Under ASC 606, when does Kidokinetics recognize revenue from its contracts with customers?

The Company's revenues consist of initial franchise fees, royalties and marketing fees based on a percentage of gross revenues, and service revenue. The Company has adopted ASC 606, Revenue from Contracts with Customers, which provides that revenues are to be recognized when control of promised goods or services is transferred to a customer in an amount that reflects the considerations expected to be received for those goods or services. In implementing ASC 606, the Company evaluated all revenue sources using the five-step approach: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and recognize revenue.

For each franchised location, the Company enters into a formal franchise agreement that clearly outlines the transaction price, which includes both an initial fee and ongoing fees, and the Company's performance obligations. For service revenues, the Company enters into contracts with individual customers and franchisees.

Upon evaluation of the five-step process, the Company has determined that royalties from locations operated by a franchisee, which are based on a percentage of gross revenue, are to be recognized at the time the underlying sales occur. Service revenue is to be recognized in the period the services are performed. In allocating the transaction price and recognizing the revenue associated with initial franchise fees, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. The practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation. These pre-opening services include the following:

• Assistance in the selection of a site
• Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
• Training of the franchisee's personnel or the franchisee
• Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
• Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes about local regulations affecting the franchisee's business
• Inspection, testing, and other quality control programs

The Company has determined the fair value of pre-opening services. This amount is recognized upon the deliver of all pre-opening services, which is generally the commencement of operations. The remaining fees are then amortized over the life of the agreement.

Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)