PLANET FITNESS, INC., 10-K filed on 3/1/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Feb. 22, 2019
Jun. 30, 2018
Document Information [Line Items]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol PLNT    
Entity Registrant Name PLANET FITNESS, INC.    
Entity Central Index Key 0001637207    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Public Float     $ 3.9
Class A Common Stock      
Document Information [Line Items]      
Entity Common Stock, Shares Outstanding   83,600,812  
Class B Common Stock      
Document Information [Line Items]      
Entity Common Stock, Shares Outstanding   9,441,730  
v3.10.0.1
Consolidated balance sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 289,431 $ 113,080
Restricted cash 30,708 0
Accounts receivable, net of allowance for bad debts of $84 and $32 at December 31, 2018 and 2017, respectively 38,960 37,272
Due from related parties 0 3,020
Inventory 5,122 2,692
Restricted assets – NAF (note 4) 0 499
Prepaid expenses 4,947 3,929
Other receivables 12,548 9,562
Income tax receivable 6,824 6,947
Total current assets 388,540 177,001
Property and equipment, net 114,367 83,327
Intangible assets, net 234,330 235,657
Goodwill 199,513 176,981
Deferred income taxes 414,841 407,782
Other assets, net 1,825 11,717
Total assets 1,353,416 1,092,465
Current liabilities:    
Current maturities of long-term debt 12,000 7,185
Accounts payable 30,428 28,648
Accrued expenses 32,384 18,590
Equipment deposits 7,908 6,498
Restricted liabilities - NAF (note 4) 0 490
Deferred revenue, current 23,488 19,083
Payable pursuant to tax benefit arrangements, current 24,765 31,062
Other current liabilities 430 474
Total current liabilities 131,403 112,030
Long-term debt, net of current maturities 1,160,127 696,576
Deferred rent, net of current portion 10,083 6,127
Deferred revenue, net of current portion 26,374 8,440
Deferred tax liabilities 2,303 1,629
Payable pursuant to tax benefit arrangements, net of current portion 404,468 400,298
Other liabilities 1,447 4,302
Total noncurrent liabilities 1,604,802 1,117,372
Commitments and contingencies (note 15)
Stockholders' equity:    
Accumulated other comprehensive gain (loss) 94 (648)
Additional paid in capital 19,732 12,118
Accumulated deficit (394,410) (130,966)
Total stockholders' deficit attributable to Planet Fitness, Inc. (374,574) (119,486)
Non-controlling interests (8,215) (17,451)
Total stockholders' deficit (382,789) (136,937)
Total liabilities and stockholders' deficit 1,353,416 1,092,465
Class A Common Stock    
Stockholders' equity:    
Common stock, value 9 9
Class B Common Stock    
Stockholders' equity:    
Common stock, value $ 1 $ 1
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Consolidated balance sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Accounts receivable, allowance for bad debts $ 84 $ 32
Class A Common Stock    
Common stock, par value (in usd per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 300,000,000 300,000,000
Common stock, shares issued (in shares) 83,584,000 87,188,000
Common stock, shares outstanding (in shares) 83,584,000 87,188,000
Class B Common Stock    
Common stock, par value (in usd per share) $ 0.0001 $ 0.0001
Common stock, shares authorized (in shares) 100,000,000 100,000,000
Common stock, shares issued (in shares) 9,448,000 11,193,000
Common stock, shares outstanding (in shares) 9,448,000 11,193,000
v3.10.0.1
Consolidated statements of operations - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2017
Sep. 30, 2017
Jun. 30, 2017
Mar. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Revenue:                      
Total revenue $ 174,359 $ 136,656 $ 140,550 $ 121,333 $ 134,028 $ 97,496 $ 107,316 $ 91,102 $ 572,898 $ 429,942 $ 378,241
Operating costs and expenses:                      
Cost of revenue                 162,646 129,266 122,317
Store operations                 75,005 60,657 60,121
Selling, general and administrative                 72,446 60,369 50,008
National advertising fund expense                 42,619 0 0
Depreciation and amortization                 35,260 31,761 31,502
Other (gain) loss                 878 353 (1,369)
Total operating costs and expenses                 388,854 282,406 262,579
Income from operations 52,742 43,573 48,811 38,918 42,277 33,954 38,250 33,055 184,044 147,536 115,662
Other income (expense), net:                      
Interest income                 4,681 54 21
Interest expense                 (50,746) (35,337) (27,146)
Other income (expense), net                 (6,175) 316,928 1,371
Total other expense, net                 (52,240) 281,645 (25,754)
Income before income taxes                 131,804 429,181 89,908
Provision for income taxes                 28,642 373,580 18,661
Net income 28,779 20,472 30,418 23,493 829 18,902 18,004 17,866 103,162 55,601 71,247
Less net income attributable to non-controlling interests                 15,141 22,455 49,747
Net income attributable to Planet Fitness, Inc. $ 24,796 $ 17,471 $ 25,874 $ 19,880 $ (3,453) $ 15,345 $ 12,412 $ 8,842 $ 88,021 $ 33,146 $ 21,500
Class A Common Stock                      
Net income attributable to Planet Fitness, Inc.                      
Basic (usd per share) $ 0.29 $ 0.20 $ 0.30 $ 0.23 $ (0.04) $ 0.18 $ 0.16 $ 0.14 $ 1.01 $ 0.42 $ 0.50
Diluted (usd per share) $ 0.29 $ 0.20 $ 0.29 $ 0.23 $ (0.04) $ 0.18 $ 0.16 $ 0.14 $ 1.00 $ 0.42 $ 0.50
Weighted-average shares of Class A common stock outstanding:                      
Basic (shares)                 87,235,021 78,910,390 43,300,288
Diluted (shares)                 87,674,903 78,971,550 43,304,685
Franchise                      
Revenue:                      
Total revenue                 $ 175,314 $ 131,983 $ 97,374
Commission income                      
Revenue:                      
Total revenue                 6,632 18,172 19,114
National advertising fund revenue                      
Revenue:                      
Total revenue                 42,194 0 0
Corporate-owned stores                      
Revenue:                      
Total revenue                 138,599 112,114 104,721
Equipment                      
Revenue:                      
Total revenue                 $ 210,159 $ 167,673 $ 157,032
v3.10.0.1
Consolidated statements of comprehensive income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net income including non-controlling interests $ 103,162 $ 55,601 $ 71,247
Net income including non-controlling interests      
Unrealized gain (loss) on interest rate caps, net of tax 989 1,143 (78)
Foreign currency translation adjustments (200) 26 (72)
Total other comprehensive income (loss), net 789 1,169 (150)
Total comprehensive income including non-controlling interests 103,951 56,770 71,097
Less: total comprehensive income attributable to non-controlling interests 15,189 22,707 49,560
Total comprehensive income attributable to Planet Fitness, Inc. $ 88,762 $ 34,063 $ 21,537
v3.10.0.1
Consolidated statements of cash flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:      
Net income $ 103,162 $ 55,601 $ 71,247
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 35,260 31,761 31,502
Amortization of deferred financing costs 3,400 1,935 1,544
Amortization of favorable leases and asset retirement obligations 375 334 392
Amortization and settlement of interest rate caps 1,170 1,755 797
Deferred tax expense 23,933 372,422 15,606
Loss (gain) on re-measurement of tax benefit arrangement 4,765 (317,354) 72
Provision for bad debts 19 (19) 59
Loss (gain) on disposal of property and equipment 462 (159) (514)
Loss on extinguishment of debt 4,570 79 606
Third party debt refinancing expense 0 1,021 3,001
Loss on reacquired franchise rights 360 0 0
Equity-based compensation 5,479 2,531 1,728
Changes in operating assets and liabilities:      
Accounts receivable (1,923) (10,481) (7,754)
Due from related parties 3,598 (604) 1,897
Inventory (2,430) (890) 2,755
Other assets and other current assets 5,778 (2,981) (7,944)
Accounts payable and accrued expenses 14,506 4,210 7,428
Other liabilities and other current liabilities (2,835) (470) 2,747
Income taxes 194 (3,027) (5,993)
Payments pursuant to tax benefit arrangements (30,493) (11,446) (6,922)
Equipment deposits 1,410 4,328 (3,417)
