| Revenue recognition | Revenue recognition Revenue from Contracts with Customers We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (“ASC 606”), from ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of Previous Standards. The $9,192 cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 stockholders' deficit. Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled in exchange for those goods or services. Revenue Recognition Significant Accounting Policies under ASC 606 The Company's revenues are comprised of franchise revenue, equipment revenue, and corporate-owned stores revenue. Franchise revenue Franchise revenues consist primarily of royalties, national advertising fund contributions, initial and renewal franchise fees and upfront fees from area development agreements ("ADAs"), transfer fees, equipment placement revenue, other fees and commission income. The Company's primary performance obligation under the franchise license is granting certain rights to use the Company's intellectual property, and all other services the Company provides under the ADA and franchise agreement are highly interrelated, not distinct within the contract, and therefore accounted for under ASC 606 as a single performance obligation, which is satisfied by granting certain rights to use our intellectual property over the term of each franchise agreement. Royalties, including franchisee contributions to national advertising funds, are calculated as a percentage of franchise sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon signing a new franchise agreement or renewal of an existing franchise agreement, and transfer fees are paid to the Company when one franchisee transfers a franchise agreement to a different franchisee. Our franchise royalties, as well as our advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, under ASC 606, initial and renewal franchise fees as well as transfer fees are recognized as revenue on a straight-line basis over the term of the respective franchise agreement. Under the Previous Standards, initial franchise fees were recognized as revenue when the related franchisees signed a lease and completed the Company's new franchisee training. Renewal franchise fees and transfer fees were recognized as revenue upon execution of a new franchise agreement. Our performance obligation under area development agreements generally consists of an obligation to grant geographic exclusive area development rights. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise agreement signed by the franchisee. The pro-rata amount apportioned to each franchise agreement is accounted for identically to the initial franchise fee. The Company is generally responsible for assembly and placement of equipment it sells to U.S. based franchisee-owned stores. Placement revenue is recognized upon completion and acceptance of the services at the franchise location. The Company recognizes commission income from its franchisees’ use of certain preferred vendor arrangements. Commissions are recognized when amounts have been earned and collectability from the vendor is reasonably assured. Online member join fees are paid to the Company by franchisees for processing new membership transactions when a new member signs up for a membership to a franchisee-owned store through the Company’s website. These fees are recognized as revenue as each transaction occurs. Billing transaction fees are paid to the Company for the processing of franchisee membership dues and annual fees through the Company’s third-party hosted point-of-sale system and are recognized as revenue as they are earned. Equipment revenue The Company sells and delivers equipment purchased from third-party equipment manufacturers to U.S. based franchisee-owned stores. Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment revenue and freight costs are recorded within cost of revenue. The Company recognizes revenue on a gross basis in these transactions as management has determined the Company to be the principal in these transactions. Management determined the Company to be the principal in the transaction because the Company controls the equipment prior to delivery to the final customer as evidenced by its pricing discretion over the goods, inventory transfer of title and risk of loss while the inventory is in transit, and having the primary responsibility to fulfill the customer order and direct the third-party vendor. Corporate-owned stores revenue The following revenues are generated from stores owned and operated by the Company. Customers are offered multiple membership choices varying in length. Membership dues are earned and recognized over the membership term on a straight-line basis. Enrollment fee revenue Enrollment fees are charged to new members at the commencement of their membership. The Company recognizes enrollment fees ratably over the estimated duration of the membership life, which is generally two years. Annual membership fee revenue Annual membership fees are annual fees charged to members in addition to and in order to maintain low monthly membership dues. The Company recognizes annual membership fees ratably over the 12 -month membership period. Retail sales The Company sells Planet Fitness branded apparel, food, beverages, and other accessories. The revenue for these items is recognized at the point of sale. Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees and ADA fees paid by franchisees, as well as transfer fees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement. Also included are corporate store enrollment fees, annual fees and monthly fees. We classify these contract liabilities as deferred revenue in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (January 1, 2018) and March 31, 2018 , : Contract liabilities Balance at January 1, 2018 $ 40,000 Revenue recognized that was included in the contract liability at the beginning of the year (10,355 ) Increase, excluding amounts recognized as revenue during the period 14,139 Balance at March 31, 2018 $ 43,784 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018. The Company has elected to exclude short term contracts, sales and usage based royalties and any other variable consideration recognized on an "as invoiced" basis. Contract liabilities to be recognized in: Amount 2018 19,327 2019 3,178 2020 1,977 2021 1,868 2022 1,732 Thereafter 15,702 Total 43,784 Financial Statement Impact of Transition to ASC 606 As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to stockholders' deficit as of that date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in millions): As Reported December 31, Total adjustments Adjusted January 1, 2017 2018 Assets Current assets: Cash and cash equivalents $ 113,080 $ — $ 113,080 Accounts receivable, net 37,272 — 37,272 Due from related parties 3,020 — 3,020 Inventory 2,692 — 2,692 Restricted assets – national advertising fund 499 — 499 Prepaid expenses 3,929 — 3,929 Other receivables 9,562 — 9,562 Other current assets 6,947 — 6,947 Total current assets 177,001 — 177,001 Property and equipment, net 83,327 — 83,327 Intangible assets, net 235,657 — 235,657 Goodwill 176,981 — 176,981 Deferred income taxes 407,782 3,285 411,067 Other assets, net 11,717 — 11,717 Total assets $ 1,092,465 $ 3,285 $ 1,095,750 Liabilities and stockholders' equity (deficit) Current liabilities: Current maturities of long-term debt $ 7,185 $ — $ 7,185 Accounts payable 28,648 — 28,648 Accrued expenses 18,590 — 18,590 Equipment deposits 6,498 — 6,498 Restricted liabilities – national advertising fund 490 — 490 Deferred revenue, current 19,083 (764 ) 18,319 Payable pursuant to tax benefit arrangements, current 31,062 — 31,062 Other current liabilities 474 — 474 Total current liabilities 112,030 (764 ) 111,266 Long-term debt, net of current maturities 696,576 — 696,576 Deferred rent, net of current portion 6,127 — 6,127 Deferred revenue, net of current portion 8,440 13,241 21,681 Deferred tax liabilities 1,629 — 1,629 Payable pursuant to tax benefit arrangements, net of current portion 400,298 — 400,298 Other liabilities 4,302 — 4,302 Total noncurrent liabilities 1,117,372 13,241 1,130,613 Stockholders' equity (deficit): Class A common stock 9 — 9 Class B common stock 1 — 1 Accumulated other comprehensive loss (648 ) — (648 ) Additional paid in capital 12,118 — 12,118 Accumulated deficit (130,966 ) (9,192 ) (140,158 ) Total stockholders' deficit attributable to Planet Fitness Inc. (119,486 ) (9,192 ) (128,678 ) Non-controlling interests (17,451 ) — (17,451 ) Total stockholders' deficit (136,937 ) (9,192 ) (146,129 ) Total liabilities and stockholders' deficit $ 1,092,465 $ 3,285 $ 1,095,750 Franchise Fees The cumulative adjustment for franchise fees, including ADA fees, renewal fees and transfer fees which will all be recognized over the franchise contract term consist of the following: • An increase in deferred revenue, net of $ 12,477 for the cumulative reversal and deferral of previously recognized fees related to franchise agreements in effect at January 1, 2018 that were entered into subsequent to the acquisition of Pla-Fit Holdings on November 8, 2012 by TSG Consumer Partners, LLC (the “2012 Acquisition”) (net of the cumulative revenue attributable for the period through January 1, 2018), with a corresponding decrease to Shareholders’ equity. • An increase to deferred income taxes, net of $ 3,285 for the tax effects of the adjustment noted above, with a corresponding increase to stockholders' equity. Comparison to Amounts if Previous Standards Had Been in Effect The following tables reflect the impact of adoption of ASC 606 on our consolidated statements of operations and cash flows from operating activities for the three months ended March 31, 2018 and our condensed consolidated balance sheet as of March 31, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”): Consolidated statement of operations As reported March 31, 2018 Total adjustments Amounts under Previous Standards Revenue: Franchise $ 42,162 $ 1,765 $ 43,927 Commission income 1,989 — 1,989 National advertising fund revenue 10,461 (10,461 ) — Corporate-owned stores 32,708 — 32,708 Equipment 34,013 — 34,013 Total revenue 121,333 (8,696 ) 112,637 Operating costs and expenses: Cost of revenue 26,500 — 26,500 Store operations 18,356 — 18,356 Selling, general and administrative 17,623 — 17,623 National advertising fund expense 10,461 (10,461 ) — Depreciation and amortization 8,465 — 8,465 Other loss (gain) 1,010 — 1,010 Total operating costs and expenses 82,415 (10,461 ) 71,954 Income from operations 38,918 1,765 40,683 Other expense, net: Interest expense, net (8,734 ) — (8,734 ) Other (expense) income 192 — 192 Total other expense, net (8,542 ) — (8,542 ) Income before income taxes 30,376 1,765 32,141 Provision for income taxes 6,883 424 7,307 Net income 23,493 1,341 24,834 Less net income attributable to non-controlling interests 3,613 196 3,809 Net income attributable to Planet Fitness, Inc. $ 19,880 $ 1,145 $ 21,025 Net income per share of Class A common stock: Basic $ 0.23 $ 0.24 Diluted $ 0.23 $ 0.24 Consolidated Statement of Cash Flows As reported March 31, 2018 Total adjustments Amounts under Previous Standards Cash flows from operating activities: Net income $ 23,493 $ 1,341 $ 24,834 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,465 — 8,465 Amortization of deferred financing costs 484 — 484 Amortization of favorable leases and asset retirement obligations 93 — 93 Amortization of interest rate caps 195 — 195 Deferred tax expense 4,909 — 4,909 Gain on re-measurement of tax benefit arrangement (396 ) — (396 ) Provision for bad debts (14 ) — (14 ) Loss on reacquired franchise rights 350 — 350 Loss (gain) on disposal of property and equipment 650 — 650 Equity-based compensation 998 — 998 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable 18,637 — 18,637 Due to and due from related parties 165 — 165 Inventory (1,364 ) — (1,364 ) Other assets and other current assets (1,341 ) — (1,341 ) National advertising fund (4,586 ) — (4,586 ) Accounts payable and accrued expenses (16,758 ) — (16,758 ) Other liabilities and other current liabilities 83 — 83 Income taxes 1,898 424 2,322 Equipment deposits 7,784 — 7,784 Deferred revenue 3,536 (1,765 ) 1,771 Deferred rent 853 — 853 Net cash provided by operating activities $ 48,134 $ — $ 48,134 Consolidated Balance Sheet As reported March 31, 2018 Total adjustments Amounts under Previous Standards Assets Current assets: Cash and cash equivalents $ 127,146 $ — $ 127,146 Accounts receivable, net 18,620 — 18,620 Due from related parties 3,060 — 3,060 Inventory 4,056 — 4,056 Restricted assets – national advertising fund 78 — 78 Deferred expenses – national advertising fund 4,596 — 4,596 Prepaid expenses 4,051 — 4,051 Other receivables 14,550 — 14,550 Other current assets 5,355 — 5,355 Total current assets 181,512 — 181,512 Property and equipment, net 84,545 — 84,545 Intangible assets, net 241,105 — 241,105 Goodwill 191,038 — 191,038 Deferred income taxes 409,216 (3,285 ) 405,931 Other assets, net 8,437 — 8,437 Total assets $ 1,115,853 $ (3,285 ) $ 1,112,568 Liabilities and stockholders' equity (deficit) Current liabilities: Current maturities of long-term debt $ 7,185 $ — $ 7,185 Accounts payable 15,664 — 15,664 Accrued expenses 14,787 424 15,211 Equipment deposits 14,283 — 14,283 Restricted liabilities – national advertising fund 78 — 78 Deferred revenue, current 20,842 499 21,341 Payable pursuant to tax benefit arrangements, current 31,062 — 31,062 Other current liabilities 493 — 493 Total current liabilities 104,394 923 105,317 Long-term debt, net of current maturities 695,264 — 695,264 Deferred rent, net of current portion 6,907 — 6,907 Deferred revenue, net of current portion 22,942 (14,741 ) 8,201 Deferred tax liabilities 1,379 — 1,379 Payable pursuant to tax benefit arrangements, net of current portion 403,022 — 403,022 Other liabilities 4,379 — 4,379 Total noncurrent liabilities 1,133,893 (14,741 ) 1,119,152 Stockholders' equity (deficit): Class A common stock 9 — 9 Class B common stock 1 — 1 Accumulated other comprehensive loss (370 ) — (370 ) Additional paid in capital 13,011 — 13,011 Accumulated deficit (120,245 ) 10,337 (109,908 ) Total stockholders' deficit attributable to Planet Fitness Inc. (107,594 ) 10,337 (97,257 ) Non-controlling interests (14,840 ) 196 (14,644 ) Total stockholders' deficit (122,434 ) 10,533 (111,901 ) Total liabilities and stockholders' deficit $ 1,115,853 $ (3,285 ) $ 1,112,568 The following summarizes the adjustments to our consolidated statement of operations for the three months ended March 31, 2018 to reflect our consolidated statement of operations as if we had continued to recognize revenue under the Previous Standards: • As described above, our transition to ASC 606 resulted in the deferral of franchise fees, ADA fees, and transfer fees. The adjustments for the three months ended March 31, 2018 to reflect the recognition of this revenue as if the Previous Standards were in effect consists of a $1,765 increase in franchise revenue and a $196 increase in non-controlling interest. • As described above, under the Previous Standards our statement of operations did not reflect gross presentations of national advertising fund revenue and expenses. Our transition to ASC 606 requires the presentation of advertising fund contributions and advertising fund expenses on a gross basis. The adjustments for the three months ended March 31, 2018 to reflect national advertising fund contributions and expenses as if the Previous Standards were in effect consist of a $10,461 decrease to revenue and a corresponding $10,461 decrease to operating expenses. The transition to ASC 606 had no net impact on our cash used for operating activities and no impact on our cash provided by investing activities or cash used for financing activities during the three months ended March 31, 2018 . |
