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 certain of 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 by certain of its franchisees 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 June 30, 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	(16,107		)
Increase, excluding amounts recognized as revenue during the period	22,548
Balance at June 30, 2018	$	46,441

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 June 30, 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	$	16,533
2019	8,035
2020	2,179
2021	2,012
2022	1,873
Thereafter	15,809
Total	$	46,441

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 for the three and six months ended June 30, 2018, cash flows from operating activities for the six months ended June 30, 2018 and our condensed consolidated balance sheet as of June 30, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”):

Consolidated statement of operations



	As reported for the three months ended June 30, 2018			Total adjustments			Amounts under Previous Standards			As reported for the six months ended June 30, 2018			Total adjustments			Amounts under Previous Standards
Revenue:
Franchise	$	45,417		$	762		$	46,179		$	87,579		$	2,527		$	90,106
Commission income	1,575			—			1,575			3,563			—			3,563
National advertising fund revenue	11,158			(11,158		)	—			21,620			(21,620		)	—
Corporate-owned stores	34,252			—			34,252			66,959			—			66,959
Equipment	48,148			—			48,148			82,161			—			82,161
Total revenue	140,550			(10,396		)	130,154			261,882			(19,093		)	242,789
Operating costs and expenses:
Cost of revenue	36,744			—			36,744			63,244			—			63,244
Store operations	18,047			—			18,047			36,403			—			36,403
Selling, general and administrative	17,210			—			17,210			34,831			—			34,831
National advertising fund expense	11,158			(11,158		)	—			21,620			(21,620		)	—
Depreciation and amortization	8,619			—			8,619			17,084			—			17,084
Other loss (gain)	(39		)	—			(39		)	971			—			971
Total operating costs and expenses	91,739			(11,158		)	80,581			174,153			(21,620		)	152,533
Income from operations	48,811			762			49,573			87,729			2,527			90,256
Other expense, net:
Interest expense, net	(8,628		)	—			(8,628		)	(17,361		)	—			(17,361		)
Other (expense) income	(502		)	—			(502		)	(310		)	—			(310		)
Total other expense, net	(9,130		)	—			(9,130		)	(17,671		)	—			(17,671		)
Income before income taxes	39,681			762			40,443			70,058			2,527			72,585
Provision for income taxes	9,263			200			9,463			16,146			624			16,770
Net income	30,418			562			30,980			53,912			1,903			55,815
Less net income attributable to non-controlling interests	4,544			83			4,627			8,157			279			8,436
Net income attributable to Planet Fitness, Inc.	$	25,874		$	479		$	26,353		$	45,755		$	1,624		$	47,379
Net income per share of Class A common stock:
Basic	$	0.30					$	0.30		$	0.52					$	0.54
Diluted	$	0.29					$	0.30		$	0.52					$	0.54

Consolidated Statement of Cash Flows



	As reported June 30, 2018			Total adjustments			Amounts under Previous Standards
Cash flows from operating activities:
Net income	$	53,912		$	1,903		$	55,815
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	17,084			—			17,084
Amortization of deferred financing costs	973			—			973
Amortization of favorable leases and asset retirement obligations	186			—			186
Amortization of interest rate caps	446			—			446
Deferred tax expense	13,300			—			13,300
Gain on re-measurement of tax benefit arrangement	(354		)	—			(354		)
Provision for bad debts	(8		)	—			(8		)
Loss on reacquired franchise rights	350			—			350
Loss (gain) on disposal of property and equipment	547			—			547
Equity-based compensation	2,687			—			2,687
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable	22,281			—			22,281
Due to and due from related parties	3,375			—			3,375
Inventory	(501		)	—			(501		)
Other assets and other current assets	(3,109		)	—			(3,109		)
National advertising fund	(1,634		)	—			(1,634		)
Accounts payable and accrued expenses	(16,884		)	—			(16,884		)
Other liabilities and other current liabilities	(2,908		)	—			(2,908		)
Income taxes	131			624			755
Payable to related parties pursuant to tax benefit arrangements	(21,706		)	—			(21,706		)
Equipment deposits	2,503			—			2,503
Deferred revenue	6,229			(2,527		)	3,702
Deferred rent	1594			—			1,594
Net cash provided by operating activities	$	78,494		$	—		$	78,494

Consolidated Balance Sheet



	As reported June 30, 2018			Total adjustments			Amounts under Previous Standards
Assets
Current assets:
Cash and cash equivalents	$	147,784		$	—		$	147,784
Accounts receivable, net	14,932			—			14,932
Due from related parties	—			—			—
Inventory	3,193			—			3,193
Restricted assets – national advertising fund	73			—			73
Deferred expenses – national advertising fund	1,648			—			1,648
Prepaid expenses	3,796			—			3,796
Other receivables	23,343			—			23,343
Other current assets	5,916			—			5,916
Total current assets	200,685			—			200,685
Property and equipment, net	87,570			—			87,570
Intangible assets, net	237,092			—			237,092
Goodwill	191,038			—			191,038
Deferred income taxes	406,699			(3,285		)	403,414
Other assets, net	1,637			—			1,637
Total assets	$	1,124,721		$	(3,285	)	$	1,121,436
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt	$	7,185		$	—		$	7,185
Accounts payable	16,268			—			16,268
Accrued expenses	14,715			624			15,339
Equipment deposits	9,001			—			9,001
Restricted liabilities – national advertising fund	73			—			73
Deferred revenue, current	23,186			306			23,492
Payable pursuant to tax benefit arrangements, current	25,578			—			25,578
Other current liabilities	436			—			436
Total current liabilities	96,442			930			97,372
Long-term debt, net of current maturities	693,957			—			693,957
Deferred rent, net of current portion	7,700			—			7,700
Deferred revenue, net of current portion	23,255			(15,068		)	8,187
Deferred tax liabilities	1,389			—			1,389
Payable pursuant to tax benefit arrangements, net of current portion	391,876			—			391,876
Other liabilities	1,350			—			1,350
Total noncurrent liabilities	1,119,527			(15,068		)	1,104,459
Stockholders' equity (deficit):
Class A common stock	9			—			9
Class B common stock	1			—			1
Accumulated other comprehensive loss	(385		)	—			(385		)
Additional paid in capital	14,744			—			14,744
Accumulated deficit	(94,348		)	10,574			(83,774		)
Total stockholders' deficit attributable to Planet Fitness Inc.	(79,979		)	10,574			(69,405		)
Non-controlling interests	(11,269		)	279			(10,990		)
Total stockholders' deficit	(91,248		)	10,853			(80,395		)
Total liabilities and stockholders' deficit	$	1,124,721		$	(3,285	)	$	1,121,436