Deferred revenue 9,640 1,276 (652)
Deferred rent 3,999 1,199 632
Net cash provided by operating activities 184,399 131,021 108,817
Cash flows from investing activities:      
Additions to property and equipment (40,860) (37,722) (15,377)
Acquisitions of franchises (45,752) 0 0
Proceeds from sale of property and equipment 196 680 683
Net cash used in investing activities (86,416) (37,042) (14,694)
Cash flows from financing activities:      
Proceeds from issuance of long-term debt 1,200,000 0 230,000
Proceeds from issuance of Class A common stock 1,209 480 136
Principal payments on capital lease obligations (47) (22) (46)
Repayment of long-term debt (712,469) (7,185) (5,621)
Payment of deferred financing and other debt-related costs (27,133) (1,278) (5,220)
Premiums paid for interest rate caps 0 (366) 0
Dividend paid to holders of Class A common stock 0 0 (169,282)
Dividend equivalent paid to members of Pla-Fit Holdings (957) (1,974) (101,729)
Distributions to members of Pla-Fit Holdings (8,300) (11,358) (31,838)
Net cash provided by (used in) financing activities 109,920 (21,703) (85,183)
Effects of exchange rate changes on cash and cash equivalents (844) 411 23
Net increase in cash, cash equivalents and restricted cash 207,059 72,687 8,963
Cash, cash equivalents and restricted cash, beginning of period 113,080 40,393 31,430
Cash, cash equivalents and restricted cash, end of period 320,139 113,080 40,393
Supplemental cash flow information:      
Net cash paid for income taxes 5,016 3,722 7,040
Cash paid for interest 38,624 31,418 24,302
Non-cash investing activities:      
Non-cash additions to property and equipment 5,451 861 2,203
Non-cash financing activities:      
Non-cash dividend equivalent payments 0 0 3,899
Class A Common Stock      
Cash flows from financing activities:      
Repurchase and retirement of common stock (342,383) 0 0
Class B Common Stock      
Cash flows from financing activities:      
Repurchase and retirement of common stock $ 0 $ 0 $ (1,583)
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Consolidated statement of changes in equity - USD ($)
shares in Thousands, $ in Thousands
Total
Accumulated other comprehensive income (loss)
Additional paid-in capital
Accumulated deficit
Non-controlling interests
Class A Common Stock
Class A Common Stock
Common Stock
Class B Common Stock
Class B Common Stock
Common Stock
Beginning balance at Dec. 31, 2015 $ (1,080) $ (1,710) $ 352 $ (14,032) $ 14,300   $ 4   $ 6
Beginning balance (shares) at Dec. 31, 2015             36,598   62,112
Net income 71,247     21,500 49,747        
Equity-based compensation expense 1,728   1,749 (21)          
Repurchase and retirement of common stock (shares)                 (222)
Repurchase and retirement of common stock (1,583)   (441) (1,142)          
Exchanges of Class B common stock (shares)             24,705   (24,705)
Exchanges of Class B common stock 0 499 10,976   (11,475)   $ 2   $ (2)
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges 21,695   21,695            
Exercise of stock options and vesting of restricted share units (shares)             11    
Exercise of stock options and vesting of restricted share units 136   136            
Dividend paid to holders of Class A common stock (169,282)     (169,282)          
Dividend equivalents paid or payable (105,628)     (1,085) (104,543)        
Distributions paid to members of Pla-Fit Holdings (31,838)       (31,838)        
Other comprehensive loss (150) 37     (187)        
Ending balance at Dec. 31, 2016 (214,755) (1,174) 34,467 (164,062) (83,996)   $ 6   $ 4
Ending balance (shares) at Dec. 31, 2016             61,314   37,185
Net income 55,601     33,146 22,455        
Equity-based compensation expense 2,531   2,565 (34)          
Repurchase and retirement of common stock (shares)                 (150)
Exchanges of Class B common stock (shares)             25,842   (25,842)
Exchanges of Class B common stock 0 (391) (54,042)   54,433   $ 3   $ (3)
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges 28,648   28,648            
Exercise of stock options and vesting of restricted share units (shares)             32    
Exercise of stock options and vesting of restricted share units 480   480            
Dividend paid to holders of Class A common stock 449     32 417        
Dividend equivalents paid or payable (11,060)     (48) (11,012)        
Distributions paid to members of Pla-Fit Holdings 1,169 917     252        
Other comprehensive loss 1,169                
Ending balance at Dec. 31, 2017 (136,937) (648) 12,118 (130,966) (17,451)   $ 9   $ 1
Ending balance (shares) at Dec. 31, 2017           87,188 87,188 11,193 11,193
Net income 103,162     88,021 15,141        
Equity-based compensation expense 5,479   5,482 (3)          
Repurchase and retirement of common stock (shares)             (5,431)   (9)
Repurchase and retirement of common stock (342,383)   719 (342,383) (719)        
Exchanges of Class B common stock (shares)             1,736   (1,736)
Exchanges of Class B common stock 0 1 (3,067)   3,066       $ 0
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges 3,271   3,271            
Exercise of stock options and vesting of restricted share units (shares)             91    
Exercise of stock options and vesting of restricted share units 1,209   1,209            
Forfeiture of dividend equivalents 113     113          
Distributions paid to members of Pla-Fit Holdings (8,300)       (8,300)        
Cumulative effect adjustment (Note 10) (9,192)     (9,192)          
Other comprehensive loss 789 741     48        
Ending balance at Dec. 31, 2018 $ (382,789) $ 94 $ 19,732 $ (394,410) $ (8,215)   $ 9   $ 1
Ending balance (shares) at Dec. 31, 2018           83,584 83,584 9,448 9,448
v3.10.0.1
Business organization
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Business organization
Business organization
Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with approximately 12.5 million members and 1,742 owned and franchised locations (referred to as stores) in all 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic, Panama and Mexico as of December 31, 2018.
The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:
Licensing and selling franchises under the Planet Fitness trade name;
Owning and operating fitness centers under the Planet Fitness trade name; and
Selling fitness-related equipment to franchisee-owned stores.
In 2012 investment funds affiliated with TSG Consumer Partners, LLC (“TSG”), purchased interests in Pla-Fit Holdings.
The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) and related transactions in order to carry on the business of Pla-Fit Holdings, LLC and its subsidiaries (“Pla-Fit Holdings”). As of August 5, 2015, in connection with the recapitalization transactions, the Company became the sole managing member and holder of 100% of the voting power of Pla-Fit Holdings. Pla-Fit Holdings owns 100% of Planet Intermediate, LLC which has no operations but is the 100% owner of Planet Fitness Holdings, LLC, a franchisor and operator of fitness centers. With respect to the Company, Pla-Fit Holdings and Planet Intermediate, LLC, each entity owns nothing other than the respective entity below it in the corporate structure and each entity has no other material operations.
The Company is a holding company whose principal asset is a controlling equity interest in Pla-Fit Holdings. As the sole managing member of Pla-Fit Holdings, the Company operates and controls all of the business and affairs of Pla-Fit Holdings, and through Pla-Fit Holdings, conducts its business. As a result, the Company consolidates Pla-Fit Holdings’ financial results and reports a non-controlling interest related to the portion of Holdings Units not owned by the Company.
The recapitalization transactions are considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the recapitalization transactions are the financial statements of Pla-Fit Holdings as the predecessor to the Company for accounting and reporting purposes.  Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.
Secondary offerings
