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EX-32.2 - EXHIBIT 32.2 - Planet Fitness, Inc.plntex322q12018.htm
EX-32.1 - EXHIBIT 32.1 - Planet Fitness, Inc.plntex321q12018.htm
EX-31.2 - EXHIBIT 31.2 - Planet Fitness, Inc.plntex312q12018.htm
EX-31.1 - EXHIBIT 31.1 - Planet Fitness, Inc.plntex311q12018.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, 2018
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.)
4 Liberty Lane West, Hampton, NH 03842
(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
 
ý
  
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  ý
As of May 1, 2018 there were 87,656,487 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 10,741,740 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, 2017 filed with the Securities and Exchange Commission on March 1, 2018.
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
1. Financial Statements
Planet Fitness, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(Amounts in thousands, except per share amounts) 
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
127,146

 
$
113,080

Accounts receivable, net of allowance for bad debts of $18 and $32 at March 31, 2018 and December 31, 2017, respectively
 
18,620

 
37,272

Due from related parties
 
3,060

 
3,020

Inventory
 
4,056

 
2,692

Restricted assets – national advertising fund
 
78

 
499

Deferred expenses – national advertising fund
 
4,596

 

Prepaid expenses
 
4,051

 
3,929

Other receivables
 
14,550

 
9,562

Other current assets
 
5,355

 
6,947

Total current assets
 
181,512

 
177,001

Property and equipment, net of accumulated depreciation of $40,493, as of March 31, 2018 and $36,228 as of December 31, 2017
 
84,545

 
83,327

Intangible assets, net
 
241,105

 
235,657

Goodwill
 
191,038

 
176,981

Deferred income taxes
 
409,216

 
407,782

Other assets, net
 
8,437

 
11,717

Total assets
 
$
1,115,853

 
$
1,092,465

Liabilities and stockholders' equity (deficit)
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
7,185

 
$
7,185

Accounts payable
 
15,664

 
28,648

Accrued expenses
 
14,787

 
18,590

Equipment deposits
 
14,283

 
6,498

Restricted liabilities – national advertising fund
 
78

 
490

Deferred revenue, current
 
20,842

 
19,083

Payable to related parties pursuant to tax benefit arrangements, current
 
31,062

 
31,062

Other current liabilities
 
493

 
474

Total current liabilities
 
104,394

 
112,030

Long-term debt, net of current maturities
 
695,264

 
696,576

Deferred rent, net of current portion
 
6,907

 
6,127

Deferred revenue, net of current portion
 
22,942

 
8,440

Deferred tax liabilities
 
1,379

 
1,629

Payable to related parties pursuant to tax benefit arrangements, net of current portion
 
403,022

 
400,298

Other liabilities
 
4,379

 
4,302

Total noncurrent liabilities
 
1,133,893

 
1,117,372

Commitments and contingencies (Note 12)
 

 

Stockholders' equity (deficit):
 
 
 
 
Class A common stock, $.0001 par value - 300,000 authorized, 87,505 and 87,188 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
9

 
9

Class B common stock, $.0001 par value - 100,000 authorized, 10,893 and 11,193 shares issued and outstanding as of March 31, 2018 December 31, 2017, respectively
 
1

 
1

Accumulated other comprehensive loss
 
(370
)
 
(648
)
Additional paid in capital
 
13,011

 
12,118

Accumulated deficit
 
(120,245
)
 
(130,966
)
Total stockholders' deficit attributable to Planet Fitness Inc.
 
(107,594
)
 
(119,486
)
Non-controlling interests
 
(14,840
)
 
(17,451
)
Total stockholders' deficit
 
(122,434
)
 
(136,937
)
Total liabilities and stockholders' deficit
 
$
1,115,853

 
$
1,092,465

 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,
 
 
2018
 
2017
Revenue:
 
 

 
 

Franchise
 
$
42,162

 
$
30,281

Commission income
 
1,989

 
6,516

National advertising fund revenue
 
10,461

 

Corporate-owned stores
 
32,708

 
27,041

Equipment
 
34,013

 
27,264

Total revenue
 
121,333

 
91,102

Operating costs and expenses:
 
 
 
 
Cost of revenue
 
26,500

 
21,124

Store operations
 
18,356

 
15,184

Selling, general and administrative
 
17,623

 
13,820

National advertising fund expense
 
10,461

 

Depreciation and amortization
 
8,465

 
7,951

Other loss (gain)
 
1,010

 
(32
)
Total operating costs and expenses
 
82,415

 
58,047

Income from operations
 
38,918

 
33,055

Other expense, net:
 
 
 
 
Interest expense, net
 
(8,734
)
 
(8,763
)
Other income
 
192

 
682

Total other expense, net
 
(8,542
)
 
(8,081
)
Income before income taxes
 
30,376

 
24,974

Provision for income taxes
 
6,883

 
7,108

Net income
 
23,493

 
17,866

Less net income attributable to non-controlling interests
 
3,613

 
9,024

Net income attributable to Planet Fitness, Inc.
 
