Revenue Recognition

Franchise and related revenue

The Company sells individual franchises. The franchise agreements typically require the franchisee to pay an initial, non-refundable fee prior to opening the respective location(s), and continuing royalty fees on a weekly basis based upon a percentage of franchisee net sales. The initial term of franchise agreements are typically

years. Subject to the Company’s approval, a franchisee

may

generally renew the franchise agreement upon its expiration. If approved, a franchisee

may

transfer a franchise agreement to a new or existing franchisee, at which point a transfer fee is typically paid by the current owner which then terminates that franchise agreement. A franchise agreement is signed with the new franchisee with

franchise fee required. If a contract is terminated prior to its term, it is a breach of contract and a penalty is assessed based on a formula reviewed and approved by management. Revenue generated from a contract breach is termed settlement income by the Company and included in licensing fees and other income.

Under the terms of our franchise agreements, the Company typically promises to provide franchise rights, pre-opening services such as blueprints, operational materials, planning and functional training courses, and ongoing services, such as management of the marketing fund. Upon adoption of Topic

606,

the Company determined that certain pre-opening activities, and the franchise rights and related ongoing services, represented

two

separate performance obligations. The franchise fee revenue has been allocated to the

two

separate performance obligations using a residual approach. The Company has estimated the value of performance obligations related to certain pre-opening activities deemed to be distinct based on cost plus an applicable margin, and assigned the remaining amount of the initial franchise fee to the franchise rights and ongoing services. Revenue allocated to preopening activities is recognized when (or as) these services are performed. Revenue allocated to franchise rights and ongoing services is deferred until the store opens, and recognized on a straight line basis over the duration of the agreement, as this ensures that revenue recognition aligns with the customer’s access to the franchise right.

Royalty income is recognized during the respective franchise agreement based on the royalties earned each period as the underlying franchise store sales occur. Adoption of ASC

606

will

not

change when the royalty revenue is recognized, this new guidance did

not

impact the recognition of royalty income.

There are

two

items involving revenue recognition of contracts that require us to make subjective judgments: the determination of which performance obligations are distinct within the context of the overall contract and the estimated stand alone selling price of each obligation. In instances where our contract includes significant customization or modification services, the customization and modification services are generally combined and recorded as

one

distinct performance obligation.

Gift Card

Breakage Revenue

The Company sells gift cards to its customers in its retail stores and through its Corporate office. The Company’s gift cards do

not

have an expiration date and are

not

redeemable for cash except where required by law. Revenue from gift cards is recognized upon redemption in exchange for product and reported within franchisee store revenue and the royalty and marketing fees are paid and shown in the Condensed Consolidated Statements of Income. Until redemption, outstanding customer balances are recorded as a liability. An obligation is recorded at the time of sale of the gift card and it is included in accrued expenses on the Company’s Condensed Consolidated Balance Sheets.

The Company recognizes gift card breakage proportional to actual gift card redemptions as required under ASC

606

on a quarterly basis and it is included in licensing fees and other revenue. Significant judgments and estimates are required in determining the breakage rate and will be reassessed each quarter.

Nontraditional and rebate revenue

As part of the Company’s franchise agreements, the franchisee purchases products and supplies from designated vendors. The Company

may

receive various fees and rebates from the vendors and distributors on product purchases by franchisees. In addition, the Company

may

collect various initial fees, and those fees are classified as deferred revenue in the balance sheet and straight lined over the life of the contract as deferred revenue in the balance sheet. The Company does

not

possess control of the products prior to their transfer to the franchisee and products are delivered to franchisees directly from the vendor or their distributors. The Company recognizes the rebates as franchisees purchase products and supplies from vendors or distributors and recognizes the initial fees over the contract life and the fees are reported as licensing fees and other income in the Condensed Consolidated Statements of Income.

Marketing Fund

Franchise agreements require the franchisee to pay continuing marketing fees on a weekly basis, based on a percentage of franchisees sales. Marketing fees are

not

paid on franchise wholesale sales. The balance sheet includes marketing fund cash, which is the restricted cash, accounts receivable and unexpended marketing fund contributions. The Company has determined that although the marketing fees are

not

separate performance obligations distinct from the underlying franchise right, the Company acts as the principal as it is primarily responsible for the fulfillment and control of the marketing services. As a result, the Company records marketing fees in revenues and related marketing fund expenditures in expenses in the Condensed Consolidated Statement of Income.

Contract balances

Information about contract balances is as follows:

	February 29, 2020		December 1, 2019

Assets
Accounts receivable	$	71,126	$	58,853
Total Assets		71,126		58,853

Liabilities
Contract liabilities - current		597,890		622,724
Contract liabilities - long-term		97,482		80,110

Total Contract Liabilities	$	695,372	$	702,834

Accounts receivable represent weekly royalty payments and monthly vendor rebate payments that represent billed and unbilled receivables due as of

February

29,

2020

and

December 1, 2019.

The balance of contract liabilities includes franchise fees, license fees and vendor payments that have ongoing contract rights and the fees are being straight lined over the contract life. Contract liabilities also include marketing fund balances and gift card liability balances.

	Accounts Receivable			Contract Liabilities

Balance at December 1, 2019	$	58,853		$	702,834

Revenue Recognized		173,344			(304,635	)

Amounts (collected) or invoiced, net		(161,071	)		297,173
Balance at February 29, 2020	$	71,126		$	695,372

Transaction price allocated to remaining performance obligations as of

February

29,

2020:

(a) 2020	$	52,743
2021		27,252
2022		18,667
2023		13,995
2024		11,864
Thereafter		30,489
Total	$	155,010

(a) represents the estimate for the remainder of

2020

The remaining performance obligations of above chart include performance obligations that are a part of a contract that has an original expected duration of more than

one

year. Also included, are license fees that have a contract fee of

one

year or less and deferred revenue for nontraditional revenue contracts of

one

year or greater duration. There is

marketing fund or gift card contract liabilities included. .