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EX-32.2 - EX-32.2 - Planet Fitness, Inc.plnt-ex322_7.htm
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EX-32.1 - EX-32.1 - Planet Fitness, Inc.plnt-ex321_6.htm
EX-31.1 - EX-31.1 - Planet Fitness, Inc.plnt-ex311_9.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to ______________

Commission file number: 001-37534

 

PLANET FITNESS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

38-3942097

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

26 Fox Run Road, Newington, NH 03801

(Address of Principal Executive Offices and Zip Code)

(603) 750-0001

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

o

  

Accelerated filer

 

o

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x

As of May 4, 2016 there were 36,597,985 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 61,970,964 shares of the Registrant’s Class B Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 

 


 

PLANET FITNESS, INC.

TABLE OF CONTENTS

  

 

 

2


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “ongoing,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

 

·

future financial position;

 

·

business strategy;

 

·

budgets, projected costs and plans;

 

·

future industry growth;

 

·

financing sources;

 

·

the impact of litigation, government inquiries and investigations; and

 

·

all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

·

our dependence on the operational and financial results of, and our relationships with, our franchisees and the success of their new and existing stores;

 

·

risks relating to damage to our brand and reputation;

 

·

our ability to successfully implement our growth strategy;

 

·

technical, operational and regulatory risks related to our third-party providers’ systems and our own information systems;

 

·

our and our franchisees’ ability to attract and retain members;

 

·

the high level of competition in the health club industry generally;

 

·

our reliance on a limited number of vendors, suppliers and other third-party service providers;

 

·

the substantial indebtedness of our subsidiary, Planet Fitness Holdings, LLC;

 

·

risks relating to our corporate structure and tax receivable agreements; and

 

·

the other factors identified under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

 

3


 

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

Planet Fitness, Inc. and subsidiaries

Condensed consolidated balance sheets

(Unaudited)

(Amounts in thousands, except per share amounts) 

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,268

 

 

$

31,430

 

Accounts receivable, net of allowance for bad debts of $637 and $629 at

   March 31, 2016 and December 31, 2015, respectively

 

 

10,446

 

 

 

19,079

 

Due from related parties

 

 

1,005

 

 

 

4,940

 

Inventory

 

 

1,476

 

 

 

4,557

 

Restricted assets – national advertising fund

 

 

5,300

 

 

 

1,962

 

Other current assets

 

 

12,318

 

 

 

10,977

 

Total current assets

 

 

68,813

 

 

 

72,945

 

Property and equipment, net of accumulated depreciation of $25,197 as of

   March 31, 2016 and $23,525 as of December 31, 2015

 

 

54,302

 

 

 

56,139

 

Intangible assets, net

 

 

268,679

 

 

 

273,619

 

Goodwill

 

 

176,981

 

 

 

176,981

 

Deferred income taxes

 

 

115,523

 

 

 

117,358

 

Other assets, net

 

 

1,368

 

 

 

2,135

 

Total assets

 

$

685,666

 

 

$

699,177

 

Liabilities and stockholders' equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

5,100

 

 

$

5,100

 

Accounts payable

 

 

10,090

 

 

 

23,950

 

Accrued expenses

 

 

9,853

 

 

 

13,667

 

Equipment deposits

 

 

5,253

 

 

 

5,587

 

Deferred revenue, current

 

 

15,477

 

 

 

14,717

 

Payable to related parties pursuant to tax benefit arrangements, current

 

 

5,870

 

 

 

3,019

 

Other current liabilities

 

 

253

 

 

 

212

 

Total current liabilities

 

 

51,896

 

 

 

66,252

 

Long-term debt, net of current maturities

 

 

478,875

 

 

 

479,779

 

Deferred rent, net of current portion

 

 

4,665

 

 

 

4,554

 

Deferred revenue, net of current portion

 

 

10,277

 

 

 

12,016

 

Payable to related parties pursuant to tax benefit arrangements, net of current portion

 

 

132,208

 

 

 

137,172

 

Other liabilities

 

 

484

 

 

 

484

 

Total noncurrent liabilities

 

 

626,509

 

 

 

634,005

 

Commitments and contingencies (note 11)

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Class A common stock, $.0001 par value - 300,000 shares authorized, 36,598

   shares issued and outstanding as of March 31, 2016 and December 31, 2015

 

 

4

 

 

 

4

 

Class B common stock, $.0001 par value - 100,000 shares authorized, 62,067

   shares issued and outstanding as of March 31, 2016, and 62,112 shares issued

   and outstanding as of December 31, 2015

 

 

6

 

 

 

6

 

Accumulated other comprehensive loss

 

 

(2,387

)

 

 

(1,710

)

Additional paid in capital

 

 

577

 

 

 

352

 

Accumulated deficit

 

 

(11,805

)

 

 

(14,032

)

Total stockholders' deficit attributable to Planet Fitness Inc.

