10-Q 1 plnt10-qq32018document.htm 10-Q Document
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 September 30, 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 every Interactive Data File required to be submitted 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 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
 
☐  
  
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 November 1, 2018 there were 88,169,242 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 9,463,730 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;
Potential return of capital initiatives;
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;
our substantial increased indebtedness as a result of our refinancing and securitization transactions and our ability to incur additional indebtedness or refinance that indebtedness in the future;
our future financial performance and our ability to pay principal and interest on our indebtedness;
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, and elsewhere in this Quarterly Report on Form 10-Q.
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) 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
572,731

 
$
113,080

Restricted cash
 
35,915

 

Accounts receivable, net of allowance for bad debts of $74 and $32 at September 30, 2018 and December 31, 2017, respectively
 
26,145

 
37,272

Due from related parties
 

 
3,020

Inventory
 
6,142

 
2,692

Restricted assets – national advertising fund
 
3,418

 
499

Prepaid expenses
 
3,813

 
3,929

Other receivables
 
10,993

 
9,562

Other current assets
 
6,318

 
6,947

Total current assets
 
665,475

 
177,001

Property and equipment, net of accumulated depreciation of $48,960, as of September 30, 2018 and $36,228 as of December 31, 2017
 
97,240

 
83,327

Intangible assets, net
 
237,896

 
235,657

Goodwill
 
199,513

 
176,981

Deferred income taxes
 
416,707

 
407,782

Other assets, net
 
4,608

 
11,717

Total assets
 
$
1,621,439

 
$
1,092,465

Liabilities and stockholders' deficit
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
12,000

 
$
7,185

Accounts payable
 
23,400

 
28,648

Accrued expenses
 
26,764

 
18,590

Equipment deposits
 
11,449

 
6,498

Restricted liabilities – national advertising fund
 
3,418

 
490

Deferred revenue, current
 
21,959

 
19,083

Payable pursuant to tax benefit arrangements, current
 
25,578

 
31,062

Other current liabilities
 
456

 
474

Total current liabilities
 
125,024

 
112,030

Long-term debt, net of current maturities
 
1,161,712

 
696,576

Deferred rent, net of current portion
 
10,297

 
6,127

Deferred revenue, net of current portion
 
25,916

 
8,440

Deferred tax liabilities
 
1,730

 
1,629

Payable pursuant to tax benefit arrangements, net of current portion
 
405,577

 
400,298

Other liabilities
 
1,331

 
4,302

Total noncurrent liabilities
 
1,606,563

 
1,117,372

Commitments and contingencies (Note 12)
 

 

Stockholders' equity (deficit):
 
 
 
 
Class A common stock, $.0001 par value - 300,000 authorized, 88,085 and 87,188 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
 
9

 
9

Class B common stock, $.0001 par value - 100,000 authorized, 9,544 and 11,193 shares issued and outstanding as of September 30, 2018 December 31, 2017, respectively
 
1

 
1

Accumulated other comprehensive income (loss)
 
256

 
(648
)
Additional paid in capital
 
17,237

 
12,118

Accumulated deficit
 
(118,964
)
 
(130,966
)
Total stockholders' deficit attributable to Planet Fitness Inc.
 
(101,461
)
 
(119,486
)
Non-controlling interests
 
(8,687
)
 
(17,451
)
Total stockholders' deficit
 
(110,148
)
 
(136,937
)
Total liabilities and stockholders' deficit
 
$
1,621,439

 
$
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
September 30,
 
For the nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 

 
 

 
 
 
 
Franchise
 
$
41,997

 
$
31,413

 
$
129,575

 
$
94,485

Commission income
 
1,448

 
4,149

 
5,012

 
15,668

National advertising fund revenue
 
11,377

 

 
32,997

 

Corporate-owned stores
 
35,406

 
28,560

 
102,365

 
83,886

Equipment
 
46,428

 
33,374

 
128,589

 
101,875

Total revenue
 
136,656

 
97,496

 
398,538

 
295,914

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
36,871

 
25,819

 
100,114

 
78,395

Store operations
 
18,751

 
15,551

 
55,154

 
45,339

Selling, general and administrative
 
17,233

 
14,071

 
52,066

 
42,659

National advertising fund expense
 
11,377

 

 
32,997

 

Depreciation and amortization
 
8,863

 
8,137

 
25,947

 
23,982

Other (gain) loss
 
(12
)
 
(36
)
 
958

 
280

Total operating costs and expenses
 
93,083

 
63,542

 
267,236

 
190,655

Income from operations
 
43,573

 
33,954

 
131,302

 
105,259

Other expense, net:
 
 
 
 
 
 
 
 
Interest income
 
2,025

 
18

 
2,480

 
24

Interest expense
 
(17,909
)
 
(8,938
)
 
(35,725
)
 
(26,735
)
Other income (expense)
 
(27
)
 
408

 
(338
)
 
157

Total other expense, net
 
(15,911
)
 
(8,512
)
 
(33,583
)
 
(26,554
)
Income before income taxes
 
27,662

 
25,442

 
97,719

 
78,705

Provision for income taxes
 
7,190

 
6,540

 
23,335

 
23,933

Net income
 
20,472

 
18,902

 
74,384

 
54,772

Less net income attributable to non-controlling interests
 
3,001

 
3,557

 
11,158

 
18,173

Net income attributable to Planet Fitness, Inc.
 
$
17,471

 
$
15,345

 
63,226

 
$
36,599

Net income per share of Class A common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.20

 
$
0.18

 
$
0.72

 
$
0.48

Diluted
 
$
0.20

 
$
0.18

 
$
0.72

 
$
0.48

Weighted-average shares of Class A common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
88,047

 
85,663

 
87,727

 
76,391

Diluted
 
88,458

 
85,734

 
88,064

 
76,435

 
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
September 30,
 
For the nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income including non-controlling interests
 
$
20,472

 
$
18,902

 
$
74,384

 
$
54,772

Other comprehensive income (loss), net:
 
 
 
 
 
 
 
 
Unrealized gain on interest rate caps, net of tax
 
606

 
374

 
989

 
730

Foreign currency translation adjustments
 
40

 
20

 
(23
)
 
25

Total other comprehensive income, net
 
646

 
394

 
966

 
755

Total comprehensive income including non-controlling
   interests
 
21,118

 
19,296

 
75,350

 
55,527

Less: total comprehensive income attributable to non-controlling interests
 
3,007

 
3,631

 
11,221

 
18,384

Total comprehensive income attributable to Planet
   Fitness, Inc.
 
$
18,111

 
$
15,665

 
$
64,129

 
$
37,143

 
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 nine months ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
74,384

 
$
54,772

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
25,947

 
23,982

Amortization of deferred financing costs
 
2,041

 
1,439

Amortization of favorable leases and asset retirement obligations
 
280

 
260

Amortization of interest rate caps
 
1,170

 
1,552

Deferred tax expense
 
19,654

 
21,344

Loss on extinguishment of debt
 
4,570

 
79

Third party debt refinancing expense
 

 
1,021

Gain on re-measurement of tax benefit arrangement
 
(354
)
 
(541
)
Provision for bad debts
 
8

 
44

Loss on reacquired franchise rights
 
360

 

Loss (gain) on disposal of property and equipment
 
542

 
(357
)
Equity-based compensation
 
4,137

 
1,800

Changes in operating assets and liabilities, excluding effects of acquisitions:
 
 
 
 
Accounts receivable
 
10,922

 
11,099

Due to and due from related parties
 
3,174

 
(580
)
Inventory
 
(3,450
)
 
1,253

Other assets and other current assets
 
4,972

 
(2,413
)
Accounts payable and accrued expenses
 
2,426

 
(16,985
)
Other liabilities and other current liabilities
 
(2,869
)
 
(724
)
Income taxes
 
1,028

 
(1,462
)
Payable pursuant to tax benefit arrangements
 
(21,706
)
 
(7,909
)
Equipment deposits
 
4,950

 
5,951

Deferred revenue
 
7,544

 
(958
)
Deferred rent
 
4,156

 
361

Net cash provided by operating activities
 
143,886

 
93,028

Cash flows from investing activities:
 
 
 
 
Additions to property and equipment
 
(18,601
)
 
(23,229
)
Acquisition of franchises
 
(45,752
)
 

Proceeds from sale of property and equipment
 
196

 
166

Net cash used in investing activities
 
(64,157
)
 
(23,063
)
Cash flows from financing activities:
 
 
 
 
Principal payments on capital lease obligations
 
(35
)
 

Proceeds from issuance of long-term debt
 
1,200,000

 

Repayment of long-term debt
 
(709,469
)
 
(5,388
)
Payment of deferred financing and other debt-related costs
 
(27,191
)
 
(1,278
)
Premiums paid for interest rate caps
 

 
(366
)
Exercise of stock options
 
1,106

 
172

Repurchase and retirement of Class A common stock
 
(42,090
)
 

Dividend equivalent payments
 
(881
)
 
(1,322
)
Distributions to Continuing LLC Members
 
(5,369
)
 
(9,308
)
Net cash provided by (used in) financing activities
 
416,071

 
(17,490
)
Effects of exchange rate changes on cash and cash equivalents
 
(234
)
 
399

Net increase in cash, cash equivalents and restricted cash
 
495,566

 
52,874

Cash, cash equivalents and restricted cash, beginning of period
 
113,080

 
40,393

Cash, cash equivalents and restricted cash, end of period
 
$
608,646

 
$
93,267

Supplemental cash flow information:
 
 
 
 
Net cash paid for income taxes
 
$
3,777

 
$
3,769

Cash paid for interest
 
$
20,015

 
$
23,637

Non-cash investing activities:
 
 
 
 
Non-cash additions to property and equipment
 
$
2,217

 
$
482

 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
 

 

 

 

 

 