$
19,880

 
$
8,842

Net income per share of Class A common stock:
 
 
 
 
Basic
 
$
0.23

 
$
0.14

Diluted
 
$
0.23

 
$
0.14

Weighted-average shares of Class A common stock outstanding:
 
 
 
 
Basic
 
87,434

 
64,121

Diluted
 
87,698

 
64,150

 
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,
 
 
2018
 
2017
Net income including non-controlling interests
 
$
23,493

 
$
17,866

Other comprehensive income (loss), net:
 
 
 
 
Unrealized gain on interest rate caps, net of tax
 
366

 
177

Foreign currency translation adjustments
 
(29
)
 
(8
)
Total other comprehensive income, net
 
337

 
169

Total comprehensive income including non-controlling
   interests
 
23,830

 
18,035

Less: total comprehensive income attributable to non-controlling interests
 
3,671

 
9,114

Total comprehensive income attributable to Planet Fitness, Inc.
 
$
20,159

 
$
8,921

 
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,
 
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
23,493

 
$
17,866

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
8,465

 
7,951

Amortization of deferred financing costs
 
484

 
465

Amortization of favorable leases and asset retirement obligations
 
93

 
94

Amortization of interest rate caps
 
195

 
432

Deferred tax expense
 
4,909

 
5,298

Gain on re-measurement of tax benefit arrangement
 
(396
)
 
(541
)
Provision for bad debts
 
(14
)
 
27

Loss on reacquired franchise rights
 
350

 

Loss on disposal of property and equipment
 
650

 

Equity-based compensation
 
998

 
380

Changes in operating assets and liabilities, excluding effects of acquisitions:
 
 
 
 
Accounts receivable
 
18,637

 
11,859

Due to and due from related parties
 
165

 
(99
)
Inventory
 
(1,364
)
 
471

Other assets and other current assets
 
(1,341
)
 
(2,187
)
National advertising fund
 
(4,586
)
 

Accounts payable and accrued expenses
 
(16,758
)
 
(21,244
)
Other liabilities and other current liabilities
 
83

 
188

Income taxes
 
1,898

 
310

Equipment deposits
 
7,784

 
8,569

Deferred revenue
 
3,536

 
527

Deferred rent
 
853

 
106

Net cash provided by operating activities
 
48,134

 
30,472

Cash flows from investing activities:
 
 
 
 
Additions to property and equipment
 
(2,036
)
 
(5,336
)
Acquisition of franchises
 
(28,503
)
 

Proceeds from sale of property and equipment
 
40

 

Net cash used in investing activities
 
(30,499
)
 
(5,336
)
Cash flows from financing activities:
 
 
 
 
Principal payments on capital lease obligations
 
(11
)
 

Repayment of long-term debt
 
(1,796
)
 
(1,796
)
Premiums paid for interest rate caps
 

 
(366
)
Exercise of stock options
 
242

 

Dividend equivalent payments
 
(20
)
 
(20
)
Distributions to Continuing LLC Members
 
(1,734
)
 
(3,142
)
Net cash used in financing activities
 
(3,319
)
 
(5,324
)
Effects of exchange rate changes on cash and cash equivalents
 
(250
)
 
31

Net increase in cash and cash equivalents
 
14,066

 
19,843

Cash and cash equivalents, beginning of period
 
113,080

 
40,393

Cash and cash equivalents, end of period
 
$
127,146

 
$
60,236

Supplemental cash flow information:
 
 
 
 
Net cash paid for income taxes
 
$
106

 
$
1,595

Cash paid for interest
 
$
8,146

 
$
7,857

Non-cash investing activities:
 
 
 
 
Non-cash additions to property and equipment
 
$
453

 
$
38

 
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
 
Accumulated
other
comprehensive
(loss) income
 
Additional paid-
in capital
 
Accumulated
deficit
 
Non-controlling
interests
 
Total (deficit)
equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
 
87,188

 
$
9

 
11,193

 
$
1

 
$
(648
)
 
$
12,118

 
$
(130,966
)
 
$
(17,451
)
 
$
(136,937
)
Net income
 

 

 

 

 

 

 
19,880

 
3,613

 
23,493

Equity-based compensation expense
 

 

 

 

 

 
998

 

 

 
998

Exchanges of Class B common stock
 
300

 

 
(300
)
 

 
(1
)
 
(673
)
 

 
674

 

Exercise of stock options and vesting of restricted share units
 
17

 

 

 

 

 
242

 

 

 
242

Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock
 

 

 

 

 

 
326

 

 

 
326

Forfeiture of dividend equivalents
 

 

 

 

 

 

 
33

 

 
33

Distributions paid to members of Pla-Fit Holdings
 

 

 

 

 

 

 

 
(1,734
)
 
(1,734
)
Cumulative effect adjustment (Note 15)
 

 

 

 

 

 

 
(9,192
)
 

 
(9,192
)
Other comprehensive income
 

 

 

 

 
279

 

 


 
58

 
337

Balance at March 31, 2018
 
87,505

 
$
9

 
10,893

 
$
1

 
$
(370
)
 
$
13,011

 
$
(120,245
)
 
$
(14,840
)
 
$
(122,434
)
 
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 11.8 million members and 1,565 owned and franchised locations (referred to as stores) in 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic and Panama as of March 31, 2018.
The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:
Licensing and selling franchises under the Planet Fitness trade name.
Owning and operating fitness centers under the Planet Fitness trade name.
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.
As of March 31, 2018, Planet Fitness, Inc. held 100.0% of the voting interest and 88.9% of the economic interest of Pla-Fit Holdings and the holders of Holdings Units of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 11.1% economic interest in Pla-Fit Holdings.

