4. Revenue Recognition: Franchising

The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Condensed Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.

Royalties

The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned.

Merchandise Sales

Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees. Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from merchandise sales. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.

Franchise Fees

The Company collects initial franchise fees when franchise agreements are signed. The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement.

Marketing Fees

Marketing fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects annual marketing fees from its franchisees at various times throughout the year. The Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company recognized $0.3 million of marketing fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.9 million for each of the nine months ended September 29, 2018 and September 30, 2017.

Software License Fees

Software license fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee. The Company recognizes software license fee revenue on a straight line basis over the franchise duration. The Company recognized $0.1 million of software license fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.2 million for each of the nine months ended September 29, 2018 and September 30, 2017.

Contract Liabilities

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above. The table below presents the activity of the current and noncurrent deferred franchise revenue during the first nine months of 2018 and 2017, respectively:


	September 29, 2018		September 30, 2017
Balance at beginning of period	$	10,310,200	$	10,408,500
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		1,354,500		1,295,600
Fees earned that were included in the balance at the beginning of the period		(1,390,200)		(1,394,300)
Balance at end of period	$	10,274,500	$	10,309,800

The following table illustrates future estimated revenue to be recognized for the remainder of 2018 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2018.


Contract Liabilities expected to be recognized in	Amount
2018	$	429,200
2019		1,711,800
2020		1,575,300
2021		1,436,500
2022		1,291,500
Thereafter		3,830,200
	$	10,274,500

Commission Fees

The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.5 million and $0.4 million are outstanding at September 29, 2018 and December 30, 2017, respectively and are included in Prepaid expenses and Other assets of the Consolidated Condensed Balance Sheets.

Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the three months ended September 29, 2018 and September 30, 2017, the Company recognized $24,800 and $24,800 of commission fee expense, respectively. During the nine months ended September 29, 2018 and September 30, 2017, the Company recognized $73,200 and $74,700 of commission fee expense, respectively.