 
63,226

 
11,158

 
74,384

Equity-based compensation expense
 

 

 

 

 

 
4,140

 
(3
)
 

 
4,137

Exchanges of Class B common stock
 
1,640

 

 
(1,640
)
 

 
1

 
(2,913
)
 

 
2,912

 

Retirement of Class B common stock
 

 

 
(9
)
 

 

 

 

 

 

Exercise of stock options and vesting of restricted share units
 
81

 

 

 

 

 
1,106

 

 

 
1,106

Repurchase and retirement of Class A common stock
 
(824
)
 

 

 

 

 

 
(42,090
)
 

 
(42,090
)
Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock
 

 

 

 

 

 
2,786

 

 

 
2,786

Forfeiture of dividend equivalents
 

 

 

 

 

 

 
61

 

 
61

Distributions paid to members of Pla-Fit Holdings
 

 

 

 

 

 

 

 
(5,369
)
 
(5,369
)
Cumulative effect adjustment (Note 15)
 

 

 

 

 

 

 
(9,192
)
 

 
(9,192
)
Other comprehensive income
 

 

 

 

 
903

 

 

 
63

 
966

Balance at September 30, 2018
 
88,085

 
$
9

 
9,544

 
$
1

 
$
256

 
$
17,237

 
$
(118,964
)
 
$
(8,687
)
 
$
(110,148
)
 
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 12.2 million members and 1,646 owned and franchised locations (referred to as stores) in 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic, Panama and Mexico as of September 30, 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 September 30, 2018, Planet Fitness, Inc. held 100.0% of the voting interest and 90.2% 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 9.8% 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 and nine months ended September 30, 2018 and 2017 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 September 30, 2018 and December 31, 2017:
 
 
 
Total fair value at September 30,
2018
 
Quoted prices
in active markets (Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
Interest rate caps
 
$

 
$

 
$

 
$

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

 
$

 
$
340

 
$

 
The carrying value and estimated fair value of long-term debt as of September 30, 2018 and December 31, 2017 were as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying value
 
Estimated fair value(1)
 
Carrying value
 
Estimated fair value(2)
Long-term debt
 
$
1,200,000

 
$
1,195,278

 
$
709,470

 
$
709,470

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


10

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



(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.
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.
The FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, in August 2018. The guidance helps align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year, but allows for early adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

(3) Variable Interest Entities
The carrying values of VIEs included in the consolidated financial statements as of September 30, 2018 and December 31, 2017 are as follows: 

11

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


 
 
September 30, 2018
 
December 31, 2017
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
PF Melville
 
$
4,695

 
$

 
$
4,420

 
$

MMR
 
3,512

 

 
3,360

 

Total
 
$
8,207

 
$

 
$
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 $798 and $979 as of September 30, 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
Colorado Acquisition
On August 10, 2018, the Company purchased from one of its franchisees certain assets associated with four franchisee-owned stores in Colorado for a cash payment of $17,249. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $10, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $17,239. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The preliminary purchase consideration was allocated as follows:
 
Amount
Fixed assets
3,873

Reacquired franchise rights
4,610

Customer relationships
140

Favorable leases, net
80

Other assets
143

Goodwill
8,476

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

The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations, financial position or cash flows of the Company.
Certain estimated values for the Colorado 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.

12

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


Long Island Acquisition
On January 1, 2018, the Company purchased from one of its franchisees certain assets associated with six franchisee-owned stores in New York for a cash payment of $28,503. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $350, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $28,153. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
$
4,672

Reacquired franchise rights
7,640

Customer relationships
1,150

Favorable leases, net
520

Reacquired area development rights
150

Other assets
275

Goodwill
14,056

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

The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations, financial position or cash flows of the Company.

(5) Goodwill and Intangible Assets
A summary of goodwill and intangible assets at September 30, 2018 and December 31, 2017 is as follows: 
September 30, 2018
 
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
 
11.0
 
$
173,063

 
(96,201
)
 
$
76,862

Noncompete agreements
 
5.0
 
14,500

 
(14,500
)
 

Favorable leases
 
7.6
 
3,545

 
(2,248
)
 
1,297

Order backlog
 
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
 
7.1
 
21,199

 
(7,890
)
 
13,309

Reacquired ADA rights
 
5.0
 
150

 
(22
)
 
128

 
 
 
 
215,857

 
(124,261
)
 
91,596

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

 

 
146,300

Total intangible assets
 
 
 
$
362,157

 
$
(124,261
)
 
$
237,896

Goodwill
 
 
 
$
199,513

 
$

 
$
199,513

 
 

13

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, and the acquisition of four franchisee-owned stores on August 10, 2018 (Note 4).
 
Amortization expense related to the intangible assets totaled $4,027 and $4,697 for the three months ended September 30, 2018 and 2017, respectively, and $12,052 and $14,122 for the nine months ended September 30, 2018 and 2017. Included within these total amortization expense amounts are $93 and $75 related to amortization of favorable leases for the three months ended September 30, 2018 and 2017, respectively, and $276 and $255 for the nine months ended September 30, 2018 and 2017, respectively. Amortization of favorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense related to intangible assets to be recognized in future years as of September 30, 2018 is as follows:
 
Amount
Remainder of 2018
$
4,026

2019
16,111

2020
14,260

2021
14,234

2022
14,426

Thereafter
28,539

Total
$
91,596


(6) Long-Term Debt
Long-term debt as of September 30, 2018 and December 31, 2017 consists of the following: 
 
 
September 30, 2018
 
December 31, 2017
Class A-2-I notes
 
$
575,000

 
$

Class A-2-II notes
 
625,000

 

Term loan B, repaid August 2018
 

 
709,470

Total debt, excluding deferred financing costs
 
1,200,000

 
709,470

Deferred financing costs, net of accumulated amortization
 
(26,288
)
 
(5,709
)
Total debt
 
1,173,712

 
703,761

Current portion of long-term debt and line of credit
 
12,000

 
7,185

Long-term debt, net of current portion
 
$
1,161,712

 
$
696,576

 

14

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


Future annual principal payments of long-term debt as of September 30, 2018 are as follows: 
 
Amount
Remainder of 2018
$
3,000

2019
12,000

2020
12,000

2021
12,000

2022
562,563

Thereafter
598,437

Total
$
1,200,000


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

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

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

In connection with the issuance of the Series 2018-1 Senior Notes, the Company incurred debt issuance costs of $27,191. The debt issuance costs are being amortized to “Interest expense” through the Anticipated Repayment Dates of the Class A-2 Notes utilizing the effective interest rate method.

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

15

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


or refinance the Class A-2 Notes on the applicable scheduled Anticipated Repayment Dates. The Series 2018-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2018-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.

In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee (the "Trustee") for the benefit of the trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents cash collections held by the Trustee, interest, principal, and commitment fee reserves held by the Trustee related to the Company’s Series 2018-1 Senior Notes. As of September 30, 2018, the Company had restricted cash held by the Trustee of $35,915. Restricted cash has been combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows.

The proceeds from the issuance of the Class A-2 Notes were used to repay all amounts outstanding on the Term Loan B under the Company’s prior credit facility. As a result, the Company recorded a loss on early extinguishment of debt of $4,570 within interest expense on the consolidated statement of operations, primarily consisting of the write-off of deferred costs related to the prior credit facility. In connection with the repayment of the Term Loan B, the Company terminated the related interest rate caps with notional amounts totaling $219,837, which had been designated as a cash flow hedge. See Note 7 for more information on the interest rate caps.

(7) Derivative Instruments and Hedging Activities
Prior to the refinancing transactions described in Note 6, the Company used interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.
In order to manage the market risk arising from the previously outstanding term loans, the Company entered into a series of interest rate caps. As of September 30, 2018, the Company had no interest rate cap agreements outstanding. In connection with the issuance of the Class A-2 Notes, the Company terminated the interest rate caps it had entered into in order to hedge one month LIBOR greater than 2.5% through March 31, 2019.
The interest rate cap balances of $0 and $340 were recorded within other assets in the condensed consolidated balance sheets as of September 30, 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. During the three and nine months ended September 30, 2018, the Company has reversed all historical unrealized gains and losses associated with its interest rate caps due to the termination or maturity of all previously outstanding caps. The Company recorded an increase to the value of its interest rate caps of $356, net of tax of $145, within other comprehensive income (loss) during the three months ended September 30, 2017, respectively, and an increase to the value of its interest rate caps of $730, net of tax of $344, within other comprehensive income (loss) during the nine months ended September 30, 2017.
(8) Related Party Transactions
 
Amounts due from related parties of $0 and $3,020 as of September 30, 2018 and December 31, 2017. The balance at December 31, 2017 primarily related to 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
September 30,
 
For the nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Franchise revenue
 
$
897

 
$
344

 
$
2,453

 
$
1,174

Equipment revenue
 
1,472

 
4

 
1,782

 
577

Total revenue from related parties
 
$
2,369

 
$
348

 
4,235

 
$
1,751

 
Additionally, the Company had deferred area development agreement revenue from related parties of $817 and $389 as of September 30, 2018 and December 31, 2017, respectively.

16

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


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 $52,521 and $44,794, as of September 30, 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 $676 and $643 for the three months ended September 30, 2018 and 2017, respectively, and $1,872 and $1,645 for the nine months ended September 30, 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 cancelled.
During the nine months ended September 30, 2018, certain existing holders of Holdings Units exercised their exchange rights and exchanged 1,640,020 Holdings Units for 1,640,020 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 1,640,020 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and cancelled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 1,640,020 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
Pursuant to the Company's share repurchase program, which was increased to $500,000 on August 3, 2018, during the nine months ended September 30, 2018, the Company repurchased and retired 824,312 shares of Class A common stock for a total cost of $42,090.
As a result of the above transactions, as of September 30, 2018:
Holders of our Class A common stock owned 88,084,736 shares of our Class A common stock, representing 90.2% of the voting power in the Company and, through the Company, 88,084,736 Holdings Units representing 90.2% of the economic interest in Pla-Fit Holdings; and
the Continuing LLC Owners collectively owned 9,543,730 Holdings Units, representing 9.8% of the economic interest in Pla-Fit Holdings, and 9,543,730 shares of our Class B common stock, representing 9.8% 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 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.