(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, 2018 are unaudited. The condensed consolidated balance sheet as of December 31, 2017 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, 2017 (the “Annual Report”) filed with the SEC on March 1, 2018. 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

9

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


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, 2018 and December 31, 2017:
 
 
 
Total fair value at March 31,
2018
 
Quoted
prices
in active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Interest rate caps
 
$
636

 
$

 
$
636

 
$

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

 
$

 
$
340

 
$

 
(d) Recent accounting pronouncements
The FASB issued ASU No. 2014-9, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. The Company has adopted the guidance as of January 1, 2018 on a modified retrospective basis. See Note 15 for details about the effect of adoption.

10

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


The FASB issued ASU No. 2016-2, 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. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company has adopted the guidance as of January 1, 2018 on a prospective basis, noting no material impact on its consolidated financial statements.
The FASB issued ASU No. 2017-4, 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 goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017. The guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. This guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

(3) Variable Interest Entities
The carrying values of VIEs included in the consolidated financial statements as of March 31, 2018 and December 31, 2017 are as follows: 
 
 
March 31, 2018
 
December 31, 2017
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
PF Melville
 
$
4,512

 


 
$
4,420

 
$

MMR
 
3,410

 


 
3,360

 

Total
 
$
7,922

 
$

 
$
7,780

 
$

 
The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements 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 $919 and $979 as of March 31, 2018 and December 31, 2017, respectively.
The amount of the Company’s maximum obligation represents a loss that the Company could incur from the variability in credit exposure without consideration of possible recoveries through insurance or other means. In addition, the amount bears no relation to the ultimate settlement anticipated to be incurred from the Company’s involvement with these entities, which is estimated at $0.
(4) Acquisition
On January 1, 2018, the Company purchased from one of its franchisees certain assets associated with six franchisee-owned stores in New York for a cash payment of $28,503. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $350, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $28,153. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.


11

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


The preliminary purchase consideration was allocated as follows:

 
Amount
Fixed assets
$
4,672

Reacquired franchise rights
7,640

Customer relationships
1,150

Favorable leases, net
520

Reacquired area development rights
150

Other assets
275

Goodwill
14,056

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


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations, financial position or cash flows of the Company.
Certain estimated values for the acquisition, including goodwill and intangible assets, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed.

(5) Goodwill and Intangible Assets
A summary of goodwill and intangible assets at March 31, 2018 and December 31, 2017 is as follows: 
March 31, 2018
 
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
 
11.1
 
$
172,932

 
(89,733
)
 
$
83,199

Noncompete agreements
 
5.0
 
14,500

 
(14,500
)
 

Favorable leases
 
7.7
 
3,455

 
(2,064
)
 
1,391

Order backlog
 
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
 
6.8
 
16,590

 
(6,518
)
 
10,072

Reacquired ADA rights
 
5.0
 
150

 
(7
)
 
143

 
 
 
 
211,027

 
(116,222
)
 
94,805

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

 

 
146,300

Total intangible assets
 
 
 
$
357,327

 
$
(116,222
)
 
$
241,105

Goodwill
 
 
 
$
191,038

 
$

 
$
191,038

 
 

12

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


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

 
$
(86,501
)
 
$
85,281

Noncompete agreements
 
5.0
 
14,500

 
(14,500
)
 

Favorable leases
 
7.5
 
2,935

 
(1,972
)
 
963

Order backlog
 
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
 
5.8
 
8,950

 
(5,837
)
 
3,113

 
 
 
 
201,567

 
(112,210
)
 
89,357

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

 

 
146,300

Total intangible assets
 
 
 
$
347,867

 
$
(112,210
)
 
$
235,657

Goodwill
 
 
 
$
176,981

 
$

 
$
176,981

 
The Company determined that no impairment charges were required during any periods presented and the increase to goodwill was due to the acquisition of six franchisee-owned stores on January 1, 2018 (Note 4).
 