 

 

(13,605

)

 

 

(15,380

)

Non-controlling interests

 

 

20,866

 

 

 

14,300

 

Total stockholders' equity (deficit)

 

 

7,261

 

 

 

(1,080

)

Total liabilities and stockholders' equity (deficit)

 

$

685,666

 

 

$

699,177

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of operations

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

For the three months ended

March 31,

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

Franchise

$

21,491

 

 

$

16,967

 

Commission income

 

6,186

 

 

 

4,790

 

Corporate-owned stores

 

25,697

 

 

 

23,546

 

Equipment

 

29,969

 

 

 

31,619

 

Total revenue

 

83,343

 

 

 

76,922

 

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

23,639

 

 

 

25,946

 

Store operations

 

14,732

 

 

 

14,341

 

Selling, general and administrative

 

11,845

 

 

 

14,138

 

Depreciation and amortization

 

7,703

 

 

 

8,201

 

Other gain

 

(186

)

 

 

(6

)

Total operating costs and expenses

 

57,733

 

 

 

62,620

 

Income from operations

 

25,610

 

 

 

14,302

 

Other expense, net:

 

 

 

 

 

 

 

Interest expense, net

 

(6,367

)

 

 

(4,756

)

Other income (expense)

 

393

 

 

 

(736

)

Total other expense, net

 

(5,974

)

 

 

(5,492

)

Income before income taxes

 

19,636

 

 

 

8,810

 

Provision for income taxes

 

3,291

 

 

 

272

 

Net income

 

16,345

 

 

 

8,538

 

Less net income attributable to non-controlling interests

 

12,977

 

 

 

113

 

Net income attributable to Planet Fitness, Inc.

$

3,368

 

 

$

8,425

 

 

 

 

 

 

 

 

 

Net income per share of Class A common stock(1):

 

 

 

 

 

 

 

Basic & diluted

$

0.09

 

 

 

 

 

Weighted-average shares of Class A common stock outstanding(1):

 

 

 

 

 

 

 

Basic & diluted

 

36,598

 

 

 

 

 

 

(1)

Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period following the recapitalization transactions and IPO (see Note 9).

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of comprehensive income (loss)

(Unaudited)

(Amounts in thousands)

 

 

For the three months ended

March 31,

 

 

2016

 

 

2015

 

Net income including non-controlling interests

$

16,345

 

 

$

8,538

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

Unrealized loss on interest rate caps, net of tax

 

(583

)

 

 

(779

)

Foreign currency translation adjustments

 

(93

)

 

 

101

 

Total other comprehensive loss, net

 

(676

)

 

 

(678

)

Total comprehensive income including non-controlling

   interests

 

15,669

 

 

 

7,860

 

Less: total comprehensive income attributable to non-controlling

   interests

 

12,491

 

 

 

113

 

Total comprehensive income attributable to Planet

   Fitness, Inc.

$

3,178

 

 

$

7,747

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of cash flows

(Unaudited)

(Amounts in thousands) 

 

 

 

For the three months ended

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

16,345

 

 

$

8,538

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,703

 

 

 

8,201

 

Amortization of deferred financing costs

 

 

371

 

 

 

305

 

Amortization of favorable leases and asset retirement obligations

 

 

99

 

 

 

113

 

Amortization of interest rate caps

 

 

75

 

 

 

 

Deferred tax expense

 

 

1,354

 

 

 

7

 

Provision for bad debts

 

 

7

 

 

 

11

 

Gain on disposal of property and equipment

 

 

(186

)

 

 

(6

)

Equity-based compensation

 

 

576

 

 

 

 

Changes in operating assets and liabilities, excluding effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,864

 

 

 

9,792

 

Notes receivable and due from related parties

 