17

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


The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:  
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator
 
 

 
 

 
 
 
 
Net income
 
$
20,472

 
$
18,902

 
$
74,384

 
$
54,772

Less: net income attributable to non-controlling interests
 
3,001

 
3,557

 
11,158

 
18,173

Net income attributable to Planet Fitness, Inc.
 
$
17,471

 
$
15,345

 
$
63,226

 
$
36,599

Denominator
 
 
 
 
 
 
 
 
Weighted-average shares of Class A common stock outstanding - basic
 
88,047,401

 
85,662,650

 
87,727,300

 
76,391,277

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
382,499

 
66,610

 
319,610

 
38,524

Restricted stock units
 
27,904

 
5,196

 
17,141

 
5,018

Weighted-average shares of Class A common stock outstanding - diluted
 
88,457,804

 
85,734,456

 
88,064,051

 
76,434,819

Earnings per share of Class A common stock - basic
 
$
0.20

 
$
0.18

 
$
0.72

 
$
0.48

Earnings per share of Class A common stock - diluted
 
$
0.20

 
$
0.18

 
$
0.72

 
$
0.48

Weighted average shares of Class B common stock of 10,004,682 and 12,693,076 for the three months ended September 30, 2018 and 2017, respectively, and 10,550,857 and 22,010,095 for the nine months ended September 30, 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 36,342 and 466,278 for the three months ended September 30, 2018 and 2017, respectively and 114,628 and 423,870 for the nine months ended September 30, 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 2,924 for the three months ended September 30, 2018 and 2017, respectively, and 11,245 and 985 for the nine months ended September 30, 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.
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 26.0% and 25.7% for the three months ended September 30, 2018 and 2017, respectively and the increase was primarily attributable to the recognition of an income tax benefit in connection with the filing of tax returns in the three months ended September 30, 2017, offset by a lower U.S. statutory tax rate in 2018. The Company’s effective tax rate was 23.9% and 30.4% for the nine months ended September 30, 2018 and 2017, respectively, and the reduction in the effective 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 and nine months ended September 30, 2018 and 2017.
Net deferred tax assets of $414,977 and $406,153 as of September 30, 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 the IPO. As of September 30, 2018, the Company does not have any material net operating loss carryforwards.
As of September 30, 2018 and December 31, 2017, the total liability related to uncertain tax positions was $300 and $2,608, respectively. During the nine months ended September 30, 2018, the Company settled a tax examination for $2,625 which was fully indemnified. At the date of settlement the Company had recorded on its balance sheet an uncertain tax position reserve and

18

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


related indemnification asset of $2,967 reflecting principal and interest and therefore released $342 as an offset to provision for income taxes and also released an indemnification asset of $342 through other expense. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. Interest and penalties for the three and nine months ended September 30, 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 September 30, 2018, the Company has not completed the accounting for the effects of the 2017 Tax Act.
 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 exchanges 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 nine months ended September 30, 2018, 1,640,020 Holdings Units were exchanged 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 $921 during the nine months ended September 30, 2018. As a result of these exchanges, during the nine months ended September 30, 2018, we also recognized deferred tax assets in the amount of $25,559, and corresponding tax benefit arrangement liabilities of $21,852, 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 September 30, 2018 and December 31, 2017, the Company had a liability of $431,155 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
$
8,764

2019
24,447

2020
24,899

2021
25,323

2022
25,812

Thereafter
321,910

Total
$
431,155


(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.

19

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


(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, Panama and Mexico, including revenues and expenses from the NAF 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 and nine months ended September 30, 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
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue
 
 

 
 

 
 
 
 
Franchise segment revenue - U.S.
 
$
53,528

 
$
35,025

 
$
164,225

 
$
108,470

Franchise segment revenue - International
 
1,294

 
537

 
3,359

 
1,683

Franchise segment total
 
54,822

 
35,562

 
167,584

 
110,153

Corporate-owned stores - U.S.
 
34,323

 
27,414

 
99,020

 
80,597

Corporate-owned stores - International
 
1,083

 
1,146

 
3,345

 
3,289

Corporate-owned stores total
 
35,406

 
28,560

 
102,365

 
83,886

Equipment segment - U.S.
 
46,428

 
33,374

 
128,589

 
101,875

Equipment segment total
 
46,428

 
33,374

 
128,589

 
101,875

Total revenue
 
$
136,656

 
$
97,496

 
$
398,538

 
$
295,914

Franchise segment revenue includes franchise revenue, NAF revenue, and commission income.
Franchise revenue includes revenue generated from placement services of $2,518 and $2,433 for the three months ended September 30, 2018 and 2017, respectively, and $7,694 and $7,410 for the nine months September 30, 2018 and 2017, respectively. 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Segment EBITDA
 
 

 
 

 
 
 
 
Franchise
 
$
37,075

 
$
29,925

 
$
113,793

 
$
94,444

Corporate-owned stores
 
15,279

 
12,046

 
42,115

 
35,579

Equipment
 
9,654

 
7,683

 
28,579

 
23,587

Corporate and other
 
(9,599
)
 
(7,155
)
 
(27,576
)
 
(24,212
)
Total Segment EBITDA
 
$
52,409

 
$
42,499

 
$
156,911

 
$
129,398

 

20

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


The following table reconciles total Segment EBITDA to income before taxes:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Total Segment EBITDA
 
$
52,409

 
$
42,499

 
$
156,911

 
$
129,398

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
8,863

 
8,137

 
25,947

 
23,982

Other expense
 
(27
)
 
408

 
(338
)
 
157

Income from operations
 
43,573

 
33,954

 
131,302

 
105,259

Interest income
 
2,025

 
18

 
2,480

 
24

Interest expense
 
(17,909
)
 
(8,938
)
 
(35,725
)
 
(26,735
)
Other expense
 
(27
)
 
408

 
(338
)
 
157

Income before income taxes
 
$
27,662

 
$
25,442

 
$
97,719

 
$
78,705

The following table summarizes the Company’s assets by reportable segment: 
 
 
September 30, 2018
 
December 31, 2017
Franchise
 
$
186,416

 
$
243,348

Corporate-owned stores
 
228,607

 
167,367

Equipment
 
204,592

 
206,632

Unallocated
 
1,001,824

 
475,118

Total consolidated assets
 
$
1,621,439

 
$
1,092,465

The table above includes $2,102 and $2,558 of long-lived assets located in the Company’s corporate-owned stores in Canada as of September 30, 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: 
 
 
September 30, 2018
 
December 31, 2017
Franchise
 
$
16,938

 
$
16,938

Corporate-owned stores
 
89,909

 
67,377

Equipment
 
92,666

 
92,666

Consolidated goodwill
 
$
199,513

 
$
176,981



21

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 and nine months ended September 30, 2018 and 2017:
 
 
For the three months ended
September 30,
 
For the nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Franchisee-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,540

 
1,345

 
1,456

 
1,255

New stores opened
 
40

 
31

 
131

 
122

Stores debranded, sold or consolidated(1)
 
(7
)
 
(2
)
 
(14
)
 
(3
)
Stores operated at end of period
 
1,573

 
1,374

 
1,573

 
1,374

 
 
 
 
 
 
 
 
 
Corporate-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
68

 
58

 
62

 
58

New stores opened
 
1

 

 
1

 

Stores acquired from franchisees
 
4

 

 
10

 

Stores operated at end of period
 
73

 
58

 
73

 
58

 
 
 
 
 
 
 
 
 
Total stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,608

 
1,403

 
1,518

 
1,313

New stores opened
 
41

 
31

 
132

 
122

Stores acquired, debranded, sold or consolidated(1)
 
(3
)
 
(2
)
 
(4
)
 
(3
)
Stores operated at end of period
 
1,646

 
1,432

 
1,646

 
1,432

 (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.

22

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, NAF 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 monthly dues and annual fees over the term of the franchise agreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, marketing and related activities. Initial and 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 NAF contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.
Additionally, under ASC 606, initial and 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 ADAs generally consists of an obligation to grant geographic exclusive area development rights. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise agreement signed by the franchisee. The pro-rata amount apportioned to each franchise agreement is accounted for identically to the initial franchise fee.
The Company is generally responsible for assembly and placement of equipment it sells to U.S. based franchisee-owned stores. Placement revenue is recognized upon completion and acceptance of the services at the franchise location.
The Company recognizes commission income from certain of its franchisees’ use of certain preferred vendor arrangements. Commissions are recognized when amounts have been earned and collectability from the vendor is reasonably assured.
Online member join fees are paid to the Company by franchisees for processing new membership transactions when a new member signs up for a membership to a franchisee-owned store through the Company’s website. These fees are recognized as revenue as each transaction occurs.

23

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 by certain of its franchisees for the processing of franchisee membership dues and annual fees through the Company’s third-party hosted point-of-sale system and are recognized as revenue as they are earned.
Equipment revenue
The Company sells and delivers equipment purchased from third-party equipment manufacturers to U.S. based franchisee-owned stores.  Revenue is recognized upon transfer of control of ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment revenue and freight costs are recorded within cost of revenue. The Company recognizes revenue on a gross basis in these transactions as management has determined the Company to be the principal in these transactions. Management determined the Company to be the principal in the transaction because the Company controls the equipment prior to delivery to the final customer as evidenced by its pricing discretion over the goods, inventory transfer of title and risk of loss while the inventory is in transit, and having the primary responsibility to fulfill the customer order and direct the third-party vendor.
Corporate-owned stores revenue
The following revenues are generated from stores owned and operated by the Company.
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-owned store enrollment fees, annual fees and monthly fees. We classify these contract liabilities as deferred revenue in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (January 1, 2018) and September 30, 2018,

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

Revenue recognized that was included in the contract liability at the beginning of the year
(18,866
)
Increase, excluding amounts recognized as revenue during the period
26,741

Balance at September 30, 2018
$
47,875


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 September 30, 2018. The Company has elected to exclude short term contracts, sales and usage based royalties and any other variable consideration recognized on an "as invoiced" basis.