Amortization expense related to the intangible assets totaled $3,966 and $4,715 for the three months ended March 31, 2018 and 2017, respectively. Included within these total amortization expense amounts are $93 and $94 related to amortization of favorable and unfavorable leases for the three months ended March 31, 2018 and 2017, 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, 2018 is as follows:
 
Amount
Remainder of 2018
$
12,029

2019
15,536

2020
13,676

2021
13,701

2022
13,789

Thereafter
26,074

Total
$
94,805


(6) Long-Term Debt
Long-term debt as of March 31, 2018 and December 31, 2017 consists of the following: 
 
 
March 31, 2018
 
December 31, 2017
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 (4.71% at March 31, 2018 and 4.59% at December 31, 2017)
 
$
707,673

 
$
709,470

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 (6.50% at March 31, 2018 and 6.25% at December 31, 2017)
 

 

Total debt, excluding deferred financing costs
 
$
707,673

 
709,470

Deferred financing costs, net of accumulated amortization
 
(5,224
)
 
(5,709
)
Total debt
 
702,449

 
703,761

Current portion of long-term debt and line of credit
 
7,185

 
7,185

Long-term debt, net of current portion
 
$
695,264

 
$
696,576


13

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


 
Term loan B payments are payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due on March 31, 2021.
Future annual principal payments of long-term debt as of March 31, 2018 are as follows: 
 
Amount
Remainder of 2018
$
5,389

2019
7,185

2020
7,185

2021
687,914

2022

Total
$
707,673


(7) 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.
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 order to manage the market risk arising from the outstanding term loans, the Company has entered into a series of interest rate caps. As of March 31, 2018, the Company had interest rate cap agreements with notional amounts of $134,000 outstanding that were entered into in order to hedge three month LIBOR greater than 1.5% through September 30, 2018, and interest rate cap agreements with notional amounts of $220,735 that were entered into in order to hedge one month LIBOR greater than 2.5% through March 31, 2019.
The interest rate cap balances of $636 and $340 were recorded within other assets in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded an increase to the value of its interest rate caps of $366, net of tax of $125 and $177, net of tax of $57, within other comprehensive income (loss) during the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, 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 could necessitate reclassifying these derivatives’ loss to earnings include the re-pricing of variable-rate debt.


14

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


(8) Related Party Transactions
 
Amounts due from related parties of $3,060 and $3,020 as of March 31, 2018 and December 31, 2017, respectively, primarily relate to potential reimbursements for certain taxes accrued or paid by the Company (see Note 11).
 
Activity with entities considered to be related parties is summarized below: 
 
 
For the three months ended
March 31,
 
 
2018
 
2017
Franchise revenue
 
$
882

 
$
448

Equipment revenue
 
591

 
19

Total revenue from related parties
 
$
1,473

 
$
467

 
Additionally, the Company had deferred area development agreement revenue from related parties of $784 and $389 as of March 31, 2018 and December 31, 2017, respectively.
The Company entered into a consulting agreement that continues through December 31, 2018 with a shareholder and former executive officer of the Company.
The Company had payables to related parties pursuant to tax benefit arrangements of $45,125 and $44,794, as of March 31, 2018 and December 31, 2017, respectively (see Note 11).
The Company provides administrative services to Planet Fitness NAF, LLC (“NAF”) and charges NAF a fee for providing these services. The services provided include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted to $640 and $573 for the three months ended March 31, 2018 and 2017, respectively.

(9) Stockholder’s Equity
Pursuant to the exchange agreement between the Company and the Continuing LLC Owners, 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. In connection with any exchange of Holdings Units for shares of Class A common stock by a Continuing LLC Owner , the number of Holdings Units held by the Company is correspondingly increased as it acquires the exchanged Holdings Units, and a corresponding number of shares of Class B common stock are canceled.
During the three months ended March 31, 2018, certain existing holders of Holdings Units exercised their exchange rights and exchanged 300,000 Holdings Units for 300,000 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 300,000 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 300,000 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
As a result of these transactions, as of March 31, 2018:
Holders of our Class A common stock owned 87,505,487 shares of our Class A common stock, representing 88.9% of the voting power in the Company and, through the Company, 87,505,487 Holdings Units representing 88.9% of the economic interest in Pla-Fit Holdings; and
the Continuing LLC Owners collectively owned 10,892,740 Holdings Units, representing 11.1% of the economic interest in Pla-Fit Holdings and 10,892,740 shares of our Class B common stock, representing 11.1% of the voting power in the Company.

(10) 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

15

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


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.
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.
The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:  
 
 
Three months ended
March 31,
 
 
2018
 
2017
Numerator
 
 

 
 

Net income
 
$
23,493

 
$
17,866

Less: net income attributable to non-controlling interests
 
3,613

 
9,024

Net income attributable to Planet Fitness, Inc.
 
$
19,880

 
$
8,842

Denominator
 
 
 
 
Weighted-average shares of Class A common stock outstanding - basic
 
87,434,384

 
64,120,677

Effect of dilutive securities:
 
 
 
 
Stock options
 
255,527

 
24,739

Restricted stock units
 
7,774

 
4,525

Weighted-average shares of Class A common stock outstanding - diluted
 
87,697,685

 
64,149,941

Earnings per share of Class A common stock - basic
 
$
0.23

 
$
0.14

Earnings per share of Class A common stock - diluted
 
$
0.23

 
$
0.14

Weighted average shares of Class B common stock of 10,953,521 and 34,378,046 for the three months ended March 31, 2018 and 2017, respectively, were evaluated under the if-converted method for potential dilutive effects and were not determined to be dilutive. Weighted average stock options outstanding of 0 and 111,912 for the three months ended March 31, 2018 and 2017, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive. Weighted average RSUs outstanding of 0 and 8,160 for the three months ended March 31, 2018 and 2017, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive.

