BASIS OF PRESENTATION

The accompanying unaudited Consolidated Financial Statements, which have been prepared in accordance with the applicable rules of the Securities and Exchange Commission, include all adjustments (consisting of a normal and recurring nature) that management considers necessary to fairly state the Company's results of operations, financial position and cash flows. The December 31, 2017 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Footnotes included in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 10-K"). Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2018.

Recently Adopted Accounting Pronouncements

In December 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, which simplifies the application of certain hedge accounting guidance to better align hedge accounting with an organization’s risk management activities in the financial statements. This standard eliminated the separate measurement and reporting of hedge ineffectiveness. Mismatches between changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. For cash flow and net investment hedges, all changes in value of the hedging instrument included in the assessment of effectiveness will be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this standard during the second quarter of fiscal 2018, which was applied to the interest rate swaps entered into described below in Note 5 "Long-Term Debt / Interest Expense." The adoption of this standard did not have a material effect on the Company's Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. This standard states that an entity should account for the effects of a modification unless all of the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified (if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification); 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this standard during the first quarter of fiscal 2018 which did not have an impact to the Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, which addresses changes to the classification of certain cash receipts and cash payments within the statement of cash flows in order to address diversity in practice. In connection with the adoption of this ASU, the Company presented the third-party fees relating to the term loan refinancing as an operating cash flow on the Consolidated Statement of Cash Flows. In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 did not have an impact to the Consolidated Statement of Cash Flows. Both standards were effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.

Adoption of New Revenue Recognition Standard

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updates revenue recognition guidance relating to contracts with customers. This standard states that an 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 entity expects to be entitled in exchange for those goods or services. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2014-09 and its related amendments (collectively known as "ASC 606") during the first quarter of fiscal 2018 using the full retrospective method.

The adoption of ASC 606 does not impact recognition of point-of-sale revenue in company-owned stores, most wholesale sales, royalties and sublease revenue, together which account for approximately 90% of the Company’s revenue. The new standard has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows and is not expected to have a significant impact on the Company’s Consolidated Statement of Operations in future periods. The Company recorded a reduction to retained earnings, net of tax, at January 1, 2016 (opening balance) and December 31, 2016 of approximately $23 million primarily relating to an increase in deferred franchise fees. Below is a description of the changes that resulted from the new standard.

Franchise fees. The Company's previous accounting policy for franchise and license fees received for new store openings and renewals was to recognize these fees when earned per the contract terms, which is when a new store opens or at the start of a new term. In accordance with the new guidance, these fees are now deferred and recognized over the applicable license term as the Company satisfies the performance obligation of granting the customer access to the rights of the Company’s intellectual property. This change impacted all of the Company’s reportable segments. In addition, franchise fees received as part of a sale of a company-owned store to a franchisee are now recorded as described above as part of revenue and will no longer be presented as part of gains on refranchising.

Cooperative advertising and other franchise support fees. The Company previously classified advertising and other franchise support fees received from domestic franchisees as a reduction to selling, general and administrative expense and cost of sales on the Consolidated Statement of Operations. In accordance with the new guidance, these fees are now required to be classified as revenue within the U.S. and Canada segment. The new standard does not impact the timing of recognition of this income or the Consolidated Balance Sheet.

Specialty manufacturing. The Company previously recognized revenue for products manufactured and sold to customers at a point in time when risk of loss, title and insurable risks have transferred to the customer, net of estimated returns and allowances. Under the new standard, revenue is required to be recognized over time as manufacturing occurs if the customized goods have no alternative use to the manufacturer, and the manufacturer has an enforceable right to payment for performance completed to date. This change impacts contract manufacturing sales to third-parties recorded in the Manufacturing / Wholesale segment. The Company is now recording a reduction to inventory as applicable custom manufacturing services are completed with a corresponding contract asset including the applicable markup, recorded within prepaid and other current assets on the Consolidated Balance Sheet.

E-commerce revenues. The Company previously recorded revenue to its e-commerce customers upon delivery. Under the new guidance, the Company is now recognizing revenue upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. The Company has not revised prior period balances for e-commerce revenues because the changes are not material.