In June 2016, the Company completed a secondary offering (“June Secondary Offering”) of 11,500,000 shares of its Class A common stock at a price of $16.50 per share. All of the shares sold in the June Secondary Offering were offered by certain Continuing LLC Owners and TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”). The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating Continuing LLC Owners. The shares sold in the June Secondary Offering consisted of (i) 3,608,840 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 7,891,160 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the June Secondary Offering. Simultaneously, and in connection with the exchange, 7,891,160 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the June Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 7,891,160 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In September 2016, the Company completed a secondary offering (“September Secondary Offering”) of 8,000,000 shares of its Class A common stock at a price of $19.62 per share. All of the shares sold in the September Secondary Offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the Continuing LLC Owners that participating in the September Secondary Offering. The shares sold in the September Secondary Offering consisted of (i) 2,593,981 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 5,406,019 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the September Secondary offering. Simultaneously, and in connection with the exchange, 5,406,019 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the September Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 5,406,019 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In November 2016, the Company completed a secondary offering (“November Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $23.22 per share. All of the shares sold in the November Secondary Offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the Continuing LLC Owners that participating in the September Secondary Offering. The shares sold in the November Secondary Offering consisted of (i) 4,863,715 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,136,285 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the November Secondary offering. Simultaneously, and in connection with the exchange, 10,136,285 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the November Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,136,285 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In March 2017, the Company completed a secondary offering (“March Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In May 2017, the Company completed a secondary offering (“May Secondary Offering”) of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In addition to the secondary offering transactions described above, during the years ended December 31, 2018 and 2017, certain Continuing LLC Owners have exercised their exchange rights and exchanged 1,736,020 and 4,762,943 Holdings Units, respectively, for 1,736,020 and 4,762,943 newly-issued shares of Class A common stock, respectively. Simultaneously, and in connection with these exchanges, 1,736,020 and 4,762,943 shares of Class B common stock were surrendered by the Continuing LLC Owners that exercised their exchange rights and canceled during the years ended December 31, 2018 and 2017, respectively. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 1,736,020 and 4,762,943 Holdings Units during the years ended December 31, 2018 and 2017, respectively, increasing its total ownership interest in Pla-Fit Holdings.
As of December 31, 2018, the Company held 100% of the voting interest, and approximately 89.8% of the economic interest in Pla-Fit Holdings and the Continuing LLC Owners held the remaining 10.2% economic interest in Pla-Fit Holdings. As future exchanges of Holdings Units occur, the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. will increase.
v3.10.0.1
Summary of significant accounting policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of significant accounting policies
Summary of significant accounting policies
(a) Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany balances and transactions have been eliminated in consolidation.
As discussed in Note 1, Planet Fitness, Inc. consolidates Pla-Fit Holdings. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include franchise entities and certain other entities. The Company is not deemed to be the primary beneficiary for Planet Fitness franchise entities. Therefore, these entities are not consolidated.
The results of the Company have been consolidated with Matthew Michael Realty LLC (“MMR”), PF Melville LLC (“PF Melville”), and Planet Fitness NAF, LLC (the “NAF”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. MMR and PF Melville are real estate holding companies that derive a majority of their financial support from the Company through lease agreements for corporate stores. See Note 3 for further information related to the Company’s VIEs. The NAF is an advertising fund on behalf of which the Company collects 2% of gross monthly membership fees from franchisees, in accordance with the provisions of the franchise agreements, and uses the amounts received to increase sales and further enhance the public reputation of the Planet Fitness brand. See Note 4 for further information related to the NAF.
(b) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Significant areas where estimates and judgments are relied upon by management in the preparation of the consolidated financial statements include revenue recognition, valuation of equity-based compensation awards, the evaluation of the recoverability of goodwill and long-lived assets, including intangible assets, income taxes, including deferred tax assets and liabilities and reserves for unrecognized tax benefits, and the liability for the Company’s tax benefit arrangements.
(c) Concentrations
Cash and cash equivalents are financial instruments, which potentially subject the Company to a concentration of credit risk. The Company invests its excess cash in several major financial institutions, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company maintains balances in excess of these limits, but does not believe that such deposits with its banks are subject to any unusual risk.
The credit risk associated with trade receivables is mitigated due to the large number of customers, generally our franchisees, and their broad dispersion over many different geographic areas. We do not have any concentrations with respect to our revenues.
The Company purchases equipment, both for corporate-owned stores and for sales to franchisee-owned stores from various equipment vendors. For the year ended December 31, 2018 purchases from two equipment vendors comprised 76% and 13%, respectively, of total equipment purchases. For the year ended December 31, 2017 purchases from one equipment vendor comprised 91% of total equipment purchases and for the year ended December 31, 2016 purchases from two equipment vendors comprised 83% and 13%, respectively, of total equipment purchases.
The Company, including the NAF, uses one primary vendor for advertising services. For the year ended December 31, 2018, purchases from this vendor comprised 65% of total advertising purchases. For the year ended December 31, 2017 purchases from one vendor comprised 63% of total advertising purchases and for the year ended December 31, 2016 purchases from two vendors comprised 25% and 16% of total advertising purchases, respectively. (see Note 4 for further discussion of the NAF).
(d) Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash held within the NAF is recorded as a restricted asset (see Note 4).
In accordance with the Company’s securitized financing facility, certain cash accounts have been established in the name of Citibank, N.A. (the “Trustee”). The Company holds restricted cash which primarily represents cash collections held by the Trustee, which includes interest, principal, and commitment fee reserves. As of December 31, 2018, the Company had restricted cash held by the Trustee of $30,708. Restricted cash has been combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows.
(e) 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 (see Note 10).