(11) Income Taxes
The Company is the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and certain state and local income taxes. 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, on a pro-rata basis. The provision for income taxes also reflects a state tax rate of 2.0% for the three months ended March 31, 2018 and 2017, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings.
Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings. The Company’s effective tax rate was 22.7% and 28.5% for the three months ended March 31, 2018 and 2017, respectively. The reduction in the current tax rate was primarily attributable to the lower U.S. statutory tax rate in 2018, partially offset by the Company’s increased pro rata share of income from Pla-Fit Holdings. The impact of discrete items was not material. The Company was also subject to taxes in foreign jurisdictions. Undistributed earnings of foreign operations were not material for the three months ended March 31, 2018 and 2017.
Net deferred tax assets of $407,837 and $406,153 as of March 31, 2018 and December 31, 2017, 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 secondary offerings, other exchanges, recapitalization transactions and IPO. As of March 31, 2018, the Company does not have any material net operating loss carryforwards.

16

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


As of March 31, 2018 and December 31, 2017, the total liability related to uncertain tax positions was $2,608. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of March 31, 2018, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next 12 months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. Interest and penalties for the three months ended March 31, 2018 and 2017 were not material.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of H.R. 1, originally known as the Tax Cuts and Jobs Act ("2017 Tax Act"). As of December 31, 2017, the Company made reasonable provisional estimates of the effects of the Tax Act on our consolidated financial statements and tax disclosures, including changes to existing deferred tax balances, the mandatory repatriation tax and remeasurement of our tax benefit arrangements. At March 31, 2018 the Company has not obtained the additional information needed to complete the accounting for the effects of the 2017 Tax Act and has not revised any of its 2017 provisional estimates.
 Tax benefit arrangements
The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (the "Direct TSG Investors") 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings.
During the three months ended March 31, 2018, 300,000 Holdings Units were redeemed by the TRA Holders for newly issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $188 during the three months ended March 31, 2018. As a result of these exchanges, during the three months ended March 31, 2018, we also recognized deferred tax assets in the amount of $3,633, and corresponding tax benefit arrangement liabilities of $3,119, representing 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges was to equity.
As of March 31, 2018 and December 31, 2017, the Company had a liability of $434,084 and $431,360, respectively, related to its projected obligations under the tax benefit arrangements. Projected future payments under the tax benefit arrangements are as follows:
 
Amount
Remainder of 2018
$
31,062

2019
23,479

2020
23,776

2021
24,191

2022
24,663

Thereafter
306,913

Total
$
434,084




17

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


(12) Commitments and contingencies
From time to time, and in the ordinary course of business, the Company is subject to various claims, charges, and litigation, such as employment-related claims and slip and fall cases. The Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.

(13) Segments

The Company has three reportable segments: (i) Franchise; (ii) Corporate-owned stores; and (iii) Equipment.  

The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.

The Franchise segment includes operations related to the Company’s franchising business in the United States, Puerto Rico, Canada, the Dominican Republic and Panama, including revenues and expenses from the national advertising fund beginning on January 1, 2018 (see Note 15). The Corporate-owned stores segment includes operations with respect to all Corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to franchisee-owned stores.

The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its segments and allocates resources to them based on revenue and earnings before interest, taxes, depreciation, and amortization, referred to as Segment EBITDA. Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues.

The tables below summarize the financial information for the Company’s reportable segments for the three months ended March 31, 2018 and 2017. The “Corporate and other” category, as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services which are not directly attributable to any individual segment.
 
 
 
Three months ended
March 31,
 
 
2018
 
2017
Revenue
 
 

 
 

Franchise segment revenue - U.S.
 
$
53,445

 
$
36,428

Franchise segment revenue - International
 
1,167

 
369

Franchise segment total
 
54,612

 
36,797

Corporate-owned stores - U.S.
 
31,573

 
25,973

Corporate-owned stores - International
 
1,135

 
1,068

Corporate-owned stores total
 
32,708

 
27,041

Equipment segment - U.S.
 
34,013

 
27,264

Equipment segment total
 
34,013

 
27,264

Total revenue
 
$
121,333

 
$
91,102

 
Franchise segment revenue includes franchise revenue, national advertising fund revenue, and commission income.

Franchise revenue includes revenue generated from placement services of $2,097 and $2,106 for the three months ended March 31, 2018 and 2017, respectively.
 