 

3,544

 

 

 

50

 

Inventory

 

 

3,081

 

 

 

1,001

 

Other assets and other current assets

 

 

(4,632

)

 

 

422

 

Accounts payable and accrued expenses

 

 

(16,202

)

 

 

(16,745

)

Other liabilities and other current liabilities

 

 

30

 

 

 

15

 

Income taxes

 

 

(2,314

)

 

 

290

 

Payable to related parties pursuant to tax benefit arrangements

 

 

(2,113

)

 

 

 

Equipment deposits

 

 

(334

)

 

 

(230

)

Deferred revenue

 

 

(1,091

)

 

 

(717

)

Deferred rent

 

 

85

 

 

 

992

 

Net cash provided by operating activities

 

 

15,262

 

 

 

12,039

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(865

)

 

 

(5,326

)

Proceeds from sale of property and equipment

 

 

20

 

 

 

6

 

Net cash used in investing activities

 

 

(845

)

 

 

(5,320

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

120,000

 

Principal payments on capital lease obligations

 

 

(12

)

 

 

(140

)

Repayment of long-term debt

 

 

(1,275

)

 

 

(975

)

Payment of deferred financing and other debt-related costs

 

 

 

 

 

(1,698

)

Distributions to Continuing LLC Members

 

 

(6,411

)

 

 

(139,688

)

Net cash used in financing activities

 

 

(7,698

)

 

 

(22,501

)

Effects of exchange rate changes on cash and cash equivalents

 

 

119

 

 

 

23

 

Net increase (decrease) in cash and cash equivalents

 

 

6,838

 

 

 

(15,759

)

Cash and cash equivalents, beginning of period

 

 

31,430

 

 

 

43,291

 

Cash and cash equivalents, end of period

 

$

38,268

 

 

$

27,532

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Net cash paid for income taxes

 

$

4,336

 

 

$

211

 

Cash paid for interest

 

$

5,815

 

 

$

4,614

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Non-cash additions to property and equipment

 

$

170

 

 

$

384

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Unsettled distributions to members

 

$

 

 

$

7,496

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

7


 

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

 

(1) Business organization

Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 8.3 million members and 1,171 owned and franchised locations (referred to as stores) in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of March 31, 2016.

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.

 

·

Selling fitness-related equipment to franchisee-owned stores.

The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) which was completed on August 11, 2015 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 that occurred prior to the IPO, the Company became the sole managing member and holder of 100% of the voting power of Pla-Fit Holdings and 37.1% of the economic interest. 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.

Subsequent to the IPO and the related recapitalization transactions, 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 limited liability company units of Pla-Fit Holdings, LLC (“Holdings Units”) not owned by the Company. As of March 31, 2016, the Company owned 100% of the voting interest, and 37.1% of the economic interest of Pla-Fit Holdings. As future exchanges of Holdings Units occur, the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. will increase.

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.

 

 

(2) Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements as of and for the three months ended March 31, 2016 are unaudited. The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Annual Report”) filed with the SEC on March 4, 2016. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

As discussed in Note 1, as a result of the recapitalization transactions, Planet Fitness, Inc. consolidates Pla-Fit Holdings and Pla-Fit Holdings is considered to be the predecessor to Planet Fitness, Inc. for accounting and reporting purposes. 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

8


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

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”) and PF Melville LLC (“PF Melville”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. These entities 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.

(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 assets and liabilities in connection with acquisitions, 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) 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 March 31, 2016 and December 31, 2015:

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

Total fair

 

 

prices

 

 

other

 

 

Significant

 

 

 

value at

 

 

in active

 

 

observable

 

 

unobservable

 

 

 

March 31,

 

 

markets

 

 

inputs

 

 

inputs

 

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate caps

 

$

376

 

 

$

 

 

$

376

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

Total fair

 

 

prices

 

 

other

 

 

Significant

 

 

 

value at

 

 

in active

 

 

observable

 

 

unobservable

 

 

 

December 31,

 

 

markets

 

 

inputs

 

 

inputs

 

 

 

2015

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate caps

 

$

1,147

 

 

$

 

 

$

1,147

 

 

$

 

 

(d) Recent accounting pronouncements

The FASB issued ASU No. 2014-09, 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

9


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 for public companies. In March 2016, the FASB issued ASU 2016-08, which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. This guidance is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its consolidated financial statements.

The FASB issued ASU No. 2015-02, Income Statement—Consolidation, in February 2015. This guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the guidance 1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, 2) eliminates the presumption that a general partner should consolidate a limited partnership, 3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and 4) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU No. 2015-02 as of January 1, 2016, noting no material impact to the consolidated financial statements.

The FASB issued ASU No. 2015-05: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, in April 2015. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. The guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU No. 2015-05 as of January 1, 2016 on a prospective basis, noting no material impact to the consolidated financial statements.

The FASB issued ASU No. 2016-02, Leases, in February 2016. 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. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public companies. Early application of the amendments in this update is permitted for all entities. The Company is currently evaluating the effect that implementation of this guidance will have on its consolidated financial statements.

The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. This guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company is currently evaluating the effect of the standard on its consolidated financial statements.

 

(3) Variable interest entities

The carrying values of VIEs included in the consolidated financial statements as of March 31, 2016 and December 31, 2015 are as follows:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

PF Melville

 

$

3,790

 

 

$

 

 

$

3,728

 

 

$

 

MMR

 

 

3,025

 

 

 

 

 

 

2,953

 

 

 

 

Total

 

$

6,815

 

 

$

 

 

$

6,681

 

 

$

 

 

The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements as well as financing provided by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $1,730 and $1,871 as of March 31, 2016 and December 31, 2015, 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.

 

10


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

     

(4) Goodwill and intangible assets

A summary of goodwill and intangible assets at March 31, 2016 and December 31, 2015 is as follows:

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

March 31, 2016

 

period (years)

 

amount

 

 

amortization

 

 

Amount

 

Customer relationships

 

11.1

 

$

171,782

 

 

 

(61,469

)

 

$

110,313

 

Noncompete agreements

 

5.0

 

 

14,500

 

 

 

(9,852

)

 

 

4,648

 

Favorable leases

 

7.5

 

 

2,935

 

 

 

(1,354

)

 

 

1,581

 

Order backlog

 

0.4

 

 

3,400

 

 

 

(3,400

)

 

 

 

Reacquired franchise rights

 

5.8

 

 

8,950

 

 

 

(3,113

)

 

 

5,837

 

 

 

 

 

 

201,567

 

 

 

(79,188

)

 

 

122,379

 

Indefinite-lived intangible:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and brand names

 

N/A

 

 

146,300

 

 

 

 

 

 

146,300

 

Total intangible assets

 

 

 

$

347,867

 

 

$

(79,188

)

 

$

268,679

 

Goodwill

 

 

 

$

176,981

 

 

$

 

 

$

176,981

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

December 31, 2015

 

period (years)

 

amount

 

 

amortization

 

 

Amount

 

Customer relationships

 

11.1

 

$

171,782

 

 

$

(57,741

)

 

$

114,041

 

Noncompete agreements

 

5.0

 

 

14,500

 

 

 

(9,127

)

 

 

5,373

 

Favorable leases

 

7.5

 

 

2,935

 

 

 

(1,256

)

 

 

1,679

 

Order backlog

 

0.4

 

 

3,400

 

 

 

(3,400

)

 

 

 

Reacquired franchise rights

 

5.8

 

 

8,950

 

 

 

(2,724

)

 

 

6,226

 

 

 

 

 

 

201,567

 

 

 

(74,248

)

 

 

127,319

 

Indefinite-lived intangible:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and brand names

 

N/A

 

 

146,300

 

 

 

 

 

 

146,300

 

Total intangible assets

 

 

 

$

347,867

 

 

$

(74,248

)

 

$

273,619

 

Goodwill

 

 

 

$

176,981

 

 

$

 

 

$

176,981

 

 

The Company determined that no impairment charges were required during any periods presented.

 

Amortization expense related to the intangible assets totaled $4,940 and $5,383 for the three months ended March 31, 2016 and 2015, respectively. Included within these total amortization expense amounts are $99 and $113 related to amortization of favorable and unfavorable leases for the three months ended March 31, 2016 and 2015, 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 March 31, 2016 is as follows:

11


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

 

 

Amount

 

Remainder of 2016

 

$

14,816

 

2017

 

 

18,215

 

2018

 

 

14,583

 

2019

 

 

14,215

 

2020

 

 

12,517

 

Thereafter

 

 

48,033

 

Total

 

$

122,379

 

 

(5) Long-term debt

Long-term debt as of March 31, 2016 and December 31, 2015 consists of the following:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Term loan B requires quarterly installments

   plus interest through the term of the loan, maturing

   March 31, 2021. Outstanding borrowings bear

   interest at LIBOR or base rate (as defined) plus a

   margin at the election of the borrower

 

 

 

 

 

 

 

 

   (4.50% at March 31, 2016 and 4.75% at December 31, 2015)

 

$

491,000

 

 

$

492,275

 

Revolving credit line, requires interest only

   payments through the term of the loan, maturing

   March 31, 2019. Outstanding borrowings bear

   interest at LIBOR or base rate (as defined) plus a

   margin at the election of the borrower

 

 

 

 

 

 

 

 

   (4.25% at March 31, 2016 and December 31, 2015)

 

 

 

 

 

 

Total debt, excluding deferred financing costs

 

$

491,000

 

 

 

492,275

 

Deferred financing costs, net of accumulated amortization

 

 

(7,025

)

 

 

(7,396

)

Total debt

 

 

483,975

 

 

 

484,879

 

Current portion of long-term debt and line of credit

 

 

5,100

 

 

 

5,100

 

Long-term debt, net of current portion

 

$

478,875

 

 

$

479,779

 

 

Future annual principal payments of long-term debt as of March 31, 2016 are as follows:

 

 

 

Amount

 

Remainder of 2016

 

$

3,825

 

2017

 

 

5,100

 

2018

 

 

5,100

 

2019

 

 

5,100

 

2020

 

 

5,100

 

Thereafter

 

 

466,775

 

Total

 

$

491,000

 

 

 

(6) Derivative instruments and hedging activities

The Company utilizes 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.

12


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is higher than A1/A+ at the inception of the derivative transaction. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company monitors interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions.

In September 2014 and September 2015, the Company entered into a series of interest rate caps. As of March 31, 2016, the Company had interest rate cap agreements with notional amounts of $224,000 outstanding that were entered into in order to hedge LIBOR greater than 1.5%.

The interest rate cap balances of $376 and $1,147 were recorded within other assets in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded a reduction to the value of its interest rate caps of $583, net of tax of $113, within other comprehensive loss during the three months ended March 31, 2016.

As of March 31, 2016, the Company does not expect to reclassify any amounts included in accumulated other comprehensive income (loss) into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that will necessitate reclassifying these derivatives’ loss to earnings include the re-pricing of variable-rate debt.

 

(7) Related party transactions

Amounts due from related parties consist of:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

Accounts receivable – related entities

 

$

47

 

 

$

39

 

Accounts receivable – stockholders/members

 

 

958

 

 

 

4,901

 

Due from related parties

 

$

1,005

 

 

$

4,940

 

 

Amounts due from stockholders/members as of March 31, 2016 and December 31, 2015 relate to reimbursements for certain taxes owed or paid by the Company.

 

Activity with entities considered to be related parties is summarized below:

 

 

 

For the three months ended

March 31,

 

 

 

2016

 

 

2015

 

Franchise revenue

 

$

421

 

 

$

262

 

Equipment revenue

 

 

593

 

 

 

55

 

Total revenue from related parties

 

$

1,014

 

 

$

317

 

 

The Company paid management fees to TSG Consumer Partners, LLC (“TSG”) totaling $0 and $265 during the three months ended March 31, 2016 and 2015, respectively. In connection with the IPO, the management agreement with TSG was terminated.

 

 

13


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

(8) Stockholder’s equity

The recapitalization transactions

We refer to the Merger, Reclassification and entry into the Exchange agreement, each as described below, as the “recapitalization transactions.” The Merger was effected pursuant to a merger agreement by and among the Company and Planet Fitness Holdings, L.P. (a predecessor entity to the Company that held indirect interests in Pla-Fit Holdings, LLC) and the recapitalization transactions were effected pursuant to a recapitalization agreement by and among the Company, Pla-Fit Holdings, existing holders (“Continuing LLC Owners”) of Holdings Units, and holders of Class A common stock issued to holders of interests in Planet Fitness Holdings L.P. (“Direct TSG Investors”).

Merger

Prior to the Merger, the Direct TSG Investors held interests in Planet Fitness Holdings, L.P. Planet Fitness Holdings, L.P. was formed in October 2014 and had no material assets, liabilities or operations, other than as a holding company owning indirect interests in Pla-Fit Holdings. The Direct TSG Investors consist of investment funds affiliated with TSG. Pursuant to a merger agreement dated June 22, 2015, Planet Fitness Holdings, L.P. merged with and into the Company, and the interests in Planet Fitness Holdings, L.P. held by the Direct TSG Investors were converted into 26,106,930 shares of Class A common stock of the Company. We refer to this as the “Merger.” All shares of Class A common stock have both voting and economic rights in Planet Fitness, Inc.

The Merger was effected on August 5, 2015, prior to the time our Class A common stock was registered under the Exchange Act and prior to the completion of the IPO.

Reclassification

The equity interests of Pla-Fit Holdings, LLC previously consisted of three different classes of limited liability company units (Class M, Class T and Class O). Prior to the completion of the IPO, the limited liability company agreement of Pla-Fit Holdings was amended and restated to, among other things, modify its capital structure to create a single new class of units, the Holdings Units. We refer to this capital structure modification as the “Reclassification.”

The Direct TSG Investors’ indirect interest in Pla-Fit Holdings was held through Planet Fitness Holdings, L.P. As a result, following the Merger, the Direct TSG Investors’ indirect interests in Pla-Fit Holdings are held through the Company. Therefore, the Holdings Units received in the Reclassification were allocated to: (1) the Continuing LLC Owners based on their existing interests in Pla-Fit Holdings; and (2) the Company to the extent of the Direct TSG Investors’ indirect interest in Pla-Fit Holdings. The number of Holdings Units allocated to the Company in the Reclassification was equal to the number of shares of Class A common stock that the Direct TSG Investors received in the Merger (on a one-for-one basis).

The Reclassification was effected on August 5, 2015, prior to the time our Class A common stock was registered under the Exchange Act and prior to the completion of the IPO.

Following the Merger and the Reclassification, the Company issued to Continuing LLC Owners 72,602,810 shares of Class B common stock, one share of Class B common stock for each Holdings Unit they held. The shares of Class B common stock have no rights to dividends or distributions, whether in cash or stock, but entitle the holder to one vote per share on matters presented to stockholders of the Company. The Continuing LLC Owners consist of investment funds affiliated with TSG and certain current and former employees and directors.

Pursuant to the LLC agreement that went into effect at the time of the Reclassification (“New LLC Agreement”), the Company was designated as the sole managing member of Pla-Fit Holdings. Accordingly, the Company has the right to determine when distributions will be made by Pla-Fit Holdings to its members and the amount of any such distributions (subject to the requirements with respect to the tax distributions described below). If the Company authorizes a distribution by Pla-Fit Holdings, the distribution will be made to the members of Pla-Fit Holdings, including the Company, pro rata in accordance with the percentages of their respective Holdings Units.

The holders of Holdings Units will incur U.S. federal, state and local income taxes on their allocable share of any taxable income of Pla-Fit Holdings (as calculated pursuant to the New LLC Agreement). Net profits and net losses of Pla-Fit Holdings will generally be allocated to its members pursuant to the New LLC Agreement pro rata in accordance with the percentages of their respective Holdings Units. The New LLC Agreement provides for cash distributions to the holders of Holdings Units for purposes of funding their tax obligations in respect of the income of Pla-Fit Holdings that is allocated to them, to the extent other distributions from Pla-Fit Holdings for the relevant year have been insufficient to cover such liability. Generally, these tax distributions are computed based on the estimated taxable income of Pla-Fit Holdings allocable to the holders of Holdings Units multiplied by an assumed, combined tax rate equal to the maximum rate applicable to an individual

14


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

or corporation resident in San Francisco, California (taking into account the non-deductibility of certain expenses and the character of the Company’s income).

Exchange agreement

Following the Merger and the Reclassification, the Company and the Continuing LLC Owners entered into an exchange agreement under which the Continuing LLC Owners (or certain permitted transferees thereof) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, along with a corresponding number of shares of Class B common stock, for shares of Class A common stock (or cash at the option of the Company) on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. As a Continuing LLC Owner exchanges Holdings Units, along with a corresponding number of shares of Class B common stock, for shares of Class A common stock, the number of Holdings Units held by the Company will be correspondingly increased as it acquires the exchanged Holdings Units and cancels a corresponding number of shares of Class B common stock.

Offering transactions

In connection with the completion of the IPO on August 11, 2015, in order to facilitate the disposition of equity interests in Pla-Fit Holdings held by Continuing LLC Owners affiliated with TSG, the Company used the net proceeds received to purchase issued and outstanding Holdings Units from these Continuing LLC Owners that they received in the Reclassification. In connection with the IPO, the Company purchased 10,491,055 issued and outstanding Holdings Units from these Continuing LLC Owners for an aggregate of $156,946. This is in addition to the 26,106,930 Holdings Units that the Company acquired in the Reclassification on a one-for-one basis in relation to the number of shares of Class A common stock issued to the Direct TSG Investors in the Merger. Accordingly, following the IPO, the Company holds 36,597,985 Holdings Units, which is equal to the number of shares of Class A common stock that were issued to the Direct TSG Investors and investors in the IPO. The Direct TSG Investors, who did not receive Holdings Units in the Reclassification but received shares of Class A common stock in the Merger, sold 5,033,945 shares of Class A common stock in the IPO as selling stockholders.   

As a result of the recapitalization transactions and the offering transactions, upon completion of the IPO:

 

·

the investors in the IPO collectively owned 15,525,000 shares of our Class A common, representing 15.7% of the voting power in the Company and, through the Company, 15.7% of the economic interest in Pla-Fit Holdings;

 

·

the Direct TSG Investors own 21,072,985 shares of our Class A common stock, representing 21.4% of the voting power in the Company and, through the Company, 21.4% of the economic interest in Pla-Fit Holdings; and

 

·

the Continuing LLC Owners collectively held 62,111,755 Holdings Units, representing 62.9% of the economic interest in Pla-Fit Holdings and 62,111,755 shares of our Class B common stock, representing 62.9% of the voting power in the Company.

                           

 

(9) Earnings per share

Basic earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. There were no shares of Class A or Class B common stock outstanding prior to August 6, 2015, therefore no earnings per share information has been presented for the three months ended March 31, 2015.

Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Planet Fitness, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related Holdings Units, are exchangeable into shares of Class A common stock on a one-for-one basis.

15


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:

 

Basic net income per share:

 

For the three months ended

March 31, 2016

 

Numerator

 

 

 

 

Net income

 

$

16,345

 

Less: net income attributable to non-controlling interests

 

 

12,977

 

Net income attributable to Planet Fitness, Inc.

 

$

3,368

 

 

 

 

 

 

Denominator

 

 

 

 

Weighted-average shares of Class A common stock outstanding - basic

 

 

36,597,985

 

 

 

 

 

 

Earnings per share of Class A common stock - basic & diluted

 

$

0.09

 

 

 

 

 

 

 

Class B common stock was evaluated under the if-converted method for potential dilutive effects and were determined to be anti-dilutive. Stock options in the amount of 134,870 and 8,160 restricted stock units were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive.

 

(10) Income taxes

As a result of the recapitalization transactions, the Company became 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 the Company 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 following the recapitalization transactions. The Company is also subject to taxes in foreign jurisdictions.

The Company incurs U.S. federal and state income taxes on its 37.1% share of income flowed through from Pla-Fit Holdings. Our effective tax rate on such income was approximately 39.4%. The provision for income taxes also reflects an effective state tax rate of 2.5% applied to non-controlling interests, representing the remaining 62.9% of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings.

Net deferred tax assets of $115,523 and $117,358 as of March 31, 2016 and December 31, 2015, respectively, relate primarily to the tax effects of temporary differences in the book basis as compared to the tax basis of our investment in Pla-Fit Holdings as a result of the recapitalization transactions and IPO. The Company has net operating loss carryforwards related to its Canada operations of approximately $2,411, which begin to expire in 2034. It is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

As of March 31, 2016, the total liability related to uncertain tax positions is $300. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. Interest and penalties for the three months ended March 31, 2016 were not material.

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 the Continuing LLC Owners 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

16


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. Also, pursuant to the exchange agreement (see Note 8), 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 Continuing LLC Owners 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 re