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, NAF contributions, initial and successor 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 monthly dues and annual fees 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 successor franchise fees are payable by the franchisee upon signing a new franchise agreement or successor 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 NAF 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 successor 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. Successor franchise fees and transfer fees were recognized as revenue upon execution of a new franchise agreement. Our ADAs generally consist 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. In most instances, the Company recognizes equipment revenue on a gross basis 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.
Membership dues revenue
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.
Sales tax
All revenue amounts are recorded net of applicable sales tax.
Revenue Recognition Significant Accounting Policies under Previous Standards, prior to January 1, 2018 if different than under ASC 606
Franchise revenue
The following revenues are generated as a result of transactions with or related to the Company’s franchisees.
Area development fees
ADA fees collected in advance are deferred until the Company provides substantially all required obligations pursuant to the ADA. As the efforts and total cost relating to initial services are affected significantly by the number of stores opened in an area, the respective ADA is treated as a divisible contract. As each new site is accepted under an ADA, a franchisee signs a franchise operating agreement for the respective franchise location. As each store opened under an ADA typically has performance obligations associated with it, the Company recognizes ADA revenue as each individual franchise location is developed in proportion to the total number of stores to be developed under the ADA. These obligations are typically completed once the store is opened or the franchisee executes the individual property lease. ADAs generally have an initial term equal to the number of years over which the franchisee is required to open franchise stores, which is typically 5 to 10 years. There is no right of refund for an executed ADA. Upon default, as defined in the agreement, the Company may reacquire the rights pursuant to an ADA, and all remaining deferred revenue is recognized at that time.
Franchise fees and performance fees
Nonrefundable franchise fees are typically deferred until the franchisee executes a lease and receives initial training for the location, which is the point at which the Company has determined it has provided all of its material obligations required to recognize revenue. These amounts are included in deferred revenue on our consolidated balance sheets.
The individual franchise agreements typically have a 10-year initial term, but provide the franchisee with an opportunity to enter into successive renewals subject to certain conditions.
Transfer fees
The Company’s current franchise agreement provides that upon the transfer of a Planet Fitness store to a different franchisee, the Company is entitled to a transfer fee in the amount of the greater of $25, or $10 per store being transferred, if more than one, in addition to reimbursement of out-of-pocket expenses, including external legal and administrative costs incurred in connection with the transfer. Transfer-related fees and expenses are due, payable, and recognized at the time the transfer is effectuated.
Royalties
Royalties, which represent recurring fees paid by franchisees based on the franchisee-owned stores’ monthly and annual membership billings, are recognized on a monthly basis over the term of the franchise agreement. As specified under certain franchise agreements, the Company recognizes additional royalty fees as the franchisee-owned stores attain contractual monthly membership billing threshold amounts.
Equipment revenue
Equipment revenue is recognized upon the equipment being delivered to and assembled at each store and accepted by the franchisee. 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 because the Company is the primary obligor in these transactions, the Company has latitude in establishing prices for the equipment sales to franchisees, the Company has supplier selection discretion and is involved in determination of product specifications, and the Company bears all credit risk associated with obligations to the equipment manufacturers.
Equipment deposits are recognized as a liability on the accompanying consolidated balance sheets until delivery, assembly (if required), and acceptance by the franchisee.
(f) Deferred revenue
Subsequent to the adoption of ASC 606 franchise deferred revenue results from initial and successor 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 and under the Previous Standard franchise deferred revenue represents cash received from franchisees for ADAs and franchise fees for which revenue recognition criteria has not yet been met. Deferred revenue is also recognized in our corporate-owned stores segment for cash received from members for enrollment fees, membership dues and annual fees for the portion not yet earned based on the membership period under both ASC 606 and the Previous Standard.
(g) Cost of revenue
Cost of revenue consists primarily of direct costs associated with equipment sales (including freight costs) and the cost of retail merchandise sold in corporate-owned stores. Costs related to retail merchandise sales were immaterial in all periods presented. Rebates from equipment vendors where the Company has recognized the related equipment revenue and costs are recorded as a reduction to the cost of revenue.
(h) Store operations
Store operations consists of the direct costs related to operating corporate-owned stores, including our store management and staff, rent expense, utilities, supplies, maintenance, and local advertising.
(i) Selling, general and administrative
Selling, general and administrative expenses consist of costs associated with administrative and franchisee support functions related to our existing business as well as growth and development activities. These costs primarily consist of payroll, IT related, marketing, legal and accounting expenses. These expenses include costs related to placement services of $5,397, $4,601, and $3,970, for the years ended December 31, 2018, 2017 and 2016, respectively.
(j) Accounts receivable
Accounts receivable is primarily comprised of amounts owed to the Company resulting from equipment, placement, and commission revenue. The Company evaluates its accounts receivable on an ongoing basis and may establish an allowance for doubtful accounts based on collections and current credit conditions. Accounts are written off as uncollectible when it is determined that further collection efforts will be unsuccessful. Historically, the Company has not had a significant amount of write-offs.
(k) Leases and asset retirement obligations
The Company recognizes rent expense related to leased office and operating space on a straight-line basis over the term of the lease. The difference between rent expense and rent paid, if any, as a result of escalation provisions and lease incentives, such as tenant improvements provided by lessors, and is recorded as deferred rent in the Company’s consolidated balance sheets.
In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations, the Company establishes assets and liabilities for the present value of estimated future costs to return certain leased facilities to their original condition. Such assets are depreciated on a straight-line basis over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs.
(l) Property and equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over its related estimated useful life. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset, whichever is shorter. Upon sale or retirement, the asset cost and related accumulated depreciation are removed from the respective accounts, and any related gain or loss is reflected in the consolidated statements of operations. Ordinary maintenance and repair costs are expensed as incurred. The estimated useful lives of the Company’s fixed assets by class of asset are as follows:
 