18

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


 
 
Three months ended
March 31,
 
 
2018
 
2017
Segment EBITDA
 
 

 
 

Franchise
 
$
36,677

 
$
32,032

Corporate-owned stores
 
12,170

 
10,693

Equipment
 
7,469

 
6,094

Corporate and other
 
(8,741
)
 
(7,131
)
Total Segment EBITDA
 
$
47,575

 
$
41,688

 
The following table reconciles total Segment EBITDA to income before taxes:
 
 
 
Three months ended
March 31,
 
 
2018
 
2017
Total Segment EBITDA
 
$
47,575

 
$
41,688

Less:
 
 
 
 
Depreciation and amortization
 
8,465

 
7,951

Other (income) expense
 
192

 
682

Income from operations
 
38,918

 
33,055

Interest expense, net
 
(8,734
)
 
(8,763
)
Other (income) expense
 
192

 
682

Income before income taxes
 
$
30,376

 
$
24,974


The following table summarizes the Company’s assets by reportable segment: 
 
 
March 31, 2018
 
December 31, 2017
Franchise
 
$
222,269

 
$
243,348

Corporate-owned stores
 
191,978

 
167,367

Equipment
 
188,630

 
206,632

Unallocated
 
512,976

 
475,118

Total consolidated assets
 
$
1,115,853

 
$
1,092,465

 
The table above includes $2,362 and $2,558 of long-lived assets located in the Company’s corporate-owned stores in Canada as of March 31, 2018 and December 31, 2017, respectively. All other assets are located in the U.S.
The following table summarizes the Company’s goodwill by reportable segment: 
 
 
March 31, 2018
 
December 31, 2017
Franchise
 
$
16,938

 
$
16,938

Corporate-owned stores
 
81,434

 
67,377

Equipment
 
92,666

 
92,666

Consolidated goodwill
 
$
191,038

 
$
176,981




19

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


(14) Corporate-Owned and Franchisee-Owned Stores

The following table shows changes in our corporate-owned and franchisee-owned stores for the three months ended March 31, 2018 and 2017:
 
 
For the three months ended
March 31,
 
 
2018
 
2017
Franchisee-owned stores:
 
 
 
 
Stores operated at beginning of period
 
1,456

 
1,255

New stores opened
 
47

 
54

Stores debranded, sold or consolidated(1)
 
(6
)
 

Stores operated at end of period
 
1,497

 
1,309

 
 
 
 
 
Corporate-owned stores:
 
 
 
 
Stores operated at beginning of period
 
62

 
58

New stores opened
 

 

Stores acquired from franchisees
 
6

 

Stores operated at end of period
 
68

 
58

 
 
 
 
 
Total stores:
 
 
 
 
Stores operated at beginning of period
 
1,518

 
1,313

New stores opened
 
47

 
54

Stores acquired, debranded, sold or consolidated(1)
 

 

Stores operated at end of period
 
1,565

 
1,367


 (1)
The term “debrand” refers to a franchisee-owned store whose right to use the Planet Fitness brand and marks has been terminated in accordance with the franchise agreement. We retain the right to prevent debranded stores from continuing to operate as fitness centers. The term “consolidated” refers to the combination of a franchisee’s store with another store located in close proximity with our prior approval. This often coincides with an enlargement, re-equipment and/or refurbishment of the remaining store.

20

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


(15) Revenue recognition
Revenue from Contracts with Customers
We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (“ASC 606”), from ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of Previous Standards. The $9,192 cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 stockholders' deficit.
Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled in exchange for those goods or services.
Revenue Recognition Significant Accounting Policies under ASC 606
The Company's revenues are comprised of franchise revenue, equipment revenue, and corporate-owned stores revenue.
Franchise revenue
Franchise revenues consist primarily of royalties, national advertising fund contributions, initial and renewal franchise fees and upfront fees from area development agreements ("ADAs"), transfer fees, equipment placement revenue, other fees and commission income. 
The Company's primary performance obligation under the franchise license is granting certain rights to use the Company's intellectual property, and all other services the Company provides under the ADA and franchise agreement are highly interrelated, not distinct within the contract, and therefore accounted for under ASC 606 as a single performance obligation, which is satisfied by granting certain rights to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee contributions to national advertising funds, are calculated as a percentage of franchise sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon signing a new franchise agreement or renewal of an existing franchise agreement, and transfer fees are paid to the Company when one franchisee transfers a franchise agreement to a different franchisee. Our franchise royalties, as well as our advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.
Additionally, under ASC 606, initial and renewal franchise fees as well as transfer fees are recognized as revenue on a straight-line basis over the term of the respective franchise agreement. Under the Previous Standards, initial franchise fees were recognized as revenue when the related franchisees signed a lease and completed the Company's new franchisee training. Renewal franchise fees and transfer fees were recognized as revenue upon execution of a new franchise agreement. Our performance obligation under area development agreements generally consists of an obligation to grant geographic exclusive area development rights. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise agreement signed by the franchisee. The pro-rata amount apportioned to each franchise agreement is accounted for identically to the initial franchise fee.
The Company is generally responsible for assembly and placement of equipment it sells to U.S. based franchisee-owned stores. Placement revenue is recognized upon completion and acceptance of the services at the franchise location.
The Company recognizes commission income from its franchisees’ use of certain preferred vendor arrangements. Commissions are recognized when amounts have been earned and collectability from the vendor is reasonably assured.
Online member join fees are paid to the Company by franchisees for processing new membership transactions when a new member signs up for a membership to a franchisee-owned store through the Company’s website. These fees are recognized as revenue as each transaction occurs.