24

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
 
$
11,369

2019
 
11,351

2020
 
2,515

2021
 
2,275

2022
 
2,127

Thereafter
 
18,238

Total
 
$
47,875


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):

25

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



26

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

27

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


Consolidated statement of operations
 
As reported for the three months ended September 30, 2018
 
Total adjustments
 
Amounts under Previous Standards
 
As reported for the nine months ended September 30, 2018
 
Total adjustments
 
Amounts under Previous Standards
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Franchise
$
41,997

 
$
2,486

 
$
44,483

 
$
129,575

 
$
5,013

 
$
134,588

Commission income
1,448

 

 
1,448

 
5,012

 

 
5,012

National advertising fund revenue
11,377

 
(11,377
)
 

 
32,997

 
(32,997
)
 

Corporate-owned stores
35,406

 

 
35,406

 
102,365

 

 
102,365

Equipment
46,428

 

 
46,428

 
128,589

 

 
128,589

Total revenue
136,656

 
(8,891
)
 
127,765

 
398,538

 
(27,984
)
 
370,554

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
36,871

 

 
36,871

 
100,114

 

 
100,114

Store operations
18,751

 

 
18,751

 
55,154

 

 
55,154

Selling, general and administrative
17,233

 

 
17,233

 
52,066

 

 
52,066

National advertising fund expense
11,377

 
(11,377
)
 

 
32,997

 
(32,997
)
 

Depreciation and amortization
8,863

 

 
8,863

 
25,947

 

 
25,947

Other loss (gain)
(12
)
 

 
(12
)
 
958

 

 
958

Total operating costs and expenses
93,083

 
(11,377
)
 
81,706

 
267,236

 
(32,997
)
 
234,239

Income from operations
43,573

 
2,486

 
46,059

 
131,302

 
5,013

 
136,315

Other expense, net:
 
 
 
 
 
 
 
 
 
 
 
Interest income
2,025

 

 
2,025

 
2,480

 

 
2,480

Interest expense
(17,909
)
 

 
(17,909
)
 
(35,725
)
 

 
(35,725
)
Other (expense) income
(27
)
 

 
(27
)
 
(338
)
 

 
(338
)
Total other expense, net
(15,911
)
 

 
(15,911
)
 
(33,583
)
 

 
(33,583
)
Income before income taxes
27,662

 
2,486

 
30,148

 
97,719

 
5,013

 
102,732

Provision for income taxes
7,190

 
654

 
7,844

 
23,335

 
1,278

 
24,613

Net income
20,472

 
1,832

 
22,304

 
74,384

 
3,735

 
78,119

Less net income attributable to non-controlling interests
3,001

 
254

 
3,255

 
11,158

 
533

 
11,691

Net income attributable to Planet Fitness, Inc.
$
17,471

 
$
1,578

 
$
19,049

 
$
63,226

 
$
3,202

 
$
66,428

Net income per share of Class A common stock:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.20

 
 
 
$
0.22

 
$
0.72

 
 
 
$
0.76

Diluted
$
0.20

 
 
 
$
0.22

 
$
0.72

 
 
 
$
0.75


28

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 September 30, 2018
 
Total adjustments
 
Amounts under Previous Standards
Cash flows from operating activities:
 
 
 
 
 
Net income
$
74,384

 
$
3,735

 
$
78,119

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
25,947

 

 
25,947

Amortization of deferred financing costs
2,041

 

 
2,041

Amortization of favorable leases and asset retirement obligations
280

 

 
280

Amortization of interest rate caps
1,170

 

 
1,170

Deferred tax expense
19,654

 

 
19,654

Loss on extinguishment of debt
4,570

 

 
4,570

Gain on re-measurement of tax benefit arrangement
(354
)
 

 
(354
)
Provision for bad debts
8

 

 
8

Loss on reacquired franchise rights
360

 

 
360

Loss on disposal of property and equipment
542

 

 
542

Equity-based compensation
4,137

 

 
4,137

Changes in operating assets and liabilities, excluding effects of acquisitions:
 
 
 
 
 
Accounts receivable
10,922

 

 
10,922

Due to and due from related parties
3,174

 

 
3,174

Inventory
(3,450
)
 

 
(3,450
)
Other assets and other current assets
4,972

 

 
4,972

National advertising fund

 

 

Accounts payable and accrued expenses
2,426

 

 
2,426

Other liabilities and other current liabilities
(2,869
)
 

 
(2,869
)
Income taxes
1,028

 
1,278

 
2,306

Payable to related parties pursuant to tax benefit arrangements
(21,706
)
 

 
(21,706
)
Equipment deposits
4,950

 

 
4,950

Deferred revenue
7,544

 
(5,013
)
 
2,531

Deferred rent
4,156

 

 
4,156

Net cash provided by operating activities
$
143,886

 
$

 
$
143,886



29

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 September 30, 2018
 
Total adjustments
 
Amounts under Previous Standards
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
572,731

 
$

 
$
572,731

Restricted cash
35,915

 

 
35,915

Accounts receivable, net
26,145

 

 
26,145

Inventory
6,142

 

 
6,142

Restricted assets – national advertising fund
3,418

 

 
3,418

Prepaid expenses
3,813

 

 
3,813

Other receivables
10,993

 

 
10,993

Other current assets
6,318

 

 
6,318

Total current assets
665,475

 

 
665,475

Property and equipment, net
97,240

 

 
97,240

Intangible assets, net
237,896

 

 
237,896

Goodwill
199,513

 

 
199,513

Deferred income taxes
416,707

 
(3,285
)
 
413,422

Other assets, net
4,608

 

 
4,608

Total assets
$
1,621,439

 
$
(3,285
)
 
$
1,618,154

Liabilities and stockholders' equity (deficit)
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt
$
12,000

 
$

 
$
12,000

Accounts payable
23,400

 

 
23,400

Accrued expenses
26,764

 
1,278

 
28,042

Equipment deposits
11,449

 

 
11,449

Restricted liabilities – national advertising fund
3,418

 

 
3,418

Deferred revenue, current
21,959

 
24

 
21,983

Payable pursuant to tax benefit arrangements, current
25,578

 

 
25,578

Other current liabilities
456

 

 
456

Total current liabilities
125,024

 
1,302

 
126,326

Long-term debt, net of current maturities
1,161,712

 

 
1,161,712

Deferred rent, net of current portion
10,297

 

 
10,297

Deferred revenue, net of current portion
25,916

 
(17,591
)
 
8,325

Deferred tax liabilities
1,730

 

 
1,730

Payable pursuant to tax benefit arrangements, net of current portion
405,577

 

 
405,577

Other liabilities
1,331

 

 
1,331

Total noncurrent liabilities
1,606,563

 
(17,591
)
 
1,588,972

Stockholders' equity (deficit):
 
 
 
 
 
Class A common stock
9

 

 
9

Class B common stock
1

 

 
1

Accumulated other comprehensive income
256

 

 
256

Additional paid in capital
17,237

 

 
17,237

Accumulated deficit
(118,964
)
 
12,471

 
(106,493
)
Total stockholders' deficit attributable to Planet Fitness Inc.
(101,461
)
 
12,471

 
(88,990
)
Non-controlling interests
(8,687
)
 
533

 
(8,154
)
Total stockholders' deficit
(110,148
)
 
13,004

 
(97,144
)
Total liabilities and stockholders' deficit
$
1,621,439

 
$
(3,285
)
 
$
1,618,154



30


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to Planet Fitness, Inc. and its consolidated subsidiaries.
Overview
We are one of the largest and fastest-growing franchisors and operators of fitness centers in the United States by number of members and locations, with a highly recognized national brand. Our mission is to enhance people’s lives by providing a high-quality fitness experience in a welcoming, non-intimidating environment, which we call the Judgement Free Zone, where anyone—and we mean anyone—can feel they belong. Our bright, clean stores are typically 20,000 square feet, with a large selection of high-quality, purple and yellow Planet Fitness-branded cardio, circuit- and weight-training equipment and friendly staff trainers who offer unlimited free fitness instruction to all our members in small groups through our PE@PF program. We offer this differentiated fitness experience at only $10 per month for our standard membership. This exceptional value proposition is designed to appeal to a broad population, including occasional gym users and the approximately 80% of the U.S. and Canadian populations over age 14 who are not gym members, particularly those who find the traditional fitness club setting intimidating and expensive. We and our franchisees fiercely protect Planet Fitness’ community atmosphere—a place where you do not need to be fit before joining and where progress toward achieving your fitness goals (big or small) is supported and applauded by our staff and fellow members.
As of September 30, 2018, we had more than 12.2 million members and 1,646 stores in all 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic, Panama, and Mexico. Of our 1,646 stores, 1,573 are franchised and 73 are corporate-owned. As of September 30, 2018, we had commitments to open more than 1,000 new stores under existing ADAs.
Our segments
We operate and manage our business in three business segments: Franchise, Corporate-owned stores and Equipment. Our Franchise segment includes operations related to our franchising business in the United States, Puerto Rico, Canada, the Dominican Republic, Panama and Mexico, including revenues and expenses from the NAF beginning on January 1, 2018 (see note 15). Our 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 our United States franchisee-owned stores. We evaluate the performance of our segments and allocate resources to them based on revenue and earnings before interest, taxes, depreciation and amortization, referred to as Segment EBITDA. Revenue and Segment EBITDA for all operating segments include only transactions with unaffiliated customers and do not include intersegment transactions. The tables below summarize the financial information for our segments for the three and nine months ended September 30, 2018 and 2017. “Corporate and other,” as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment.
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in thousands)
 
