license is to provide the franchisee with access to the brand’s symbolic intellectual property over the term of the license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
 
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees; (b) continuing franchise fees (royalties); (c) advertising fees; and (d) software fees. Since the Company considers the licensing of the franchising right to be a single performance obligation,
no
allocation of the transaction price is required.
 
The Company recognizes the primary components of the transaction price as follows:
 
Franchise fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the execution of the franchise agreement. As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as a contract liability until recognized as revenue over time;
 
The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue are recognized when the franchisee's sales occur. Depending on timing within a fiscal period, the recognition of revenue results in either what is considered a contract asset (unbilled receivable) or, once billed, accounts receivable, on the balance sheet.
   
The Company is entitled to a software fee, which is charged monthly. The Company recognizes revenue related to software fees ratably on a straight-line basis over the term of the franchise agreement.
 
In determining the amount and timing of revenue from contracts with customers, the Company exercises significant judgment with respect to collectability of the amount; however, the timing of recognition does
not
require significant judgment as it is based on either the franchise term or the reported sales of the franchisee,
none
of which require estimation. The Company believes its franchising arrangements do
not
contain a significant financing component.
 
Prior to the adoption of ASC
606,
the Company generally recognized the entire franchise fee as revenue at the clinic opening date. The impact on the Company's previously reported financial statements of the change from that policy to the policy described above is presented in Note
1,
Nature of Operations and Summary of Significant Accounting Policies
.
 
Under ASC
606,
the Company recognizes advertising fees received under franchise agreements as advertising fund revenue. Under previously issued accounting guidance for franchisors, advertising revenue and expense were recognized in the same amount in each period. That guidance was superseded by ASC
606
such that advertising expense
may
now be different than the advertising revenue recognized as described above. The impact of these changes with respect to advertising fees and advertising expenses on the Company's previously reported financial statements was
not
material.
 
Regional Developer Fees
 
The Company currently utilizes regional developers to assist in the development of the brand across certain geographic territories. The arrangement is documented in the form of a regional developer agreement. The arrangement between the Company and the regional developer requires the Company to perform various activities to support the brand that do
not
directly transfer goods and services to the regional developer, but instead represent a single performance obligation, which is the transfer of the development rights to the defined geographic region. The intellectual property subject to the development rights is symbolic intellectual property as it does
not
have significant standalone functionality, and substantially all of the utility is derived from its association with the Company’s past or ongoing activities. The nature of the Company’s promise in granting the development rights is to provide the regional developer with access to the brand’s symbolic intellectual property over the term of the agreement. The services provided by the Company are highly interrelated with the development of the territory and the resulting franchise licenses sold by the regional developer and as such are considered to represent a single performance obligation.
  
The transaction price in a standard regional developer arrangement primarily consists of the initial territory fees. The Company recognizes the regional developer fee as revenue ratably on a straight-line basis over the term of the regional developer agreement commencing with the execution of the regional developer agreement. As these fees are typically received in cash at or near the beginning of the term of the regional developer agreement, the cash received is initially recorded as a contract liability until recognized as revenue over time.
 
Disaggregation of Revenue
 
The Company believes that the captions contained on the consolidated statements of operations appropriately reflect the disaggregation of its revenue by major type for the years ended
December 31, 2018
and
2017.
 
Rollforward of Contract Liabilities and Contract Assets
 
Changes in the Company's contract liability for deferred franchise and regional development fees during the year ended
December 31, 2018
and
2017
were as follows (in thousands):
 
    Deferred Revenue
short and long-term
     
Balance at December 31, 2016   $
9,598
 
Recognized as revenue during the year ended December 31, 2017    
(1,781
)
Fees received and deferred during the year ended December 31, 2017    
3,730
 
Balance at December 31, 2017   $
11,547
 
Recognized as revenue during the year ended December 31, 2018    
(2,287
)
Fees received and deferred during the year ended December 31, 2018    
4,349
 
Balance at December 31, 2018   $
13,609
 
 
Changes in the Company's contract assets for deferred franchise costs during the year ended
December 31, 2018
and
2017
were as follows (in thousands):
 
    Deferred Franchise Costs
short and long-term
     
Balance at December 31, 2016   $
3,023
 
Recognized as cost of revenue during the year ended December 31, 2017    
(477
)
Costs incurred and deferred during the year ended December 31, 2017    
265
 
Balance at December 31, 2017   $
2,811
 
Recognized as cost of revenue during the year ended December 31, 2018    
(631
)
Costs incurred and deferred during the year ended December 31, 2018    
1,309
 
Balance at December 31, 2018   $
3,489
 
 
The following table illustrates revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of
December 
31,
2018
(in thousands):
 
Contract liabilities expected to be recognized in   Amount
2019   $
2,370
 
2020   $
2,373
 
2021   $
2,247
 
2022   $
1,809
 
2023   $
1,332
 
Thereafter   $
3,478
 
Total   $
13,609