21

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


Billing transaction fees are paid to the Company for the processing of franchisee membership dues and annual fees through the Company’s third-party hosted point-of-sale system and are recognized as revenue as they are earned.
Equipment revenue
The Company sells and delivers equipment purchased from third-party equipment manufacturers to U.S. based franchisee-owned stores.  Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment revenue and freight costs are recorded within cost of revenue. The Company recognizes revenue on a gross basis in these transactions as management has determined the Company to be the principal in these transactions. Management determined the Company to be the principal in the transaction because the Company controls the equipment prior to delivery to the final customer as evidenced by its pricing discretion over the goods, inventory transfer of title and risk of loss while the inventory is in transit, and having the primary responsibility to fulfill the customer order and direct the third-party vendor.
Corporate-owned stores revenue
The following revenues are generated from stores owned and operated by the Company.
Customers are offered multiple membership choices varying in length. Membership dues are earned and recognized over the membership term on a straight-line basis.
Enrollment fee revenue
Enrollment fees are charged to new members at the commencement of their membership. The Company recognizes enrollment fees ratably over the estimated duration of the membership life, which is generally two years.
Annual membership fee revenue
Annual membership fees are annual fees charged to members in addition to and in order to maintain low monthly membership dues. The Company recognizes annual membership fees ratably over the 12-month membership period.
Retail sales
The Company sells Planet Fitness branded apparel, food, beverages, and other accessories. The revenue for these items is recognized at the point of sale.

Contract Liabilities

Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees and ADA fees paid by franchisees, as well as transfer fees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement. Also included are corporate store enrollment fees, annual fees and monthly fees. We classify these contract liabilities as deferred revenue in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (January 1, 2018) and March 31, 2018, :


Contract liabilities
Balance at January 1, 2018
$
40,000

Revenue recognized that was included in the contract liability at the beginning of the year
(10,355
)
Increase, excluding amounts recognized as revenue during the period
14,139

Balance at March 31, 2018
$
43,784


The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018. The Company has elected to exclude short term contracts, sales and usage based royalties and any other variable consideration recognized on an "as invoiced" basis.


22

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


Contract liabilities to be recognized in:
 
Amount
2018
 
19,327

2019
 
3,178

2020
 
1,977

2021
 
1,868

2022
 
1,732

Thereafter
 
15,702

Total
 
43,784


Financial Statement Impact of Transition to ASC 606

As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to stockholders' deficit as of that date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in millions):

23

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)



As Reported December 31,

Total adjustments

Adjusted January 1,

2017



2018
Assets





Current assets:





Cash and cash equivalents
$
113,080


$


$
113,080

Accounts receivable, net
37,272




37,272

Due from related parties
3,020




3,020

Inventory
2,692




2,692

Restricted assets – national advertising fund
499




499

Prepaid expenses
3,929




3,929

Other receivables
9,562




9,562

Other current assets
6,947




6,947

Total current assets
177,001




177,001

Property and equipment, net
83,327




83,327

Intangible assets, net
235,657




235,657

Goodwill
176,981




176,981

Deferred income taxes
407,782


3,285


411,067

Other assets, net
11,717




11,717

Total assets
$
1,092,465


$
3,285


$
1,095,750

Liabilities and stockholders' equity (deficit)





Current liabilities:





Current maturities of long-term debt
$
7,185


$


$
7,185

Accounts payable
28,648




28,648

Accrued expenses
18,590




18,590

Equipment deposits
6,498




6,498

Restricted liabilities – national advertising fund
490




490

Deferred revenue, current
19,083


(764
)

18,319

Payable pursuant to tax benefit arrangements, current
31,062




31,062

Other current liabilities
474




474

Total current liabilities
112,030


(764
)

111,266

Long-term debt, net of current maturities
696,576




696,576

Deferred rent, net of current portion
6,127




6,127

Deferred revenue, net of current portion
8,440


13,241


21,681

Deferred tax liabilities
1,629




1,629

Payable pursuant to tax benefit arrangements, net of current portion
400,298




400,298

Other liabilities
4,302




4,302

Total noncurrent liabilities
1,117,372


13,241


1,130,613

Stockholders' equity (deficit):





Class A common stock
9




9

Class B common stock
1




1

Accumulated other comprehensive loss
(648
)



(648
)
Additional paid in capital
12,118




12,118

Accumulated deficit
(130,966
)

(9,192
)

(140,158
)
Total stockholders' deficit attributable to Planet Fitness Inc.
(119,486
)

(9,192
)

(128,678
)
Non-controlling interests
(17,451
)



(17,451
)
Total stockholders' deficit
(136,937
)

(9,192
)

(146,129
)
Total liabilities and stockholders' deficit
$
1,092,465


$
3,285


$
1,095,750



24

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


Franchise Fees
The cumulative adjustment for franchise fees, including ADA fees, renewal fees and transfer fees which will all be recognized over the franchise contract term consist of the following:
An increase in deferred revenue, net of $12,477 for the cumulative reversal and deferral of previously recognized fees related to franchise agreements in effect at January 1, 2018 that were entered into subsequent to the acquisition of Pla-Fit Holdings on November 8, 2012 by TSG Consumer Partners, LLC (the “2012 Acquisition”) (net of the cumulative revenue attributable for the period through January 1, 2018), with a corresponding decrease to Shareholders’ equity.
An increase to deferred income taxes, net of $3,285 for the tax effects of the adjustment noted above, with a corresponding increase to stockholders' equity.

