Revenue Recognition | 3 . Revenue Recognition We account for revenue from contracts with customers in accordance with Accounting Standards Codification (“ASC”) Topic 606. The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied. Healthcare Segment Our Healthcare segment earns revenue primarily from three programs, SilverSneakers senior fitness, Prime Fitness and WholeHealth Living. We provide the SilverSneakers senior fitness program to members of Medicare Advantage, Medicare Supplement, and group retiree plans through our contracts with such plans. We offer Prime Fitness, a fitness facility access program, through contracts with commercial health plans, employers, and other sponsoring organizations that allow their members to individually purchase the program. We sell our WholeHealth Living program primarily to health plans. Except for Prime Fitness, our Healthcare segment’s customer contracts generally have initial terms of approximately three years. Some contracts allow the customer to terminate early and/or determine on an annual basis to which of their members they will offer our programs. For Prime Fitness, our contracts with commercial health plans, employers, and other sponsoring organizations generally have initial terms of approximately three years, while i . The significant majority of Healthcare segment’s customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term. There are generally no performance obligations that are unsatisfied at the end of a particular month. There was no material revenue recognized during the three and nine months ended September 30, 2020 from performance obligations satisfied in a prior period. Our fees within the the average monthly total participation levels of our members were significantly lower than in the third quarter of 2019 due to the COVID-19 pandemic. As a result, revenues from PMPM fees represented 59% of SilverSneakers revenue for the third quarter of 2020, compared to 33% for the third quarter of 2019. Our Healthcare segment’s customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month. The allocated consideration corresponds directly with the value to our customers of our services completed for the month. Under the majority of Healthcare segment’s contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. Although we evaluate our financial performance and make resource allocation decisions based upon the results of our two reportable segments, we believe the following information depicts how our Healthcare segment revenues and cash flows are affected by economic factors. The following table sets forth Healthcare revenue disaggregated by program. Revenue from our SilverSneakers program is predominantly contracted with Medicare Advantage and Medicare Supplement plans. (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 SilverSneakers $ 68,613 $ 124,602 $ 239,377 $ 370,524 Prime Fitness 21,687 30,499 73,545 88,993 WholeHealth Living 5,040 4,752 14,835 13,783 Other (1) 141 126 9,339 687 $ 95,481 $ 159,979 $ 337,096 $ 473,987 (1) For the nine months ended September 30, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer. For the three and nine months ended September 30, 2020, other revenue in the table above also includes $0.1 million and $2.2 million, respectively, of Wisely Well revenue. Sales and usage-based taxes are excluded from revenues. Nutrition Segment Our Nutrition segment earns revenue from four sources: direct to consumer, retail, QVC and other. Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. As explained in more detail below, revenue is recognized upon satisfaction of the performance obligation by transferring control over a product to a Nutrition segment customer. Direct-mail advertising costs are expensed as incurred. We recognize an asset for the carrying amount of product to be returned and for costs to obtain a contract if the amortization is more than one year in duration. We expense costs to obtain a contract as incurred if the amortization period is less than one year. We sell pre-packaged foods directly to weight loss program participants primarily through the Internet and telephone (referred to as the direct to consumer channel), through QVC (a television shopping network), and select retailers. Pre-packaged foods include both frozen and non-frozen (ready-to-go), shelf-stable products. Products sold through the direct to consumer channel, both frozen and non-frozen, may be sold separately (a la carte) or as part of a packaged monthly meal plan for which customers pay at the point of sale. Products sold through QVC are payable by QVC upon our shipment of the product to the end consumer. For both the direct to consumer channel and QVC, we recognize revenue at a point in time, i.e., at the shipping point. Direct to consumer customers may return unopened ready-to-go Nutrisystem products within 30 days after purchase in order to receive a refund or credit. Frozen Nutrisystem products are refundable only if the order is canceled within 14 days after delivery. South Beach Diet products are not refundable. Products sold to retailers include both frozen and non-frozen products and are payable by the retailer upon receipt. We recognize revenue at a point in time, i.e., when the retailers take possession of the product. Certain retailers have the right to return unsold products. We account for the shipment of frozen and non-frozen, ready-to-go products as separate performance obligations. The consideration, including variable consideration for product returns, is allocated between frozen and non-frozen products based on their standalone selling prices. The amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data. In addition to our pre-packaged foods, we sell prepaid gift cards through a wholesaler that are redeemable through the Internet or telephone. Prepaid gift cards represent grants of rights to goods to be provided in the future to gift card buyers. The wholesaler has the right to return all unsold prepaid gift cards. The wholesaler’s retail selling price of the gift cards is deferred in the balance sheet and recognized as revenue when we have satisfied our performance obligation, i.e., when a gift card holder redeems the gift card with us. We recognize breakage amounts (the estimated amount of unused gift cards) as revenue, in proportion to the actual gift card redemptions exercised by gift card holders in relation to the total expected redemptions of gift cards. We utilize historical experience in estimating the total expected breakage and period over which the gift cards will be redeemed. Sales and other taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a Nutrition segment customer are excluded from revenue and presented on a net basis. After control over a product has transferred to a Nutrition segment customer, shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in revenue and cost of revenue in the accompanying consolidated statements of operations. Revenue from shipping and handling charges was $5.8 million and $18.7 million for the three and nine months ended September 30, 2020, respectively, and $5.3 million and $13.4 million for the three and six months ended September 30, 2019 (from March 8, 2019 forward), respectively. The following table sets forth Nutrition segment revenue, from March 8, 2019 forward, disaggregated by the source of revenue: (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Nutrisystem direct to consumer $ 147,317 $ 122,419 $ 467,826 $ 326,397 South Beach Diet direct to consumer 6,314 12,162 $ 27,728 31,280 Retail 4,069 6,311 13,419 19,343 QVC 1,282 2,882 8,370 6,926 Other 446 144 723 436 $ 159,428 $ 143,918 $ 518,066 $ 384,382 The following table provides information about receivables, contract assets and contract liabilities from contracts with customers: (In thousands) September 30, 2020 December 31, 2019 Contract assets $ 163 $ 95 Contract liabilities $ 13,208 $ 10,911 The contract assets primarily relate to unbilled accounts receivable and are included as other current assets in the accompanying consolidated balance sheet. The contract liabilities (deferred revenue) primarily relate to sale of prepaid gift cards and unshipped foods, which are deferred until such time as the Company has satisfied its performance obligations. Significant changes in the contract liabilities (deferred revenue) balance during the period are as follows: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2020 2020 Revenue recognized that was included in the contract liability (deferred revenue) balance on January 1, 2020 $ (931 ) $ (7,692 ) Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue, reduced by (decreases) due to returns $ 3,202 $ 9,989 The following table includes estimated revenue from the prepaid gift cards expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period: (In thousands) Remaining 2020 $ 1,303 2021 3,097 2022 1,649 2023 993 2024 692 2025 286 $ 8,020 We apply the practical expedient in subtopic ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. We review the reserves for our customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment. The provision for estimated returns for the three and nine months ended September 30, 2020 was $3.7 million and $13.0 million, respectively, and for the three and nine months ended September 30, 2019 ( he reserve for estimated returns incurred but not received and processed was In October 2020, we entered into the Purchase Agreement that will result in the disposition of our Nutrition segment, which is expected to occur in the fourth quarter of 2020 (see Note 17). |