 
Years
Buildings and building improvements
20–40
Information technology and systems
3-5
Furniture and fixtures
5
Leasehold improvements
Useful life or term of lease
whichever is shorter
Fitness equipment
5–7
Vehicles
5


(m) Advertising expenses
The Company expenses advertising costs as incurred. Advertising expenses, net of amounts reimbursed by franchisees, are included within store operations and selling, general and administrative expenses and totaled $12,101, $9,906, and $8,270 for the years ended December 31, 2018, 2017 and 2016, respectively. See Note 4 for discussion of the national advertising fund.
(n) Goodwill, long-lived assets, and other intangible assets
Goodwill and other intangible assets that arise from acquisitions are recorded in accordance with ASC Topic 350, Intangibles—Goodwill and Other. In accordance with this guidance, specifically identified intangible assets must be recorded as a separate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is separable. Intangibles are typically trade and brand names, customer relationships, noncompete agreements, reacquired franchise rights, and favorable or unfavorable leases. Transactions are evaluated to determine whether any gain or loss on reacquired franchise rights, based on their fair value, should be recognized separately from identified intangibles. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.
Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives on either a straight-line or accelerated basis as deemed appropriate, and are reviewed for impairment when events or circumstances suggest that the assets may not be recoverable.
The Company performs its annual test for impairment of goodwill and indefinite lived intangible assets on December 31 of each year. For goodwill, the first step of the impairment test is to determine whether the carrying amount of a reporting unit exceeds the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, the Company would be required to perform a second step of the impairment test as this is an indication that the reporting unit’s goodwill may be impaired. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. Any impairment loss would be recognized in an amount equal to the excess of the carrying value of the goodwill over the implied fair value of the goodwill. The Company is also permitted to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the Company concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.
For indefinite lived intangible assets, the impairment assessment consists of comparing the carrying value of the asset to its estimated fair value. To the extent that the carrying value exceeds the fair value of the asset, an impairment is recorded to reduce the carrying value to its fair value. The Company is also permitted to make a qualitative assessment of whether it is more likely than not an indefinite lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If based on the Company’s qualitative assessment it is not more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment is not required.
The Company determined that no impairment charges were required during any periods presented.
The Company applies the provisions of ASC Topic 360, Property, Plant and Equipment, which requires that long-lived assets, including amortizable intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for impairment, then assets are required to be grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the undiscounted future net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no events or changes in circumstances that required the Company to test for impairment during any of the periods presented.
(o) Income taxes
The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from acquisitions and the recapitalization transactions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Planet Fitness, Inc. is the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including Planet Fitness, Inc. following the recapitalization transactions, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings. The Company is also subject to taxes in foreign jurisdictions.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs (see Note 14).
(p) Tax benefit arrangements
The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings, LLC who are unaffiliated with TSG (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. Also, pursuant to the exchange agreement, to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the TRA Holders have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such tax liability (up to 3.5% of the value received upon exchange). If and when the Company subsequently realizes a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant Continuing LLC Owner in respect of its contribution. Due to changes in New Hampshire tax law, the Company no longer expects to incur any such liability under the New Hampshire business profits tax.
Based on current projections, the Company anticipates having sufficient taxable income to utilize these tax attributes and receive corresponding tax deductions in future periods. Accordingly, as of December 31, 2018 the Company has recorded a liability of $429,233 payable to the TRA Holders under the tax benefit obligations, representing approximately 85% of the calculated tax savings based on the original basis adjustments the Company anticipates being able to utilize in future years. Changes in the projected liability resulting from these tax benefit arrangements may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and impact the expected future tax benefits to be received by the Company. Changes in the projected liability under these tax benefit arrangements will be recorded as a component of other income (expense) each period. The projection of future taxable income involves significant judgment. Actual taxable income may differ from estimates, which could significantly impact the liability under the tax benefit arrangements and the Company’s consolidated results of operations.  
(q) Fair value
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2017
 