Loyalty. Effective with the launch of the One New GNC on December 29, 2016, the Company introduced a free points-based myGNC Rewards loyalty program system-wide in the U.S. The Company utilized the new revenue recognition standard to account for this program in 2017, the difference of which was immaterial relative to the standard in effect at that time.

Refer to Note 3 "Revenue" for additional information relating to the impact of adopting ASC 606.

Revisions to Prior Periods

As a result of adopting ASC 606 on January 1, 2018, the Company has revised its comparative financial statements for the years ended December 31, 2016 and 2017, and applicable interim periods within those years, as if ASC 606 had been effective for those periods. Additionally, the cumulative effect of applying the new guidance to all contracts with customers that were not completed was recorded as an adjustment to retained earnings as of January 1, 2016.

The impact of the adoption of ASC 606 on the Company's Consolidated Balance Sheet as of December 31, 2017 was as follows:




	As Previously Reported			Franchise Fees			Specialty Manufacturing			Total Adjustments			As Revised
	(in thousands)
Inventory	$	506,858		$	—		$	(21,126	)	$	(21,126	)	$	485,732
Prepaid and other current assets	42,320			—			24,328			24,328			66,648
Total current assets	739,829			—			3,202			3,202			743,031
Total assets	$	1,516,561		$	—		$	3,202		$	3,202		$	1,519,763

Deferred revenue and other current liabilities	$	108,672		$	5,409		$	—		$	5,409		$	114,081
Total current liabilities	261,690			5,409			—			5,409			267,099
Deferred income taxes	64,121			(8,868		)	807			(8,061		)	56,060
Other long-term liabilities	55,721			29,781			—			29,781			85,502
Total long-term liabilities	1,416,865			20,913			807			21,720			1,438,585
Total liabilities	1,678,555			26,322			807			27,129			1,705,684
Retained earnings	567,741			(26,322		)	2,395			(23,927		)	543,814
Total stockholders' deficit	(161,994		)	(26,322		)	2,395			(23,927		)	(185,921		)
Total liabilities and stockholders' deficit	$	1,516,561		$	—		$	3,202		$	3,202		$	1,519,763

The impact of the adoption of ASC 606 on the Consolidated Statements of Operations for the three and six months ended June 30, 2017 was as follows:



	Three months ended June 30, 2017
	As Previously Reported			Franchise Fees		Specialty Manufacturing		Cooperative Advertising and Other Franchise Support Fees		Total Adjustments		As Revised
	(in thousands, except per share amounts)
Revenue	$	640,994		$	1,353	$	1,542	$	6,349	$	9,244	$	650,238
Cost of sales ⁽¹⁾	428,271			—		1,342		842		2,184		430,455
Gross profit	212,723			1,353		200		5,507		7,060		219,783
SG&A ⁽²⁾	154,033			—		—		5,507		5,507		159,540
Long-lived asset impairments	19,356			—		—		—		—		19,356
Other income, net	(486		)	—		—		—		—		(486		)
Operating income	39,820			1,353		200		—		1,553		41,373
Interest expense, net	16,067			—		—		—		—		16,067
Income before income taxes	23,753			1,353		200		—		1,553		25,306
Income tax expense	8,092			497		73		—		570		8,662
Net income	$	15,661		$	856	$	127	$	—	$	983	$	16,644
Earnings per share:
Basic	$	0.23		$	0.01	$	—	$	—	$	0.01	$	0.24
Diluted	$	0.23		$	0.01	$	—	$	—	$	0.01	$	0.24



	Six months ended June 30, 2017
	As Previously Reported			Franchise Fees		Specialty Manufacturing		Cooperative Advertising and Other Franchise Support Fees		Total Adjustments		As Revised
	(in thousands, except per share amounts)
Revenue	$	1,285,832		$	2,336	$	4,628	$	12,390	$	19,354	$	1,305,186
Cost of sales ⁽¹⁾	860,138			—		3,966		1,437		5,403		865,541
Gross profit	425,694			2,336		662		10,953		13,951		439,645
SG&A ⁽²⁾	314,614			—		—		10,953		10,953		325,567
Long-lived asset impairments	19,356			—		—		—		—		19,356
Other income, net	(1,649		)	30		—		—		30		(1,619		)
Operating income	93,373			2,306		662		—		2,968		96,341
Interest expense, net	31,961			—		—		—		—		31,961
Income before income taxes	61,412			2,306		662		—		2,968		64,380
Income tax expense	21,901			847		244		—		1,091		22,992
Net income	$	39,511		$	1,459	$	418	$	—	$	1,877	$	41,388
Earnings per share:
Basic	$	0.58		$	0.02	$	0.01	$	—	$	0.03	$	0.61
Diluted	$	0.58		$	0.02	$	0.01	$	—	$	0.03	$	0.61

(1) Includes warehousing, distribution and occupancy.

