• Filing Date: 2018-07-13
  • Form Type: 10-Q
  • Description: Quarterly report
v3.10.0.1
Note 11 - Adoption of ASU 2014-09, "Revenue from Contracts with Customers" ("ASC 606")
3 Months Ended
May 31, 2018
Notes to Financial Statements  
Revenue from Contract with Customer [Text Block]
NOTE
11
– ADOPTION OF ASU
2014
-
09,
“REVENUE FROM CONTRACTS WITH CUSTOMERS” (“ASC
606”
)
 
As described in Note
1,
effective
March 1, 2018,
the Company adopted ASC
606.
ASC
606
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 consideration expected to be received for those goods or services. This new standard does
not
impact the Company's recognition of revenue from sales of confectionary items to our franchised and licensed locations, or in our Company-owned stores as those sales are recognized at the time of the underlying sale and are presented net of sales taxes and discounts. The standard also does
not
change the recognition of royalties and marketing fees from franchised or licensed locations, which are based on a percent of sales and recognized at the time the sales occur. The standard does change the timing in which the Company recognizes initial fees from franchisees and licensees for new franchise locations and renewals that affect the term of the franchise agreement.
 
Initial Franchise Fees, License Fees, Transfer Fees and Renewal Fees
 
The Company's policy for recognizing initial franchise and renewal fees through
February 28, 2018,
was to recognize initial franchise fees upon new store openings and renewals that impact the term of the franchise agreement upon renewal. In accordance with the new guidance, the initial franchise services are
not
distinct from the continuing rights or services offered during the term of the franchise agreement, and will be treated as a single performance obligation. Beginning
March 1, 2018,
initial franchise fees are being recognized as the Company satisfies the performance obligation over the term of the franchise agreement, which is generally
10
-
15
years.
 
Gift Cards
 
The Company’s franchisees sell gift cards which do
not
have either expiration dates, or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. The Company has historically accumulated gift card liabilities and has
not
recognized breakage associated with the gift card liability. The adoption of ASC
606
requires the use of the “proportionate” method for recognizing breakage, which the Company has
not
historically utilized. Upon adoption of ASC
606
the Company began recognizing breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
 
Impact to Prior Periods
 
The cumulative adjustment recorded upon adoption of ASC
606
consisted of net contract liabilities of approximately
$1,022,720,
a reduction in gift card liability of
$2,250,743
and approximately
$302,094
of associated adjustments to the deferred tax balances which are recorded in deferred income taxes. The Company did
not
record any contract assets. The following table outlines the adjustments to the consolidated financial statements made upon adoption of ASC
606
on
March 1, 2018:
 
   
Amount
 
Increase in deferred revenue
  $
1,022,720
 
Reduction in gift card liabilities
   
(2,250,743
)
Adjustment to deferred income tax assets
   
302,094
 
         
Cumulative increase to retained earnings
  $
925,929
 
 
The Company adopted ASC
606
as of
March 1, 2018,
using the modified retrospective method. This method allows the new standard to be applied retrospectively through a cumulative catch up adjustment recognized upon adoption. As a result, comparative information in the Company’s financial statements has
not
been restated and continues to be reported under the accounting standards in effect for those periods.
 
The adoption of ASC
606
impacted the Company’s previously reported financial statements as follows:
 
   
CONSOLIDATED BALANCE SHEET
   
AS OF FEBRUARY 28, 2018
   
Previously Reported
   
Adjustments
   
Restated
   
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
  $
6,072,984
    $
-
    $
6,072,984
   
Accounts receivable, net
   
3,897,334
     
-
     
3,897,334
   
Notes receivable, current portion, net
   
105,540
     
-
     
105,540
   
Refundable income taxes
   
342,863
     
-
     
342,863
   
Inventories, net
   
4,842,474
     
-
     
4,842,474
   
Other
   
310,173
     
-
     
310,173
   
Total current assets
   
15,571,368
     
-
     
15,571,368
   
                           
Property and Equipment, Net
   
6,166,240
     
-
     
6,166,240
   
                           
Other Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes receivable, less current portion, net
   
235,983
     
-
     
235,983
   
Goodwill, net
   
1,046,944
     
-
     
1,046,944
   
Franchise rights, net
   
4,433,927
     
-
     
4,433,927
   
Intangible assets, net
   
587,377
     
-
     
587,377
   
Deferred income taxes
   
835,463
     
(302,094
)    
533,369
   
Other
   
63,333
     
-
     
63,333
   
Total other assets
   
7,203,027
     
(302,094
)    
6,900,933
   
Total Assets
  $
28,940,635
    $
(302,094
)   $
28,638,541
   
                           
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
  $
1,352,893
    $
-
    $
1,352,893
   
Accounts payable
   
1,647,991
     
-
     
1,647,991
   
Accrued salaries and wages
   
644,005
     
-
     
644,005
   
Gift card liabilities
   
3,057,131
     
(2,250,743
)    
806,388
   
Other accrued expenses
   
325,034
     
-
     
325,034
   
Dividend payable
   
708,652
     
-
     
708,652
   
Deferred revenue
   
471,910
     
(143,445
)    
328,465
   
Total current liabilities
   
8,207,616
     
(2,394,188
)    
5,813,428
   
                           
Long-Term Debt, Less Current Maturities
   
1,176,416
     
-
     
1,176,416
   
Deferred Revenue, Less Current Portion
   
-
     
1,166,165
     
1,166,165
   
                           
Commitments and Contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
                           
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
                         
Common stock
   
5,903
     
-
     
5,903
   
Additional paid-in capital
   
6,131,147
     
-
     
6,131,147
   
Retained earnings
   
13,419,553
     
925,929
     
14,345,482
   
Total stockholders’ equity
   
19,556,603
     
925,929
     
20,482,532
   
                           
Total Liabilities and Stockholders’ Equity
  $
28,940,635
    $
(302,094
)   $
28,638,541
   
 
The following table contains a reconciliation of revenue reported for the current period and revenue had the Company reported under the prior method for revenue recognition:
   
Three Months Ended May 31,
 
   
2018
   
2017
 
Franchise fees contained within the Statement of Income:   $
93,135
    $
249,125
 
Adjustment required to conform revenue to prior period method:    
8,365
     
-
 
Comparable franchise fees:
  $
101,500
    $
249,125
 
 
At
May 31, 2018,
annual revenue expected to be recognized in the future, related to performance obligations that are
not
yet fully satisfied, are estimated to be the following:
 
2019
  $
187,950
 
2020
   
238,572
 
2021
   
190,950
 
2022
   
178,099
 
2023
   
163,123
 
Thereafter
   
453,920
 
Total
  $
1,412,614