Total fair value at
December 31, 2018
 
Quoted prices
in active markets
markets (Level 1)
 
Significant
other observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
Interest rate caps
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Total fair value at
December 31, 2017
 
Quoted prices
in active markets
markets (Level 1)
 
Significant
other observable
inputs (Level 2)
 
Significant
unobservable
inputs (Level 3)
Interest rate caps
$
340

 
$

 
$
340

 
$

 
The carrying value and estimated fair value of long-term debt as of December 31, 2018 and December 31, 2017 were as follows:
 
 
December 31, 2018
 
December 31, 2017
 
 
Carrying value
 
Estimated fair value(1)
 
Carrying value
 
Estimated fair value(2)
Long-term debt
 
$
1,197,000

 
$
1,188,985

 
$
709,470

 
$
709,470

(1) The estimated fair value of our long-term debt is estimated primarily based on current bid prices for our long-term debt. Judgment is required to develop these estimates. As such, the fair value of our long-term debt is classified within Level 2, as defined under U.S. GAAP.
(2) The carrying value of the Term Loan B debt approximated fair value as of December 31, 2017 as it was variable rate debt.

(r) Financial instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments.
(s) Derivative instruments and hedging activities
The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.
The Company only enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 8 for further information.
(t) Equity-based compensation
The Company has an equity-based compensation plan under which it receives services from employees and directors as consideration for equity instruments of the Company. The compensation expense is determined based on the fair value of the award as of the grant date. Compensation expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. For awards with graded vesting, the fair value of each tranche is recognized over its respective vesting period. The Company accounts for forfeitures as they occur by reversing compensation cost for unvested awards when the award is forfeited. See Note 13 for further information.
(u) Guarantees
The Company, as a guarantor, is required to recognize, at inception of the guaranty, a liability for the fair value of the obligation undertaken in issuing the guarantee. See Notes 3 and 16 for further discussion of such obligations guaranteed.
(v) Contingencies
The Company records estimated future losses related to contingencies when such amounts are probable and estimable. The Company includes estimated legal fees related to such contingencies as part of the accrual for estimated future losses.
(w) Reclassifications
Certain amounts have been reclassified to conform to current year presentation.
(x) Recent accounting pronouncements
The FASB issued Accounting Standards Update (ASU) No. 2014-9, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company adopted this new guidance in fiscal year 2018 utilizing the modified retrospective method. See above for revenue recognition policies and Note 10.
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, Leases, in February 2016. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Leases will be classified as finance or operating, with the classification affecting the pattern and classification of expense recognition within the income statement.
The new guidance is effective for fiscal years beginning after December 15, 2018 and requires a modified retrospective transition approach with application in all comparative periods presented (the “comparative method”), or alternatively, as of the effective date as the date of initial application without restating comparative period financial statements (the “effective date method”). The Company expects to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new guidance also provides several practical expedients and policies that companies may elect upon transition. The Company has elected the package of practical expedients under which we will not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. The Company does not expect to elect the practical expedient pertaining to land easements, as it is not applicable to its leases. Additionally, the Company elected to use the practical expedient that permits a reassessment of lease terms for existing leases using hindsight.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company currently expects to elect the short-term lease recognition exemption. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components.
The Company performed an analysis of the impact of the new lease guidance and are in the process of completing the final phase of a comprehensive plan for our implementation of the new guidance. The project plan includes analyzing the impact of the new guidance on our current lease contracts, reviewing the completeness of our existing lease portfolio, comparing our accounting policies under current accounting guidance to the new accounting guidance and identifying potential differences from applying the requirements of the new guidance to our lease contracts. Upon transition to the new guidance on January 1, 2019, the Company currently expects to recognize between $125 million and $135 million of operating lease liabilities. Additionally, the Company expects to record right-of-use assets in a corresponding amount, net of amounts reclassified from other assets and liabilities, as specified by the new lease guidance.
The FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company has adopted the guidance as of January 1, 2018 on a prospective basis, noting no material impact on its consolidated financial statements.
The FASB issued ASU No. 2017-4, Simplifying the Test for Goodwill Impairment, in January 2017. This guidance eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, in August 2017. The guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. This guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company does not expect the adoption of this guidance to have an impact on its consolidated financial statements.
The FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, in August 2018. The guidance helps align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year, but allows for early adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
v3.10.0.1
Variable interest entities
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Variable interest entities
Variable interest entities
The carrying values of VIEs included in the consolidated financial statements as of December 31, 2018 and December 31, 2017 are as follows:
 
December 31, 2018
 
December 31, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
PF Melville
$
4,787

 
$

 
$
4,420

 
$

MMR
$
3,563

 

 
$
3,360

 

Total
$
8,350

 
$

 
$
7,780

 
$


The Company also has variable interests in certain franchisees through the guarantee of certain lease agreements. The Company’s maximum obligation, as a result of its guarantees of leases, is approximately $732 and $979 as of December 31, 2018 and 2017, respectively.
The amount of the Company’s maximum obligation represents a loss that the Company could incur from the variability in credit exposure without consideration of possible recoveries through insurance or other means. In addition, the amount bears no relation to the ultimate settlement anticipated to be incurred from the Company’s involvement with these entities, which is estimated at $0.
v3.10.0.1
National advertising fund
12 Months Ended
Dec. 31, 2018
Related Party Transactions [Abstract]  
National advertising fund
National advertising fund
On July 26, 2011, the Company established the NAF for the creation and development of marketing, advertising, and related programs and materials for all Planet Fitness stores located in the United States and Puerto Rico. On behalf of the NAF, the Company collects 2% of gross monthly membership billings from franchisees, in accordance with the provisions of the franchise agreements, which subsequent to the adoption of ASC 606 is reflected on January 1, 2018, is reflected as NAF revenue on the consolidated statements of operations (see Note 2 and Note 10). The Company also contributes 2% of monthly membership billings from stores owned by the Company to the NAF, which is reflected in store operations expense in the consolidated statements of operations. The use of amounts received by the NAF is restricted to advertising, product development, public relations, merchandising, and administrative expenses and programs to increase sales and further enhance the public reputation of the Planet Fitness brand. The Company consolidates and reports all assets and liabilities held by the NAF within the consolidated financial statements. Amounts received or receivable by NAF are reported as restricted assets and restricted liabilities within current assets and current liabilities on the consolidated balance sheets. Beginning in 2018 with the adoption of ASC 606, the Company records all revenues of the NAF within franchise revenue and all expenses of the NAF within the operating expenses on the consolidated statement of operations (see Note 2 and Note 10). The Company provides administrative services to the NAF and charges the NAF a fee for providing those services. These services include accounting, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted $2,472, $2,150 and $1,700 for the years ended December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018, subsequent to the adoption of ASC 606, the fees paid to the Company by the NAF are reflected as expense in the NAF expense line, and reflected as a corresponding reduction in general and administrative expenses in the consolidated statements of operations (see Note 2 and Note 10). For the years ended December 31, 2017 and 2016 the fees paid to the Company by the NAF are included in the consolidated statements of operations as a reduction in general and administrative expense, where the expense incurred by the Company was initially recorded.
v3.10.0.1
Acquisition
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Acquisition
Acquisition
Colorado Acquisition
On August 10, 2018, the Company purchased from one of its franchisees certain assets associated with four franchisee-owned stores in Colorado for a cash payment of $17,249. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $10, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $17,239. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
3,873