2018
 
2017
 
2018
 
2017
Revenue
 
 
 
 
 
 
 
 
Franchise segment
 
$
54,822

 
$
35,562

 
$
167,584

 
$
110,153

Corporate-owned stores segment
 
35,406

 
28,560

 
102,365

 
83,886

Equipment segment
 
46,428

 
33,374

 
128,589

 
101,875

Total revenue
 
$
136,656

 
$
97,496

 
$
398,538

 
$
295,914

 
 
 
 
 
 
 
 
 
Segment EBITDA
 
 
 
 
 
 
 
 
Franchise
 
$
37,075

 
$
29,925

 
$
113,793

 
$
94,444

Corporate-owned stores
 
15,279

 
12,046

 
42,115

 
35,579

Equipment
 
9,654

 
7,683

 
28,579

 
23,587

Corporate and other
 
(9,599
)
 
(7,155
)
 
(27,576
)
 
(24,212
)
Total Segment EBITDA(1)
 
$
52,409

 
$
42,499

 
$
156,911

 
$
129,398


(1)
Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with U.S. GAAP. Refer to “—Non-GAAP financial measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable U.S. GAAP measure.


31


A reconciliation of income from operations to Segment EBITDA is set forth below: 
(in thousands)
 
Franchise
 
Corporate-owned
stores
 
Equipment
 
Corporate and
other
 
Total
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Income from operations
 
$
35,120

 
$
9,872

 
$
8,398

 
$
(9,817
)
 
$
43,573

Depreciation and amortization
 
1,955

 
5,277

 
1,256

 
375

 
8,863

Other income (expense)
 

 
130

 

 
(157
)
 
(27
)
Segment EBITDA(1)
 
$
37,075

 
$
15,279

 
$
9,654

 
$
(9,599
)
 
$
52,409

 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Income from operations
 
$
27,801

 
$
7,729

 
$
6,024

 
$
(7,600
)
 
$
33,954

Depreciation and amortization
 
2,140

 
4,038

 
1,552

 
407

 
8,137

Other income (expense)
 
(16
)
 
279

 
107

 
38

 
408

Segment EBITDA(1)
 
$
29,925

 
$
12,046

 
$
7,683

 
$
(7,155
)
 
$
42,499

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Income from operations
 
$
107,910

 
$
27,327

 
$
24,810

 
$
(28,745
)
 
$
131,302

Depreciation and amortization
 
5,895

 
15,006

 
3,769

 
1,277

 
25,947

Other income (expense)
 
(12
)
 
(218
)
 

 
(108
)
 
(338
)
Segment EBITDA(1)
 
$
113,793

 
$
42,115

 
$
28,579

 
$
(27,576
)
 
$
156,911

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Income from operations
 
$
88,045

 
$
23,358

 
$
18,826

 
$
(24,970
)
 
$
105,259

Depreciation and amortization
 
6,424

 
11,722

 
4,654

 
1,182

 
23,982

Other income (expense)
 
(25
)
 
499

 
107

 
(424
)
 
157

Segment EBITDA(1)
 
$
94,444

 
$
35,579

 
$
23,587

 
$
(24,212
)
 
$
129,398


(1)
Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with U.S. GAAP. Refer to “—Non-GAAP Financial Measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable U.S. GAAP measure.
How we assess the performance of our business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing include the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, EBITDA, Adjusted EBITDA, Segment EBITDA, Adjusted net income, and Adjusted net income per share, diluted. See “—Non-GAAP financial measures” below for our definition of EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted and why we present EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, and a reconciliation of Adjusted net income per share, diluted to net income per share, diluted, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
Number of new store openings
The number of new store openings reflects stores opened during a particular reporting period for both corporate-owned and franchisee-owned stores. Opening new stores is an important part of our growth strategy and we expect the majority of our future new stores will be franchisee-owned. Before we obtain the certificate of occupancy or report any revenue for new corporate-owned stores, we incur pre-opening costs, such as rent expense, labor expense and other operating expenses. Some of our stores open with an initial start-up period of higher than normal marketing and operating expenses, particularly as a percentage of monthly revenue. New stores may not be profitable and their revenue may not follow historical patterns.

32


The following table shows the change in our corporate-owned and franchisee-owned store base for the three and nine months ended September 30, 2018 and 2017: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Franchisee-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,540

 
1,345

 
1,456

 
1,255

New stores opened
 
40

 
31

 
131

 
122

Stores debranded, sold or consolidated(1)
 
(7
)
 
(2
)
 
(14
)
 
(3
)
Stores operated at end of period
 
1,573

 
1,374

 
1,573

 
1,374

 
 
 
 
 
 
 
 
 
Corporate-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
68

 
58

 
62

 
58

New stores opened
 
1

 

 
1

 

Stores acquired from franchisees
 
4

 

 
10

 

Stores operated at end of period
 
73

 
58

 
73

 
58

 
 
 
 
 
 
 
 
 
Total stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,608

 
1,403

 
1,518

 
1,313

New stores opened
 
41

 
31

 
132

 
122

Stores acquired, debranded, sold or consolidated(1)
 
(3
)
 
(2
)
 
(4
)
 
(3
)
Stores operated at end of period
 
1,646

 
1,432

 
1,646

 
1,432


(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.
Same store sales
Same store sales refers to year-over-year sales comparisons for the same store sales base of both corporate-owned and franchisee-owned stores. We define the same store sales base to include those stores that have been open and for which monthly membership dues have been billed for longer than 12 months. We measure same store sales based solely upon monthly dues billed to members of our corporate-owned and franchisee-owned stores.
Several factors affect our same store sales in any given period, including the following:
the number of stores that have been in operation for more than 12 months;
the percentage mix of PF Black Card and standard memberships in any period;
growth in total net memberships per store;
consumer recognition of our brand and our ability to respond to changing consumer preferences;
overall economic trends, particularly those related to consumer spending;
our and our franchisees’ ability to operate stores effectively and efficiently to meet consumer expectations;
marketing and promotional efforts;
local competition;
trade area dynamics; and
opening of new stores in the vicinity of existing locations.
Consistent with common industry practice, we present same store sales as compared to the same period in the prior year. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year’s same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance.

33


Stores acquired from or sold to franchisees are removed from the franchisee-owned or corporate-owned same store sales base, as applicable, upon the ownership change and for the 12 months following the date of the ownership change. These stores are included in the corporate-owned or franchisee-owned same store sales base, as applicable, following the 12th month after the acquisition or sale. These stores remain in the system-wide same store sales base in all periods.
The following table shows our same store sales for the three and nine months ended September 30, 2018 and 2017:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
2018
 
2017
 
2018
 
2017
 
Same store sales data
 
 

 
 

 
 
 
 
 
Same store sales growth:
 
 

 
 

 
 
 
 
 
Franchisee-owned stores
 
9.9
%
 
9.6
%
 
10.5
%
 
10.1
%
 
Corporate-owned stores
 
6.1
%
 
5.1
%
 
5.6
%
 
4.6
%
 
Total stores
 
9.7
%
 
9.3
%
 
10.3
%
 
9.8
%
 
Number of stores in same store sales base:
 
 
 
 
 
 
 
 
 
Franchisee-owned stores
 
1,355

 
1,170

 
1,355

 
1,170

 
Corporate-owned stores
 
58

 
58

 
58

 
58

 
Total stores
 
1,423

 
1,228

 
1,423

 
1,228

 

Total monthly dues and annual fees from members (system-wide sales)
We review the total amount of dues we collect from our members on a monthly basis, which allows us to assess changes in the performance of our corporate-owned and franchisee-owned stores from period to period, any competitive pressures, local or regional membership traffic patterns and general market conditions that might impact our store performance. We collect monthly dues on or around the 17th of every month. We collect annual fees once per year from each member based upon when the member signed his or her membership agreement. System-wide sales were $659 million and $534 million, during the three months ended September 30, 2018 and 2017, respectively, and $2,061 million and $1,726 million during the nine months ended September 30, 2018 and 2017, respectively.

Non-GAAP financial measures
We refer to EBITDA and Adjusted EBITDA as we use these measures to evaluate our operating performance and we believe these measures provide useful information to investors in evaluating our performance. EBITDA and Adjusted EBITDA as presented in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for U.S. GAAP metrics such as net income or any other performance measures derived in accordance with U.S. GAAP. Also, in the future we may incur expenses or charges such as those used to calculate Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in “Our Segments” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA.
We define EBITDA as net income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our Board of Directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain additional non-cash and other items that we do not consider in our evaluation of ongoing performance of the Company’s core operations. These items include certain purchase accounting adjustments, stock offering-related costs, and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. Four-wall EBITDA is an assessment of store-level profitability for stores included in the same-store-sales base, which adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance.

