How does Dermani Medspa recognize revenue from franchise fees?
Dermani_Medspa Franchise · 2025 FDDAnswer from 2025 FDD Document
Unearned revenue relates to the unsatisfied future performance obligations associated with the issuance of franchise agreements. Initial franchise fees are received upon the franchisee's signing of a franchise agreement and recognized over the terms of the respective franchise agreements, which are typically ten years once the related locations are opened. Three performance obligations are identified related to initial franchise fees as described in the revenue recognition disclosure.
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and are made at the Company's discretion. Advertising and marketing expenses for the year ended December 31, 2024 was $248,452.
Revenue Recognition
The Company recognizes revenue in accordance with FASB Accounting Standard Codification (ASC) 606, Revenue from Contracts with Customers. Some of the more pertinent revenue recognition policies are as follows:
NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Franchise Sales
Franchise sales comprise revenue from the sale or renewal of franchises. A fee is charged upon sale or renewal. Under this arrangement, franchisees are granted the right to operate a center using the "dermani MEDSPA®" system for an initial term of ten (10) years with the right to renew for two (2) additional consecutive successor terms of five (5) years each subject to certain conditions being met. The Company is required to provide initial training regarding the system and provide assistance in accordance to the Franchise Agreement.
The Company recognizes revenue from franchise fees during the year in which the related performance obligations are provided to franchisees. The Company has identified three performance obligations delivered as part of the franchise fee related to initial training of franchisees, store location assistance, and rights to intellectual property.
The performance obligation of training franchisees is satisfied at the time of training, and the related revenue is recognized at the time initial training is completed. The transaction price allocated to pre-opening training was determined using the cost plus margin approach.
The performance obligation of store location assistance is satisfied at the time a franchisee's agreement is signed and the related revenue is recognized at the time the agreement is signed. The transaction price allocated to store location assistance was determined using the cost plus margin approach.
Source: Item 23 — RECEIPTS (FDD pages 66–311)
What This Means (2025 FDD)
According to Dermani Medspa's 2025 Franchise Disclosure Document, the company recognizes revenue from franchise fees during the year in which they provide the related performance obligations to franchisees. Dermani Medspa identifies three performance obligations related to the franchise fee: initial training, store location assistance, and rights to intellectual property. The franchise agreement lasts for an initial term of ten years, with the option to renew for two additional five-year terms if certain conditions are met. As of December 31, 2024, $1,350,595 of initial franchise fees received have not been earned by the company.
Specifically, Dermani Medspa recognizes revenue from training franchisees at the time the initial training is completed. The transaction price for pre-opening training is determined using a cost plus margin approach. Revenue from store location assistance is recognized when the franchise agreement is signed, and the transaction price is also determined using a cost plus margin approach.
The revenue related to providing the right to intellectual property is recognized ratably over the ten-year term of the franchise agreement. The transaction price allocated to intellectual property is determined using the residual approach. This means Dermani Medspa spreads the recognition of revenue from intellectual property rights over the entire franchise term, aligning the revenue recognition with the franchisee's ongoing use of these rights.