Reacquired franchise rights
4,610

Customer relationships
140

Favorable leases, net
80

Other assets
143

Goodwill
8,476

Liabilities assumed, including deferred revenues
(83
)
 
17,239


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations of the Company.
Long Island Acquisition
On January 1, 2018, the Company purchased from one of its franchisees certain assets associated with six franchisee-owned stores in New York for a cash payment of $28,503. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $350, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $28,153. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
$
4,672

Reacquired franchise rights
7,640

Customer relationships
1,150

Favorable leases, net
520

Reacquired area development rights
150

Other assets
275

Goodwill
14,056

Liabilities assumed, including deferred revenues
(310
)
 
$
28,153


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations of the Company.
v3.10.0.1
Property and equipment
12 Months Ended
Dec. 31, 2018
Property, Plant and Equipment [Abstract]  
Property and equipment
Property and equipment
Property and equipment as of December 31, 2018 and 2017 consists of the following: 
 
December 31, 2018
 
December 31, 2017
Land
$
1,341

 
$
910

Equipment
40,895

 
32,403

Leasehold improvements
76,832

 
60,181

Buildings and improvements
8,632

 
5,107

Furniture & fixtures
13,827

 
9,790

Information technology and systems assets
17,238

 
6,449

Other
1,593

 
1,474

Construction in progress
7,095

 
3,241

 
167,453

 
119,555

Accumulated Depreciation
(53,086
)
 
(36,228
)
Total
$
114,367

 
$
83,327


 
The Company recorded depreciation expense of $19,540, $13,886, and $12,131 for the years ended December 31, 2018, 2017 and 2016, respectively.
v3.10.0.1
Goodwill and intangible assets
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and intangible assets
Goodwill and intangible assets
A summary of goodwill and intangible assets at December 31, 2018 and 2017 is as follows:
December 31, 2018
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
11.0
 
$
173,063

 
(99,439
)
 
$
73,624

Noncompete agreements
5.0
 
14,500

 
(14,500
)
 

Favorable leases
8.0
 
4,017

 
(2,345
)
 
1,672

Order backlog
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
7.0
 
21,349

 
(8,615
)
 
12,734

 
 
 
216,329

 
(128,299
)
 
88,030

Indefinite-lived intangible:
 
 
 
 
 
 
 
Trade and brand names
N/A
 
146,300

 

 
146,300

Total intangible assets
 
 
$
362,629

 
$
(128,299
)
 
$
234,330

Goodwill
 
 
$
199,513

 
$

 
$
199,513

 
December 31, 2017
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
11.1
 
$
171,782

 
(86,501
)
 
$
85,281

Noncompete agreements
5.0
 
14,500

 
(14,500
)
 

Favorable leases
7.5
 
2,935

 
(1,972
)
 
963

Order backlog
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
5.8
 
8,950

 
(5,837
)
 
3,113

 
 
 
201,567

 
(112,210
)
 
89,357

Indefinite-lived intangible:
 
 
 
 
 
 
 
Trade and brand names
N/A
 
146,300

 

 
146,300

Total intangible assets
 
 
$
347,867

 
$
(112,210
)
 
$
235,657

Goodwill
 
 
$
176,981

 
$

 
$
176,981


 
A rollforward of goodwill during the years ended December 31, 2018 or 2017 is as follows:
 
Franchise
 
Corporate-owned stores
 
Equipment
 
Total
As of December 31, 2016
16,938

 
67,377

 
92,666

 
176,981

Additions

 

 

 

As of December 31, 2017
16,938

 
67,377

 
92,666

 
176,981

Acquisition of franchisee-owned stores

 
22,532

 

 
22,532

As of December 31, 2018
16,938

 
89,909

 
92,666

 
199,513



Amortization expense related to the intangible assets totaled $16,089, $18,205, and $19,757 for the years ended December 31, 2018, 2017 and 2016, respectively. Included within these total amortization expense amounts are $369, $330, and $386 related to amortization of favorable and unfavorable leases for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization of favorable and unfavorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense to be recognized in future years as of December 31, 2018 is as follows:
 
Amount
2019
$
16,153

2020
14,302

2021
14,276

2022
14,467

2023
14,316

Thereafter
14,516

Total
$
88,030

v3.10.0.1
Long-term debt
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Long-term debt
Long-term debt
Long-term debt as of December 31, 2018 and 2017 consists of the following:  
 
December 31, 2018
 
December 31, 2017
Class A-2-I notes
$
573,563

 
$

Class A-2-II notes
623,437

 

Term loan B, repaid August 2018

 
709,470

Total debt, excluding deferred financing costs
1,197,000

 
709,470

Deferred financing costs, net of accumulated amortization
(24,873
)
 
(5,709
)
Total debt
1,172,127

 
703,761

Current portion of long-term debt and Variable Funding Note
12,000

 
7,185

Long-term debt, net of current portion
$
1,160,127

 
$
696,576


 
On August 1, 2018, Planet Fitness Master Issuer LLC (the “Master Issuer”), a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary of Pla-Fit Holdings, LLC, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2018-1 4.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $575,000 and Series 2018-1 4.666% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $625,000. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility that allows for the issuance of up to $75,000 in Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes” and together with the Class A-2 Notes, the “Series 2018-1 Senior Notes”), and certain letters of credit, all of which is currently undrawn. The Class A-2 Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic revenue-generating assets, consisting principally of franchise-related agreements, certain corporate-owned store assets, equipment supply agreements and intellectual property and license agreements for the use of intellectual property, were assigned to the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Series 2018-1 Senior Notes and that have pledged substantially all of their assets to secure the Series 2018-1 Senior Notes.

Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the Class A-2 Notes is in September 2048, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in September 2022 and the Class A-2-II Notes will be repaid in September 2025 (together, the "Anticipated Repayment Dates"). If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to the respective Anticipated Repayment Dates, additional interest will accrue pursuant to the Indenture.

The Variable Funding Notes will accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars, or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Variable Funding Note agreement. There is a commitment fee on the unused portion of the Variable Funding Notes of 0.5% based on utilization. It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to September 2023, subject to two additional one-year extensions. Following the anticipated repayment date (and any extensions thereof) additional interest will accrue on the Variable Funding Notes equal to 5.0% per year.

