How does Aerus recognize revenue from sales through franchisees?

According to Aerus's 2025 Franchise Disclosure Document, the company primarily uses a consignment model for sales to its franchisees. This means Aerus retains ownership of the machines until the franchisee sells them to the end customer. Consequently, Aerus recognizes revenue from these sales only when the franchisees actually sell the inventory. However, revenue from the sale of parts to franchisees is recognized immediately upon shipment. Aerus also sells products to distributors and through sales representatives, recognizing revenue upon shipment in these cases as well.

In addition to product sales, Aerus generates revenue from franchise fees, renewals, royalties, and other fees. Revenue from the sales of individual franchises and franchise renewals is initially recorded as deferred revenue and is recognized over the contractual term of the franchise agreements, which is three years. Revenue from royalties and administration fees is recognized as the related services are performed. Closing and transfer fees are recognized when Aerus accepts the terms of the franchise.

For a prospective franchisee, this revenue recognition policy has implications for understanding Aerus's financial statements. The consignment model for machine sales means that Aerus's revenue is directly tied to the sales performance of its franchisees. Franchisees should focus on sales strategies and inventory management to ensure products are moving, which in turn drives revenue recognition for Aerus. The deferred recognition of franchise and renewal fees means that a portion of Aerus's upfront income is spread out over the life of the franchise agreement, providing a more consistent revenue stream for the company. Understanding these accounting practices can help a franchisee better assess the financial health and stability of Aerus.