34


A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the three and nine months ended September 30, 2018 and 2017:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
(in thousands)
 
 

 
 

 
 
 
 
Net income
 
$
20,472

 
$
18,902

 
$
74,384

 
$
54,772

Interest income
 
(2,025
)
 
(18
)
 
(2,480
)
 
(24
)
Interest expense
 
17,909

 
8,938

 
35,725

 
26,735

Provision for income taxes
 
7,190

 
6,540

 
23,335

 
23,933

Depreciation and amortization
 
8,863

 
8,137

 
25,947

 
23,982

EBITDA
 
$
52,409

 
$
42,499

 
$
156,911

 
$
129,398

Purchase accounting adjustments-revenue(1)
 
527

 
336

 
941

 
1,116

Purchase accounting adjustments-rent(2)
 
198

 
174

 
548

 
561

Loss on reacquired franchise rights(3)
 
10

 

 
360

 

Transaction fees(4)
 
254

 

 
290

 
1,021

Stock offering-related costs(5)
 

 
41

 

 
977

Severance costs(6)
 

 

 
352

 

Pre-opening costs(7)
 
370

 
421

 
853

 
421

Equipment discount(8)
 

 
(107
)
 

 
(107
)
Early lease termination costs(9)
 

 

 

 
719

Other(10)
 
19

 

 
685

 
(573
)
Adjusted EBITDA
 
$
53,787

 
$
43,364

 
$
160,940

 
$
133,533

 
(1)
Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred ADA fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.
(2)
Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 – Business Combinations, in connection with the 2012 Acquisition, the Company’s deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of $105, $100, $272 and $306 in the three and nine months ended September 30, 2018 and 2017, respectively, reflect the difference between the higher rent expense recorded in accordance with U.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $93, $75, $276 and $255 in the three and nine months ended September 30, 2018 and 2017, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations.
(3)
Represents the impact of a non-cash loss recorded in accordance with ASC 805 - Business Combinations related to our acquisition of six franchisee-owned stores on January 1, 2018 and our acquisition of four franchisee-owned stores on August 10, 2018. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations.
(4)
Represents transaction fees and expenses related to the issuance of the Series 2018-1 Senior Notes in 2018 and the amendment of our previous credit facilities in 2017.
(5)
Represents legal, accounting and other costs incurred in connection with offerings of the Company’s Class A common stock.
(6)
Represents severance expense recorded in connection with an equity award modification.

35


(7)
Represents costs associated with new corporate-owned stores incurred prior to the store opening, including payroll-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.
(8)
Represents a gain recorded in connection with the write-off of a previously accrued deferred equipment discount that can no longer be utilized. This amount was originally recognized through purchase accounting in connection with the acquisition of eight franchisee-owned stores on March 31, 2014.
(9)
Represents charges and expenses incurred in connection with the early termination of the lease for our previous headquarters.
(10)
Represents certain other charges and gains that we do not believe reflect our underlying business performance. In the nine months ended September 30, 2018, this amount includes $342 related to the reversal of a tax indemnification receivable. In the nine months ended September 30, 2018 and 2017, this amount includes a gain of $354 and $541, respectively, related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate. Additionally, in the nine months ended September 30, 2018, this amount includes expense of $590 related to the write off of certain assets that were being tested for potential use across the system.
As a result of the recapitalization transactions that occurred prior to our IPO, the limited liability company agreement of Pla-Fit Holdings was amended and restated (the “LLC Agreement”) to, among other things, designate Planet Fitness, Inc. as the sole managing member of Pla-Fit Holdings. As sole managing member, Planet Fitness, Inc. exclusively operates and controls the business and affairs of Pla-Fit Holdings. As a result of the recapitalization transactions and the LLC Agreement, Planet Fitness, Inc. now consolidates Pla-Fit Holdings, and Pla-Fit Holdings is considered the predecessor to Planet Fitness, Inc. for accounting purposes. Our presentation of Adjusted net income and Adjusted net income per share, diluted, gives effect to the consolidation of Pla-Fit Holdings with Planet Fitness, Inc. resulting from the recapitalization transactions and the LLC Agreement as if they had occurred on January 1, 2017. In addition, Adjusted net income assumes that all net income is attributable to Planet Fitness, Inc., which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock of Planet Fitness, Inc., adjusted for certain non-recurring items that we do not believe directly reflect our core operations. Adjusted net income per share, diluted, is calculated by dividing Adjusted net income by the total shares of Class A common stock outstanding plus any dilutive options and restricted stock units as calculated in accordance with U.S. GAAP and assuming the full exchange of all outstanding Holdings Units and corresponding Class B common stock as of the beginning of each period presented. Adjusted net income and Adjusted net income per share, diluted, are supplemental measures of operating performance that do not represent, and should not be considered, alternatives to net income and earnings per share, as calculated in accordance with U.S. GAAP. We believe Adjusted net income and Adjusted net income per share, diluted, supplement U.S. GAAP measures and enable us to more effectively evaluate our performance period-over-period. A reconciliation of Adjusted net income to net income, the most directly comparable U.S. GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below.

36


 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
20,472

 
$
18,902

 
$
74,384

 
$
54,772

Provision for income taxes, as reported
 
7,190

 
6,540

 
23,335

 
23,933

Purchase accounting adjustments-revenue(1)
 
527

 
336

 
941

 
1,116

Purchase accounting adjustments-rent(2)
 
198

 
174

 
548

 
561

Loss on reacquired franchise rights(3)
 
10

 

 
360

 

Transaction fees(4)
 
254

 

 
290

 
1,021

Loss on extinguishment of debt(5)
 
4,570

 

 
4,570

 

Stock offering-related costs(6)
 

 
41

 

 
977

Severance costs(7)
 

 

 
352

 

Pre-opening costs(8)
 
370

 
421

 
853

 
421

Equipment discount(9)
 

 
(107
)
 

 
(107
)
Early lease termination costs(10)
 

 

 

 
1,143

Other(11)
 
19

 

 
685

 
(573
)
Purchase accounting amortization(12)
 
3,934

 
4,622

 
11,776

 
13,867

Adjusted income before income taxes
 
$
37,544

 
$
30,929

 
$
118,094

 
$
97,131

Adjusted income taxes(13)
 
9,874

 
12,217

 
31,059

 
38,367

Adjusted net income
 
$
27,670

 
$
18,712

 
$
87,035

 
$
58,764

 
 
 
 
 
 
 
 
 
Adjusted net income per share, diluted
 
$
0.28

 
$
0.19

 
$
0.88

 
$
0.60

 
 
 
 
 
 
 
 
 
Adjusted weighted-average shares outstanding(14)
 
98,462

 
98,428

 
98,615

 
98,445

 
(1)
Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred ADA fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.
(2)
Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 – Business Combinations, in connection with the 2012 Acquisition, the Company’s deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of $105, $100, $272 and $306 in the three and nine months ended September 30, 2018 and 2017, respectively, reflect the difference between the higher rent expense recorded in accordance with U.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $93, $75, $276 and $255 for the three and nine months ended September 30, 2018 and 2017, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations.
(3)
Represents the impact of a non-cash loss recorded in accordance with ASC 805 - Business Combinations related to our acquisition of six franchisee-owned stores on January 1, 2018 and our acquisition of four franchisee-owned stores on August 10, 2018. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations.
(4)
Represents transaction fees and expenses related to the issuance of the Series 2018-1 Senior Notes in 2018 and the amendment of our previous credit facilities in 2017.
(5)
Represents a loss on extinguishment of debt related to the write-off of deferred financing costs associated with the Term Loan B which the Company repaid in August 2018.

37


(6)
Represents legal, accounting and other costs incurred in connection with offerings of the Company’s Class A common stock.
(7)
Represents severance expense recorded in connection with an equity award modification.
(8)
Represents costs associated with new corporate-owned stores incurred prior to the store opening, including payroll-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.
(9)
Represents a gain recorded in connection with the write-off of a previously accrued deferred equipment discount that can no longer be utilized. This amount was originally recognized through purchase accounting in connection with the acquisition of eight franchisee-owned stores on March 31, 2014.
(10)
Represents charges and expenses incurred in connection with the early termination of the lease for our previous headquarters.
(11)
Represents certain other charges and gains that we do not believe reflect our underlying business performance. In the nine months ended September 30, 2018, this amount includes $342 related to the reversal of a tax indemnification receivable. In the nine months ended September 30, 2018 and 2017, this amount includes a gain of $354 and $541, respectively, related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate. Additionally, in the nine months ended September 30, 2018, this amount includes expense of $590 related to the write off of certain assets that were being tested for potential use across the system.
(12)
Includes $3,096, $4,086, $9,288 and $12,258 of amortization of intangible assets, other than favorable leases, for the three and nine months ended September 30, 2018 and 2017, respectively, recorded in connection with the 2012 Acquisition, and $838, $536, $2,488 and $1,609 of amortization of intangible assets for the three months ended September 30, 2018 and 2017, respectively, recorded in connection with historical acquisitions of franchisee-owned stores. The adjustment represents the amount of actual non-cash amortization expense recorded, in accordance with U.S. GAAP, in each period.
(13)
Represents corporate income taxes at an assumed effective tax rate of 26.3% and 39.5% for the three and nine months ended September 30, 2018 and 2017, respectively, applied to adjusted income before income taxes.
(14)
Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc.

A reconciliation of net income per share, diluted, to Adjusted net income per share, diluted is set forth below for three and nine months ended September 30, 2018 and 2017:
 
 
For the three months ended
September 30, 2018
 
For the three months ended
September 30, 2017
(in thousands, except per share amounts)
 
Net income
 
Weighted Average Shares
 
Net income per share, diluted
 
Net income
 
Weighted Average Shares
 
Net income per share, diluted
Net income attributable to Planet Fitness, Inc.(1)
 
$
17,471

 
88,458

 
$
0.20

 
$
15,345

 
85,734

 
$
0.18

Assumed exchange of shares(2)
 
3,001

 
10,004

 
 
 
3,557

 
12,694

 
 
Net Income
 
20,472

 
 
 
 
 
18,902

 
 
 
 
Adjustments to arrive at adjusted income
   before income taxes(3)
 
17,072

 
 
 
 
 
12,027

 
 
 
 
Adjusted income before income taxes
 
37,544

 
 

 
 
 
30,929

 
 
 
 
Adjusted income taxes(4)
 
9,874

 
 
 
 
 
12,217

 
 
 
 
Adjusted Net Income
 
$
27,670

 
98,462

 
$
0.28

 
$
18,712

 
98,428

 
$
0.19

(1)
Represents net income attributable to Planet Fitness, Inc. and the associated weighted average shares, diluted of Class A common stock outstanding.
(2)
Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and Class B common shares for shares of Class A common stock.
(3)
Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes.
(4)
Represents corporate income taxes at an assumed effective tax rate of 26.3% and 39.5% for the three and nine months ended September 30, 2018 and 2017, respectively, applied to adjusted income before income taxes.


38


 
 
For the nine months ended
September 30, 2018
 
For the nine months ended
September 30, 2017
(in thousands, except per share amounts)
 
Net income
 
Weighted Average Shares
 
Net income per share, diluted
 
Net income
 
Weighted Average Shares
 
Net income per share, diluted
Net income attributable to Planet Fitness, Inc.(1)
 
$
63,226

 
88,064

 
$
0.72

 
$
36,599

 
76,435

 
$
0.48

Assumed exchange of shares(2)
 
11,158

 
10,551

 


 
18,173

 
22,010

 


Net Income
 
74,384

 
 
 
 
 
54,772

 
 
 
 
Adjustments to arrive at adjusted income
   before income taxes
(3)
 
43,710

 
 
 
 
 
42,359

 
 
 
 
Adjusted income before income taxes
 
118,094

 
 
 
 
 
97,131

 
 
 
 
Adjusted income taxes(4)
 
31,059

 
 
 
 
 
38,367

 
 
 
 
Adjusted Net Income
 
$
87,035

 
98,615

 
$
0.88

 
$
58,764

 
98,445

 
$
0.60


(1)
Represents net income attributable to Planet Fitness, Inc. and the associated weighted average shares, diluted of Class A common stock outstanding.
(2)
Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and Class B common shares for shares of Class A common stock.
(3)
Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes.
(4)
Represents corporate income taxes at an assumed effective tax rate of 26.3% and 39.5% for the three and nine months ended September 30, 2018 and 2017, respectively, applied to adjusted income before income taxes.



39


Results of operations
The following table sets forth our condensed consolidated statements of operations as a percentage of total revenue for the three and nine months ended September 30, 2018 and 2017:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 

 
 

 
 
 
 
Franchise revenue
 
30.7
 %
 
32.2
 %
 
32.5
 %
 
31.9
 %
Commission income
 
1.1
 %
 
4.3
 %
 
1.2
 %
 
5.3
 %
National advertising fund revenue
 
8.3
 %
 
 %
 
8.3
 %
 
 %
Franchise segment
 
40.1
 %
 
36.5
 %
 
42.0
 %
 
37.2
 %
Corporate-owned stores
 
25.9
 %
 
29.3
 %
 
25.7
 %
 
28.4
 %
Equipment
 
34.0
 %
 
34.2
 %
 
32.3
 %
 
34.4
 %
Total revenue
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
27.0
 %
 
26.5
 %
 
25.1
 %
 
26.5
 %
Store operations
 
13.7
 %
 
16.0
 %
 
13.8
 %
 
15.3
 %
Selling, general and administrative
 
12.6
 %
 
14.4
 %
 
13.1
 %
 
14.4
 %
National advertising fund expense
 
8.3
 %
 
 %
 
8.3
 %
 
 %
Depreciation and amortization
 
6.5
 %
 
8.3
 %
 
6.5
 %
 
8.1
 %
Other loss (gain)
 
 %
 
 %
 
0.2
 %
 
0.1
 %
Total operating costs and expenses
 
68.1
 %
 
65.2
 %
 
67.0
 %
 
64.4
 %
Income from operations
 
31.9
 %
 
34.8
 %
 
33.0
 %
 
35.6
 %
Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
1.5
 %
 
 %
 
0.6
 %
 
 %
Interest expense
 
(13.1
)%
 
(9.1
)%
 
(9.0
)%
 
(9.0
)%
Other expense
 
 %
 
0.4
 %
 
(0.1
)%
 
0.1
 %
Total other expense, net
 
(11.6
)%
 
(8.7
)%
 
(8.5
)%
 
(8.9
)%
Income before income taxes
 
20.3
 %
 
26.1
 %
 
24.5
 %
 
26.7
 %
Provision for income taxes
 
5.3
 %
 
6.7
 %
 
5.9
 %
 
8.1
 %
Net income
 
15.0
 %
 
19.4
 %
 
18.6
 %
 
18.6
 %
Less net income attributable to non-controlling interests
 
2.2
 %
 
3.6
 %
 
2.8
 %
 
6.1
 %
Net income attributable to Planet Fitness, Inc.
 
12.8
 %
 
15.8
 %
 
15.8
 %
 
12.5
 %


40


The following table sets forth a comparison of our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
(in thousands)
 
 

 
 

 
 
 
 
Revenue:
 
 
 
 

 
 
 
 
Franchise revenue
 
$
41,997

 
$
31,413

 
$
129,575

 
$
94,485

Commission income
 
1,448

 
4,149

 
5,012

 
15,668

National advertising fund revenue
 
11,377

 

 
32,997

 

Franchise segment
 
54,822

 
35,562

 
167,584

 
110,153

Corporate-owned stores
 
35,406

 
28,560

 
102,365

 
83,886

Equipment
 
46,428

 
33,374

 
128,589

 
101,875

Total revenue
 
136,656

 
97,496

 
398,538

 
295,914

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
36,871

 
25,819

 
100,114

 
78,395

Store operations
 
18,751

 
15,551

 
55,154

 
45,339

Selling, general and administrative
 
17,233

 
14,071

 
52,066

 
42,659

National advertising fund expense
 
11,377

 

 
32,997

 

Depreciation and amortization
 
8,863

 
8,137

 
25,947

 
23,982

Other loss (gain)
 
(12
)
 
(36
)
 
958

 
280

Total operating costs and expenses
 
93,083

 
63,542

 
267,236

 
190,655

Income from operations
 
43,573

 
33,954

 
131,302

 
105,259

Other income (expense), net:
 
 
 
 
 
 
 
 
Interest income
 
2,025

 
18

 
2,480

 
24

Interest expense
 
(17,909
)
 
(8,938
)
 
(35,725
)
 
(26,735
)
Other expense
 
(27
)
 
408

 
(338
)
 
157

Total other expense, net
 
(15,911
)
 
(8,512
)
 
(33,583
)
 
(26,554
)
Income before income taxes
 
27,662

 
25,442

 
97,719

 
78,705

Provision for income taxes
 
7,190

 
6,540

 
23,335

 
23,933

Net income
 
20,472

 
18,902

 
74,384

 
54,772

Less net income attributable to non-controlling interests
 
3,001

 
3,557

 
11,158

 
18,173

Net income attributable to Planet Fitness, Inc.
 
$
17,471

 
$
15,345

 
$
63,226

 
$
36,599

Comparison of the three months ended September 30, 2018 and three months ended September 30, 2017
Revenue
Total revenues were $136.7 million in the three months ended September 30, 2018, compared to $97.5 million in the three months ended September 30, 2017, an increase of $39.2 million, or 40.2%.
Franchise segment revenue was $54.8 million in the three months ended September 30, 2018, compared to $35.6 million in the three months ended September 30, 2017, an increase of $19.3 million, or 54.2%.
Franchise revenue was $42.0 million in the three months ended September 30, 2018 compared to $31.4 million in the three months ended September 30, 2017, an increase of $10.6 million or 33.7%. Included in franchise revenue is royalty revenue of $36.0 million, franchise and other fees of $3.5 million, and placement revenue of $2.5 million for the three months ended September 30, 2018, compared to royalty revenue of $22.0 million, franchise and other fees of $7.0 million, and placement revenue of $2.4 million for the three months ended September 30, 2017. The $13.9 million increase in royalty revenue was primarily driven by $7.0 million due to higher royalty rates on monthly dues and $2.3 million due to higher royalties on annual fees, primarily as a result of the franchise agreements that were amended to increase royalty rates by 1.59% which were offset by a corresponding decrease in franchise and other fees as well as reduced commission income (the "Rebate to Royalty Amendment"). Additionally, $2.6 million was attributable to royalties from new stores in 2018, as well as stores that opened in 2017 that were not included in the same store sales base, and $2.0 million attributable to a same store sales increase of 9.9% in franchisee-owned stores. The $3.4