Comparison to Amounts if Previous Standards Had Been in Effect
The following tables reflect the impact of adoption of ASC 606 on our consolidated statements of operations and cash flows from operating activities for the three months ended March 31, 2018 and our condensed consolidated balance sheet as of March 31, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”):
Consolidated statement of operations
 
As reported March 31, 2018
 
Total adjustments
 
Amounts under Previous Standards
Revenue:
 
 
 
 
 
Franchise
$
42,162

 
$
1,765

 
$
43,927

Commission income
1,989

 

 
1,989

National advertising fund revenue
10,461

 
(10,461
)
 

Corporate-owned stores
32,708

 

 
32,708

Equipment
34,013

 

 
34,013

Total revenue
121,333

 
(8,696
)
 
112,637

Operating costs and expenses:
 
 
 
 
 
Cost of revenue
26,500

 

 
26,500

Store operations
18,356

 

 
18,356

Selling, general and administrative
17,623

 

 
17,623

National advertising fund expense
10,461

 
(10,461
)
 

Depreciation and amortization
8,465

 

 
8,465

Other loss (gain)
1,010

 

 
1,010

Total operating costs and expenses
82,415

 
(10,461
)
 
71,954

Income from operations
38,918

 
1,765

 
40,683

Other expense, net:
 
 
 
 
 
Interest expense, net
(8,734
)
 

 
(8,734
)
Other (expense) income
192

 

 
192

Total other expense, net
(8,542
)
 

 
(8,542
)
Income before income taxes
30,376

 
1,765

 
32,141

Provision for income taxes
6,883

 
424

 
7,307

Net income
23,493

 
1,341

 
24,834

Less net income attributable to non-controlling interests
3,613

 
196

 
3,809

Net income attributable to Planet Fitness, Inc.
$
19,880

 
$
1,145

 
$
21,025

Net income per share of Class A common stock:
 
 
 
 
 
Basic
$
0.23

 
 
 
$
0.24

Diluted
$
0.23

 
 
 
$
0.24


25

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


Consolidated Statement of Cash Flows
 
As reported March 31, 2018
 
Total adjustments
 
Amounts under Previous Standards
Cash flows from operating activities:
 
 
 
 
 
Net income
$
23,493

 
$
1,341

 
$
24,834

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
8,465

 

 
8,465

Amortization of deferred financing costs
484

 

 
484

Amortization of favorable leases and asset retirement obligations
93

 

 
93

Amortization of interest rate caps
195

 

 
195

Deferred tax expense
4,909

 

 
4,909

Gain on re-measurement of tax benefit arrangement
(396
)
 

 
(396
)
Provision for bad debts
(14
)
 

 
(14
)
Loss on reacquired franchise rights
350

 

 
350

Loss (gain) on disposal of property and equipment
650

 

 
650

Equity-based compensation
998

 

 
998

Changes in operating assets and liabilities, excluding effects of acquisitions:
 
 
 
 
 
Accounts receivable
18,637

 

 
18,637

Due to and due from related parties
165

 

 
165

Inventory
(1,364
)
 

 
(1,364
)
Other assets and other current assets
(1,341
)
 

 
(1,341
)
National advertising fund
(4,586
)
 

 
(4,586
)
Accounts payable and accrued expenses
(16,758
)
 

 
(16,758
)
Other liabilities and other current liabilities
83

 

 
83

Income taxes
1,898

 
424

 
2,322

Equipment deposits
7,784

 

 
7,784

Deferred revenue
3,536

 
(1,765
)
 
1,771

Deferred rent
853

 

 
853

Net cash provided by operating activities
$
48,134

 
$

 
$
48,134



26

Planet Fitness, Inc. and subsidiaries
Notes to Condensed Consolidated financial statements
(Unaudited)
(Amounts in thousands, except share and per share amounts)


Consolidated Balance Sheet
 
As reported March 31, 2018
 
Total adjustments
 
Amounts under Previous Standards
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
127,146

 
$

 
$
127,146

Accounts receivable, net
18,620

 

 
18,620

Due from related parties
3,060

 

 
3,060

Inventory
4,056

 

 
4,056

Restricted assets – national advertising fund
78

 

 
78

Deferred expenses – national advertising fund
4,596

 

 
4,596

Prepaid expenses
4,051

 

 
4,051

Other receivables
14,550

 

 
14,550

Other current assets
5,355

 

 
5,355

Total current assets
181,512

 

 
181,512

Property and equipment, net
84,545