(2) Defined as selling, general and administrative expense.

The impact of adoption of ASC 606 on the Company's reportable segments for the three and six months ended June 30, 2017 was as follows:



	Three months ended June 30, 2017
	As Previously Reported			Franchise Fees		Specialty Manufacturing		Cooperative Advertising and Other Franchise Support Fees		Total Adjustments		As Revised
	(in thousands)
Revenue:
U.S. and Canada	$	520,804		$	661	$	—	$	6,349	$	7,010	$	527,814
International	43,631			182		—		—		182		43,813
Manufacturing / Wholesale:
Intersegment revenues	56,000			—		—		—		—		56,000
Third party	53,945			510		1,542		—		2,052		55,997
Subtotal Manufacturing / Wholesale	109,945			510		1,542		—		2,052		111,997
Total reportable segment revenues	674,380			1,353		1,542		6,349		9,244		683,624
Other	22,614			—		—		—		—		22,614
Elimination of intersegment revenues	(56,000		)	—		—		—		—		(56,000		)
Total revenue	$	640,994		$	1,353	$	1,542	$	6,349	$	9,244	$	650,238
Operating income:
U.S. and Canada	$	51,829		$	661	$	—	$	—	$	661	$	52,490
International	15,605			182		—		—		182		15,787
Manufacturing / Wholesale	17,927			510		200		—		710		18,637
Total reportable segment operating income	85,361			1,353		200		—		1,553		86,914
Corporate costs	(26,207		)	—		—		—		—		(26,207		)
Other	(19,334		)	—		—		—		—		(19,334		)
Unallocated corporate and other	(45,541		)	—		—		—		—		(45,541		)
Total operating income	$	39,820		$	1,353	$	200	$	—	$	1,553	$	41,373



	Six months ended June 30, 2017
	As Previously Reported			Franchise Fees		Specialty Manufacturing		Cooperative Advertising and Other Franchise Support Fees		Total Adjustments		As Revised
	(in thousands)
Revenue:
U.S. and Canada	$	1,050,983		$	1,062	$	—	$	12,390	$	13,452	$	1,064,435
International	83,048			516		—		—		516		83,564
Manufacturing / Wholesale:
Intersegment revenues	117,298			—		—		—		—		117,298
Third party	106,445			758		4,628		—		5,386		111,831
Subtotal Manufacturing / Wholesale	223,743			758		4,628		—		5,386		229,129
Total reportable segment revenues	1,357,774			2,336		4,628		12,390		19,354		1,377,128
Other	45,356			—		—		—		—		45,356
Elimination of intersegment revenues	(117,298		)	—		—		—		—		(117,298		)
Total revenue	$	1,285,832		$	2,336	$	4,628	$	12,390	$	19,354	$	1,305,186
Operating income:
U.S. and Canada	$	101,948		$	1,032	$	—	$	—	$	1,032	$	102,980
International	30,140			516		—		—		516		30,656
Manufacturing / Wholesale	34,484			758		662		—		1,420		35,904
Total reportable segment operating income	166,572			2,306		662		—		2,968		169,540
Corporate costs	(54,281		)	—		—		—		—		(54,281		)
Other	(18,918		)	—		—		—		—		(18,918		)
Unallocated corporate and other	(73,199		)	—		—				—		(73,199		)
Total operating income	$	93,373		$	2,306	$	662	$	—	$	2,968	$	96,341

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments for all leases with a term greater than 12 months. This standard is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018 and is required to be applied using a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented. The Company has a significant number of leases, and as a result, expects this guidance to have a material impact on its Consolidated Balance Sheet, the impact of which is currently being evaluated.