Quarterly report pursuant to Section 13 or 15(d)

Note 3 - Revenue Disclosures

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Note 3 - Revenue Disclosures
6 Months Ended
Jun. 30, 2019
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.  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 or in accordance with the Company’s breakage policy as discussed in Note
1,
Revenue Recognition
.  
 
Franchising Fees, Royalty Fees, Advertising Fund Revenue, and Software Fees
 
The Company currently franchises its concept across
33
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.
 
The Company recognizes advertising fees received under franchise agreements as advertising fund revenue.
 
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 condensed consolidated statements of operations appropriately reflect the disaggregation of its revenue by major type for the
three
and
six
months ended
June 30, 2019
and
2018.
 
Rollforward of Contract Liabilities and Contract Assets
 
Changes in the Company's contract liability for deferred franchise and regional development fees during the
six
months ended
June 30, 2019
were as follows (in thousands):
 
    Deferred Revenue
    short and long-term
Balance at December 31, 2018   $
13,609
 
Recognized as revenue during the six months ended June 30, 2019    
(1,249
)
Fees received and deferred during the six months ended June 30, 2019    
2,990
 
Balance at June 30, 2019   $
15,350
 
 
Changes in the Company's contract assets for deferred franchise costs during the
six
months ended
June 30, 2019
are as follows (in thousands):
 
    Deferred Franchise Costs
    short and long-term
Balance at December 31, 2018   $
3,489
 
Recognized as cost of revenue during the six months ended June 30, 2019    
(325
)
Costs incurred and deferred during the six months ended June 30, 2019    
1,032
 
Balance at June 30, 2019   $
4,196
 
 
The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that were unsatisfied (or partially unsatisfied) as of
June 30, 2019 (
in thousands):
 
Contract liabilities expected to be recognized in   Amount
2019 (remainder)   $
1,356
 
2020    
2,694
 
2021    
2,572
 
2022    
2,150
 
2023    
1,788
 
Thereafter    
4,790
 
Total   $
15,350