In connection with the issuance of the Series 2018-1 Senior Notes, the Company incurred debt issuance costs of $27,133. The debt issuance costs are being amortized to “Interest expense” through the Anticipated Repayment Dates of the Class A-2 Notes utilizing the effective interest rate method.

The Series 2018-1 Senior Notes are subject to covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2018-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2018-1 Senior Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information and similar matters. The Series 2018-1 Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled Anticipated Repayment Dates. The Series 2018-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2018-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.

In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee (the "Trustee") for the benefit of the trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents cash collections held by the Trustee, interest, principal, and commitment fee reserves held by the Trustee related to the Company’s Series 2018-1 Senior Notes. As of December 31, 2018, the Company had restricted cash held by the Trustee of $30,708. Restricted cash has been combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows.

The proceeds from the issuance of the Class A-2 Notes were used to repay all amounts outstanding on the Term Loan B under the Company’s prior credit facility. As a result, the Company recorded a loss on early extinguishment of debt of $4,570 within interest expense on the consolidated statement of operations, primarily consisting of the write-off of deferred costs related to the prior credit facility. In connection with the repayment of the Term Loan B, the Company terminated the related interest rate caps with notional amounts totaling $219,837, which had been designated as a cash flow hedge. See Note 8 for more information on the interest rate caps.
On November 10, 2016, the Company amended its credit facility to increase the Revolving Credit Facility to $75,000, reduce the interest rate margin for term loan borrowings by 25 basis points, and increase the Term Loan to $718,450 primarily in order to fund a cash dividend and other equivalent payments totaling $271,011. In connection with the amendment, during the year ended December 31, 2016, the Company capitalized and deferred financing costs of $2,219, recorded expense of $3,001 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $606 included in interest expense on the consolidated statement of operations.
On May 26, 2017, the Company amended the credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, to LIBOR plus 300 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment to the credit agreement also reduced the interest rate margin for revolving loan borrowings by 25 basis points. In connection with the amendment to the credit agreement, in the year ended December 31, 2017, the Company capitalized deferred financing costs of $257, recorded expense of $1,021 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $79 included in interest expense on the consolidated statement of operations.
Future annual principal payments of long-term debt as of December 31, 2018 are as follows:  
 
Amount
2019
$
12,000

2020
12,000

2021
12,000

2022
562,563

2023
6,250

Thereafter
592,187

Total
$
1,197,000

v3.10.0.1
Derivative instruments and hedging activities
12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative instruments and hedging activities
Derivative instruments and hedging activities
Prior to the refinancing transactions described in Note 8, the Company used interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.
In order to manage the market risk arising from the previously outstanding term loans, the Company entered into a series of interest rate caps. As of December 31, 2018, the Company had no interest rate cap agreements outstanding. In connection with the issuance of the Class A-2 Notes, the Company terminated the interest rate caps it had entered into in order to hedge one month LIBOR greater than 2.5% through March 31, 2019.
The interest rate cap balances of $0 and $340 were recorded within other assets in the consolidated balance sheets as of December 31, 2018 and 2017, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. During the year ended December 31, 2018, the Company has reversed all historical unrealized gains and losses associated with its interest rate caps due to the termination or maturity of all previously outstanding caps. The Company recorded an increase to the value of its interest rate caps of $1,143 net of tax of $280 for the year ended December 31, 2017, and a reduction to the value of its interest rate caps of $78, net of tax of $35, during the years ended December 31, 2016, within other comprehensive income (loss).
v3.10.0.1
Revenue recognition
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
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.
Contract Liabilities

Contract liabilities consist of deferred revenue resulting from initial and successor 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-owned 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 December 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
(20,439
)
Increase, excluding amounts recognized as revenue during the period
30,301

Balance at December 31, 2018
$
49,862



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 December 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
2019
 
$
23,606

2020
 
2,797

2021
 
2,432

2022
 
2,345

2023
 
2,261

Thereafter
 
16,421

Total
 
$
49,862



The summary set forth below represents the balances in deferred revenue as of December 31, 2018 and 2017:
 
December 31, 2018
 
December 31, 2017
Prepaid membership fees
$
6,085

 
$
5,198

Enrollment fees
1,104

 
1,014

Equipment discount
3,855

 
2,567

Annual membership fees
10,142

 
8,113

Area development and franchise fees
28,676

 
10,631

Total deferred revenue
49,862

 
27,523

Long-term portion of deferred revenue
26,374

 
8,440

Current portion of deferred revenue
$
23,488

 
$
19,083


 
Equipment deposits received in advance of delivery as of December 31, 2018 and 2017 were $7,908 and $6,498, respectively and are expected to be recognized as revenue in the next twelve months.
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:
 
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, successor 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 year ended December 31, 2018, cash flows from operating activities for the year ended December 31, 2018 and our condensed consolidated balance sheet as of December 31, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”):
 
As reported for the year ended December 31, 2018
 
Total adjustments
 
Amounts under Previous Standards
Revenue:
 
 
 
 
 
Franchise
$
175,314

 
$
5,666

 
$
180,980

Commission income
6,632

 

 
6,632

National advertising fund revenue
42,194

 
(42,194
)
 

Corporate-owned stores
138,599

 

 
138,599

Equipment
210,159

 

 
210,159

Total revenue
572,898

 
(36,528
)
 
536,370

Operating costs and expenses:
 
 
 
 
 
Cost of revenue
162,646

 

 
162,646

Store operations
75,005

 

 
75,005

Selling, general and administrative
72,446

 

 
72,446

National advertising fund expense
42,619

 
(42,619
)
 

Depreciation and amortization
35,260

 

 
35,260

Other loss (gain)
878

 

 
878

Total operating costs and expenses
388,854

 
(42,619
)
 
346,235

Income from operations
184,044

 
6,091

 
190,135

Other expense, net:
 
 
 
 
 
Interest income
4,681

 

 
4,681

Interest expense
(50,746
)
 

 
(50,746
)
Other (expense) income
(6,175
)
 

 
(6,175
)
Total other expense, net
(52,240
)
 

 
(52,240
)
Income before income taxes
131,804

 
6,091

 
137,895

Provision for income taxes
28,642

 
1,437

 
30,079

Net income
103,162

 
4,654

 
107,816

Less net income attributable to non-controlling interests
15,141

 
642

 
15,783

Net income attributable to Planet Fitness, Inc.
$
88,021

 
$
4,012

 
$
92,033

Net income per share of Class A common stock: