Attached files

file filename
EX-32.2 - EX-32.2 - Planet Fitness, Inc.plnt-ex322_7.htm
EX-32.1 - EX-32.1 - Planet Fitness, Inc.plnt-ex321_8.htm
EX-31.2 - EX-31.2 - Planet Fitness, Inc.plnt-ex312_9.htm
EX-31.1 - EX-31.1 - Planet Fitness, Inc.plnt-ex311_6.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2017

OR

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       No  

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       No  

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

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of April 26, 2017 there were 72,552,901 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 25,795,641 shares of the Registrant’s Class B Common Stock, par value $0.0001 per share, outstanding.

 

 

 

1


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, 2016 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,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,236

 

 

$

40,393

 

Accounts receivable, net of allowance for bad debts of $118 and $687 at   March 31, 2017 and December 31, 2016, respectively

 

 

 

14,988

 

 

 

26,873

 

Due from related parties

 

 

2,914

 

 

 

2,864

 

Inventory

 

 

1,331

 

 

 

1,802

 

Restricted assets – national advertising fund

 

 

2,502

 

 

 

3,074

 

Other receivables

 

 

9,715

 

 

 

7,935

 

Other current assets

 

 

7,905

 

 

 

8,284

 

Total current assets

 

 

99,591

 

 

 

91,225

 

Property and equipment, net of accumulated depreciation of $33,794 as of

   March 31, 2017 and $30,987 as of December 31, 2016

 

 

61,104

 

 

 

61,238

 

Intangible assets, net

 

 

249,148

 

 

 

253,862

 

Goodwill

 

 

176,981

 

 

 

176,981

 

Deferred income taxes

 

 

561,342

 

 

 

410,407

 

Other assets, net

 

 

8,186

 

 

 

7,729

 

Total assets

 

$

1,156,352

 

 

$

1,001,442

 

Liabilities and stockholders' equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

7,185

 

 

$

7,185

 

Accounts payable

 

 

13,278

 

 

 

28,507

 

Accrued expenses

 

 

10,263

 

 

 

19,190

 

Equipment deposits

 

 

10,739

 

 

 

2,170

 

Deferred revenue, current

 

 

18,226

 

 

 

17,780

 

Payable to related parties pursuant to tax benefit arrangements, current

 

 

11,283

 

 

 

8,072

 

Other current liabilities

 

 

536

 

 

 

369

 

Total current liabilities

 

 

71,510

 

 

 

83,273

 

Long-term debt, net of current maturities

 

 

700,672

 

 

 

702,003

 

Deferred rent, net of current portion

 

 

5,213

 

 

 

5,108

 

Deferred revenue, net of current portion

 

 

8,445

 

 

 

8,351

 

Deferred tax liabilities

 

 

1,052

 

 

 

1,238

 

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

 

 

552,213

 

 

 

410,999

 

Other liabilities

 

 

5,271

 

 

 

5,225

 

Total noncurrent liabilities

 

 

1,272,866

 

 

 

1,132,924

 

Commitments and contingencies (note 11)

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Class A common stock, $.0001 par value - 300,000 shares authorized, 72,473 and 61,314

   shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

7

 

 

 

6

 

Class B common stock, $.0001 par value - 100,000 shares authorized, 26,026 and 37,185

   shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

3

 

 

 

4

 

Accumulated other comprehensive loss

 

 

(1,274

)

 

 

(1,174

)

Additional paid in capital

 

 

23,087

 

 

 

34,467

 

Accumulated deficit

 

 

(155,288

)

 

 

(164,062

)

Total stockholders' deficit attributable to Planet Fitness Inc.

 

 

(133,465

)

 

 

(130,759

)

Non-controlling interests

 

 

(54,559

)

 

 

(83,996

)

Total stockholders' deficit

 

 

(188,024

)

 

 

(214,755

)

Total liabilities and stockholders' deficit

 

$

1,156,352

 

 

$

1,001,442

 

 

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,

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

Franchise

$

30,281

 

 

$

21,491

 

Commission income

 

6,516

 

 

 

6,186

 

Corporate-owned stores

 

27,041

 

 

 

25,697

 

Equipment

 

27,264

 

 

 

29,969

 

Total revenue

 

91,102

 

 

 

83,343

 

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

 

21,124

 

 

 

23,639

 

Store operations

 

15,184

 

 

 

14,732

 

Selling, general and administrative

 

13,820

 

 

 

11,845

 

Depreciation and amortization

 

7,951

 

 

 

7,703

 

Other gain

 

(32

)

 

 

(186

)

Total operating costs and expenses

 

58,047

 

 

 

57,733

 

Income from operations

 

33,055

 

 

 

25,610

 

Other expense, net:

 

 

 

 

 

 

 

Interest expense, net

 

(8,763

)

 

 

(6,367

)

Other income

 

682

 

 

 

393

 

Total other expense, net

 

(8,081

)

 

 

(5,974

)

Income before income taxes

 

24,974

 

 

 

19,636

 

Provision for income taxes

 

7,108

 

 

 

3,291

 

Net income

 

17,866

 

 

 

16,345

 

Less net income attributable to non-controlling interests

 

9,024

 

 

 

12,977

 

Net income attributable to Planet Fitness, Inc.

$

8,842

 

 

$

3,368

 

 

 

 

 

 

 

 

 

Net income per share of Class A common stock:

 

 

 

 

 

 

 

Basic & diluted

$

0.14

 

 

$

0.09

 

Weighted-average shares of Class A common stock outstanding:

 

 

 

 

 

 

 

Basic

 

64,121

 

 

 

36,598

 

Diluted

 

64,150

 

 

 

36,598

 

 

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,

 

 

2017

 

 

2016

 

Net income including non-controlling interests

$

17,866

 

 

$

16,345

 

Other comprehensive income (loss), net:

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate caps, net of tax

 

177

 

 

 

(583

)

Foreign currency translation adjustments

 

(8

)

 

 

(93

)

Total other comprehensive income (loss), net

 

169

 

 

 

(676

)

Total comprehensive income including non-controlling

   interests

 

18,035

 

 

 

15,669

 

Less: total comprehensive income attributable to non-controlling

   interests

 

9,114

 

 

 

12,491

 

Total comprehensive income attributable to Planet

   Fitness, Inc.

$

8,921

 

 

$

3,178

 

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

17,866

 

 

$

16,345

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,951

 

 

 

7,703

 

Amortization of deferred financing costs

 

 

465

 

 

 

371

 

Amortization of favorable leases and asset retirement obligations

 

 

94

 

 

 

99

 

Amortization of interest rate caps

 

 

432

 

 

 

75

 

Deferred tax expense

 

 

5,298

 

 

 

1,354

 

Gain on re-measurement of tax benefit arrangement

 

 

(541

)

 

 

 

Provision for bad debts

 

 

27

 

 

 

7

 

Gain on disposal of property and equipment

 

 

 

 

 

(186

)

Equity-based compensation

 

 

380

 

 

 

576

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,859

 

 

 

8,864

 

Notes receivable and due from related parties

 

 

(99

)

 

 

3,544

 

Inventory

 

 

471

 

 

 

3,081

 

Other assets and other current assets

 

 

(2,187

)

 

 

(4,632

)

Accounts payable and accrued expenses

 

 

(21,244

)

 

 

(16,202

)

Other liabilities and other current liabilities

 

 

188

 

 

 

30

 

Income taxes

 

 

310

 

 

 

(2,314

)

Payable to related parties pursuant to tax benefit arrangements

 

 

 

 

 

(2,113

)

Equipment deposits

 

 

8,569

 

 

 

(334

)

Deferred revenue

 

 

527

 

 

 

(1,091

)

Deferred rent

 

 

106

 

 

 

85

 

Net cash provided by operating activities

 

 

30,472

 

 

 

15,262

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(5,336

)

 

 

(865

)

Proceeds from sale of property and equipment

 

 

 

 

 

20

 

Net cash used in investing activities

 

 

(5,336

)

 

 

(845

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payments on capital lease obligations

 

 

 

 

 

(12

)

Repayment of long-term debt

 

 

(1,796

)

 

 

(1,275

)

Premiums paid for interest rate caps

 

 

(366

)

 

 

 

Dividend equivalent payments

 

 

(20

)

 

 

 

Distributions to Continuing LLC Members

 

 

(3,142

)

 

 

(6,411

)

Net cash used in financing activities

 

 

(5,324

)

 

 

(7,698

)

Effects of exchange rate changes on cash and cash equivalents

 

 

31

 

 

 

119

 

Net increase in cash and cash equivalents

 

 

19,843

 

 

 

6,838

 

Cash and cash equivalents, beginning of period

 

 

40,393

 

 

 

31,430

 

Cash and cash equivalents, end of period

 

$

60,236

 

 

$

38,268

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Net cash paid for income taxes

 

$

1,595

 

 

$

4,336

 

Cash paid for interest

 

$

7,857

 

 

$

5,815

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Non-cash additions to property and equipment

 

$

38

 

 

$

170

 

 

See accompanying notes to condensed consolidated financial statements.

 


7


Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of changes in equity (deficit)

(Unaudited)

(Amounts in thousands) 

 

 

 

Class A common stock

 

 

Class B common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Accumulated

other

comprehensive

(loss) income

 

 

Additional paid-

in capital

 

 

Accumulated deficit

 

 

Non-controlling

interests

 

 

Total (deficit) equity

 

Balance at December 31, 2016

 

 

61,314

 

 

$

6

 

 

 

37,185

 

 

$

4

 

 

$

(1,174

)

 

$

34,467

 

 

$

(164,062

)

 

$

(83,996

)

 

$

(214,755

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,842

 

 

 

9,024

 

 

 

17,866

 

Equity-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

 

(20

)

 

 

 

 

 

380

 

Exchanges of Class B common stock

 

 

11,159

 

 

 

1

 

 

 

(11,159

)

 

 

(1

)

 

 

(179

)

 

 

(23,286

)

 

 

 

 

 

 

23,465

 

 

 

 

Tax benefit arrangement liability and

   deferred taxes arising from secondary

   offerings and other exchanges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,506

 

 

 

 

 

 

 

 

 

11,506

 

Distributions paid to members

   of Pla-Fit Holdings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(48

)

 

 

(3,142

)

 

 

(3,190

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79

 

 

 

 

 

 

 

 

 

90

 

 

 

169

 

Balance at March 31, 2017

 

 

72,473

 

 

$

7

 

 

 

26,026

 

 

$

3

 

 

$

(1,274

)

 

$

23,087

 

 

$

(155,288

)

 

$

(54,559

)

 

$

(188,024

)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


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 10.1 million members and 1,367 owned and franchised locations (referred to as stores) in 48 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of March 31, 2017.

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. 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 (“Holdings Units”) not owned by the Company. Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.

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 TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”), funds affiliated with TSG Consumer Partners, LLC (“TSG”). 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 addition to the March Secondary Offering, during the three months ended March 31, 2017, certain existing holders of Holdings Units have exercised their exchange rights and exchanged 949,861 Holdings Units for 949,861 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 949,861 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and canceled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 949,861 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

Following the completion of the March Secondary Offering and other exchanges, and as of March 31, 2017, Planet Fitness, Inc. held 100% of the voting interest and 73.6% of the economic interest of Pla-Fit Holdings and the existing equity owners of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 26.4% economic interest in Pla-Fit Holdings. As future exchanges of Holdings Units occur, Planet Fitness, Inc.’s economic interest in Pla-Fit Holdings will increase.

 

(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

9


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

 

(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, 2017 are unaudited. The condensed consolidated balance sheet as of December 31, 2016 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, 2016 (the “Annual Report”) filed with the SEC on March 6, 2017. 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. 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”) 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.

10


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

 

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, 2017 and December 31, 2016:

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

Total fair

 

 

prices

 

 

other

 

 

Significant

 

 

 

value at

 

 

in active

 

 

observable

 

 

unobservable

 

 

 

March 31,

 

 

markets

 

 

inputs

 

 

inputs

 

 

 

2017

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate caps

 

$

473

 

 

$

 

 

$

473

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

Total fair

 

 

prices

 

 

other

 

 

Significant

 

 

 

value at

 

 

in active

 

 

observable

 

 

unobservable

 

 

 

December 31,

 

 

markets

 

 

inputs

 

 

inputs

 

 

 

2016

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate caps

 

$

306

 

 

$

 

 

$

306

 

 

$

 

 

(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 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 expects to adopt this new guidance in fiscal year 2018 and is still evaluating the most appropriate transition method to be utilized. The Company expects the adoption of the new guidance to change the timing of recognition of area development agreement and initial franchise fees. Currently, these fees are generally recognized upfront upon either a store opening or upon execution of the property lease for an area development agreement, and upon execution of a lease and delivery of training for franchise fees. The new guidance will generally require these fees to be recognized over the contractual terms of the geographic exclusivity right and the related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions, including the impact this guidance may have on the presentation of national advertising fund revenues and expenses.

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 anticipates that adoption of this guidance will bring all current operating leases onto the statement of financial position as a right of use asset and related rent liability, and is currently evaluating the effect that implementation of this guidance will have on its consolidated statement of operations.

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 has adopted the guidance as of January 1, 2017 on a modified retrospective basis, noting no material impact to the consolidated financial statements.

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 does not expect the adoption of the standard to have a material impact on its consolidated financial statements.

The FASB issued ASU No. 2017-04, Intangibles–Goodwill and Other (Topic 350): 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

11


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

 

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.

 

(3) Variable interest entities

The carrying values of VIEs included in the consolidated financial statements as of March 31, 2017 and December 31, 2016 are as follows:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

PF Melville

 

$

4,158

 

 

$

 

 

$

4,071

 

 

$

 

MMR

 

 

3,207

 

 

 

 

 

 

3,156

 

 

 

 

Total

 

$

7,365

 

 

$

 

 

$

7,227

 

 

$

 

 

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 $1,241 and $1,350 as of March 31, 2017 and December 31, 2016, 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.

 

     

(4) Goodwill and intangible assets

A summary of goodwill and intangible assets at March 31, 2017 and December 31, 2016 is as follows:

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

March 31, 2017

 

period (years)

 

amount

 

 

amortization

 

 

Amount

 

Customer relationships

 

11.1

 

$

171,782

 

 

 

(76,163

)

 

$

95,619

 

Noncompete agreements

 

5.0

 

 

14,500

 

 

 

(12,752

)

 

 

1,748

 

Favorable leases

 

7.5

 

 

2,935

 

 

 

(1,735

)

 

 

1,200

 

Order backlog

 

0.4

 

 

3,400

 

 

 

(3,400

)

 

 

 

Reacquired franchise rights

 

5.8

 

 

8,950

 

 

 

(4,669

)

 

 

4,281

 

 

 

 

 

 

201,567

 

 

 

(98,719

)

 

 

102,848

 

Indefinite-lived intangible:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and brand names

 

N/A

 

 

146,300

 

 

 

 

 

 

146,300

 

Total intangible assets

 

 

 

$

347,867

 

 

$

(98,719

)

 

$

249,148

 

Goodwill

 

 

 

$

176,981

 

 

$

 

 

$

176,981

 

12


Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

December 31, 2016

 

period (years)

 

amount

 

 

amortization

 

 

Amount

 

Customer relationships

 

11.1

 

$

171,782

 

 

$

(72,655

)

 

$

99,127

 

Noncompete agreements

 

5.0

 

 

14,500

 

 

 

(12,027

)

 

 

2,473

 

Favorable leases

 

7.5

 

 

2,935

 

 

 

(1,643

)

 

 

1,292

 

Order backlog

 

0.4

 

 

3,400

 

 

 

(3,400

)

 

 

 

Reacquired franchise rights

 

5.8

 

 

8,950

 

 

 

(4,280

)

 

 

4,670

 

 

 

 

 

 

201,567

 

 

 

(94,005

)

 

 

107,562

 

Indefinite-lived intangible:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and brand names

 

N/A

 

 

146,300

 

 

 

 

 

 

146,300

 

Total intangible assets

 

 

 

$

347,867

 

 

$

(94,005

)

 

$

253,862

 

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 $4,715 and $4,940 for the three months ended March 31, 2017 and 2016, respectively. Included within these total amortization expense amounts are $94 and $99 related to amortization of favorable and unfavorable leases for the three months ended March 31, 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 March 31, 2017 is as follows:

 

 

Amount

 

Remainder of 2017

 

$

13,500

 

2018

 

 

14,583

 

2019

 

 

14,215

 

2020

 

 

12,517

 

2021

 

 

12,422

 

Thereafter