41


million decrease in franchise and other fees was primarily driven by the Rebate to Royalty Amendment mentioned above in the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.
Commission income, which is included in our franchise segment, was $1.4 million in the three months ended September 30, 2018 compared to $4.1 million in the three months ended September 30, 2017. The $2.7 million decrease was primarily attributable to the Rebate to Royalty Amendment mentioned above.
National advertising fund revenue was $11.4 million in the three months ended September 30, 2018, compared to zero in the three months ended September 30, 2017, as a result of the adoption of the new revenue recognition standard ASC 606. This revenue is offset by national advertising fund expenses below. See Note 15 in the notes to the consolidated financial statements.
Revenue from our corporate-owned stores segment was $35.4 million in the three months ended September 30, 2018, compared to $28.6 million in the three months ended September 30, 2017, an increase of $6.8 million, or 24.0%. The increase was due to higher revenue of $5.2 million from new corporate-owned stores opened or acquired since June 30, 2017, higher same store sales from corporate-owned stores which increased 6.1% in the three months ended September 30, 2018 and contributed incremental revenues of $1.4 million, and higher annual fee revenue of $0.3 million.
Equipment segment revenue was $46.4 million in the three months ended September 30, 2018, compared to $33.4 million in the three months ended September 30, 2017, an increase of $13.1 million, or 39.1%. The increase was driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, as well as higher equipment sales to new franchisee-owned stores related to 15 additional new equipment sales in the three months ended September 30, 2018 compared to the three months ended September 30, 2017.
Cost of revenue
Cost of revenue was $36.9 million in the three months ended September 30, 2018 compared to $25.8 million in the three months ended September 30, 2017, an increase of $11.1 million, or 42.8%. Cost of revenue, which relates to our equipment segment, increased due to 15 additional equipment sales to new franchisee-owned stores, in addition to an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2018, as compared to the three months ended September 30, 2017.
Store operations
Store operation expenses, which relate to our corporate-owned stores segment, were $18.8 million in the three months ended September 30, 2018 compared to $15.6 million in the three months ended September 30, 2017, an increase of $3.2 million, or 20.6%. The increase was primarily attributable to the acquisition of six franchisee-owned stores on January 1, 2018, the acquisition of four franchisee-owned stores on August 10, 2018, and the opening of five new corporate-owned stores since June 30, 2017.
Selling, general and administrative
Selling, general and administrative expenses were $17.2 million in the three months ended September 30, 2018 compared to $14.1 million in the three months ended September 30, 2017, an increase of $3.2 million, or 22.5%. The $3.2 million increase was primarily due to additional expenses incurred during the three months ended September 30, 2018 to support our growing operations, including additional headcount and equity-based compensation. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count continues to grow.
National advertising fund expense
National advertising fund expense was $11.4 million in the three months ended September 30, 2018 compared to zero in the three months ended September 30, 2017, as a result of the adoption of the new revenue recognition standard ASC 606. This expense is offset by national advertising fund revenue as described above. See Note 15 in the notes to the consolidated financial statements.
Depreciation and amortization
Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements.
Depreciation and amortization expense was $8.9 million in the three months ended September 30, 2018 compared to $8.1 million in the three months ended September 30, 2017, an increase of $0.7 million, or 8.9%. The increase was primarily attributable to the acquisition and opening of corporate-owned stores since June 30, 2017.
Other loss (gain)
Other loss (gain) was zero in both the three months ended September 30, 2018 and 2017.

42


Interest income
Interest income was $2.0 million in the three months ended September 30, 2018, compared to $0 in the three months ended September 30, 2017. The increase was due to the increase in the cash balance in connection with the issuance of the Class A-2 Notes.
Interest expense
Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.  
Interest expense was $17.9 million in the three months ended September 30, 2018 compared to $8.9 million in the three months ended September 30, 2017. Included in interest expense in the three months ended September 30, 2018 was $4.6 million of losses on extinguishment of debt recorded in connection with the repayment of our Term Loan B which was repaid in August 2018, as well as higher interest expense related to the issuance of $1.2 billion of Class A-2 Notes.
Other (expense) income
Other expense was zero in the three months ended September 30, 2018 compared to income of $0.4 million in the three months ended September 30, 2017, a decrease of $0.4 million. In the three months ended September 30, 2017, other income included $0.3 million of foreign currency gains.
Provision for income taxes
Income tax expense was $7.2 million in the three months ended September 30, 2018, compared to $6.5 million in the three months ended September 30, 2017, a increase of $0.7 million. The increase in the provision for income taxes was primarily attributable to the recognition of an income tax benefit in connection with the filing of tax returns in the three months ended September 30, 2017, partially offset by a lower U.S. statutory tax rate in 2018 as evidenced by our effective tax rate of 26.0% for the three months ended September 30, 2018 compared to 25.7% for the three months ended September 30, 2017.
Segment results
Franchise
Segment EBITDA for the franchise segment was $37.1 million in the three months ended September 30, 2018 compared to $29.9 million in the three months ended September 30, 2017, an increase of $7.2 million, or 23.9%. This increase was primarily the result of growth in our franchise segment revenue of $7.0 million due to higher royalty rates on monthly dues and $2.3 million due to higher royalties on annual fees, primarily as a result of the Rebate to Royalty Amendment. Additionally, $2.6 million was attributable to royalties from new stores in 2018, as well as stores that opened in 2017 that were not included in the same store sales base and $2.0 million attributable to a same store sales increase of 9.9% in franchisee-owned stores. The increase in revenue was partially offset by $2.7 million of lower commission income and $3.4 million of lower franchise and other fee revenue in connection to the Rebate to Royalty Amendment, and $0.7 million of higher franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $2.0 million and $2.1 million for the three months ended September 30, 2018 and 2017, respectively.
Corporate-owned stores
Segment EBITDA for the corporate-owned stores segment was $15.3 million in the three months ended September 30, 2018 compared to $12.0 million in the three months ended September 30, 2017, an increase of $3.2 million, or 26.8%. Of this increase, $2.4 million increase was attributable to the stores acquired, opened and planned to open since June 30, 2017. An additional $0.8 million was from stores included in our same store sales base in the three months ended September 30, 2018, compared to the three months ended September 30, 2017. Depreciation and amortization was $5.3 million and $4.0 million for the three months ended September 30, 2018 and 2017, respectively. The increase in depreciation and amortization was primarily attributable to the stores acquired and opened since June 30, 2017.
Equipment
Segment EBITDA for the equipment segment was $9.7 million in the three months ended September 30, 2018 compared to $7.7 million in the three months ended September 30, 2017, an increase of $2.0 million, or 25.7%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2018 compared to the three months ended September 30, 2017, in addition to 15 additional equipment sales to new franchisee-owned stores in the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Depreciation and amortization was $1.3 million and $1.6 million for the three months ended September 30, 2018 and 2017, respectively.

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Comparison of the nine months ended September 30, 2018 and nine months ended September 30, 2017
Revenue
Total revenues were $398.5 million in the nine months ended September 30, 2018, compared to $295.9 million in the nine months ended September 30, 2017, an increase of $102.6 million, or 34.7%.
Franchise segment revenue was $167.6 million in the nine months ended September 30, 2018, compared to $110.2 million in the nine months ended September 30, 2017, an increase of $57.4 million, or 52.1%.
Franchise revenue was $129.6 million in the nine months ended September 30, 2018 compared to $94.5 million in the nine months ended September 30, 2017, an increase of $35.1 million or 37.1%. Included in franchise revenue is royalty revenue of $108.7 million, franchise and other fees of $13.2 million, and placement revenue of $7.7 million for the nine months ended September 30, 2018, compared to royalty revenue of $66.5 million, franchise and other fees of $20.6 million, and placement revenue of $7.4 million for the nine months ended September 30, 2017. Of the $42.2 million increase in royalty revenue, $20.7 million was primarily attributable to higher royalty rates on monthly dues and $8.3 million was attributable to higher royalties on annual fees, primarily as a result of the Rebate to Royalty Amendment. Additionally, $7.2 million was attributable to royalties from new stores in 2018, as well as stores that opened in 2017 that were not included in the same store sales base, and $5.9 million was attributable to a same store sales increase of 10.5% in franchisee-owned stores. The $7.4 million decrease in franchise and other fees was primarily driven by the Rebate to Royalty Amendment mentioned above in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Commission income, which is included in our franchise segment, was $5.0 million in the nine months ended September 30, 2018 compared to $15.7 million in the nine months ended September 30, 2017. The $10.7 million decrease was primarily attributable to the Rebate to Royalty Amendment mentioned above.
National advertising fund revenue was $33.0 million in the nine months ended September 30, 2018, compared to zero in the nine months ended September 30, 2017, as a result of the adoption of the new revenue recognition standard ASC 606. This revenue is offset by national advertising fund expenses below. See Note 15 in the notes to the consolidated financial statements.
Revenue from our corporate-owned stores segment was $102.4 million in the nine months ended September 30, 2018, compared to $83.9 million in the nine months ended September 30, 2017, an increase of $18.5 million, or 22.0%. The increase was due to higher revenue of $12.4 million from new corporate-owned stores opened and acquired since January 1, 2017, higher same store sales from corporate-owned stores which increased 5.6% in the nine months ended September 30, 2018 and contributed incremental revenues of $4.5 million, and higher annual fees of $1.5 million.
Equipment segment revenue was $128.6 million in the nine months ended September 30, 2018, compared to $101.9 million in the nine months ended September 30, 2017, an increase of $26.7 million, or 26.2%. The increase was driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, as well as higher equipment sales to new franchisee-owned stores related to 23 additional new equipment sales in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
Cost of revenue
Cost of revenue was $100.1 million in the nine months ended September 30, 2018 compared to $78.4 million in the nine months ended September 30, 2017, an increase of $21.7 million, or 27.7%. Cost of revenue, which relates to our equipment segment, increased due to 23 additional equipment sales to new franchisee-owned stores, in addition to an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017.
Store operations
Store operation expenses, which relate to our corporate-owned stores segment, were $55.2 million in the nine months ended September 30, 2018 compared to $45.3 million in the nine months ended September 30, 2017, an increase of $9.8 million, or 21.6%. The increase was primarily attributable to the acquisition of six franchisee-owned stores on January 1, 2018, the acquisition of four franchisee-owned stores on August 10, 2018, and the opening of five new corporate-owned stores since January 1, 2017 and expenses related to future openings.
Selling, general and administrative
Selling, general and administrative expenses were $52.1 million in the nine months ended September 30, 2018 compared to $42.7 million in the nine months ended September 30, 2017, an increase of $9.4 million, or 22.1%. The $9.4 million increase was primarily due to additional expenses incurred during the nine months ended September 30, 2018 to support our growing operations, including additional headcount, equity-based compensation, and costs related to our franchisee conference which occurs approximately every 18 months. Partially offsetting this increase was $1.0 million of lower costs incurred in connection with

44


secondary offerings in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count continues to grow.
National advertising fund expense
National advertising fund expense was $33.0 million in the nine months ended September 30, 2018 compared to zero in the nine months ended September 30, 2017, as a result of the adoption of the new revenue recognition standard ASC 606. This expense is offset by national advertising fund revenue as described above. See Note 15 in the notes to the consolidated financial statements.
Depreciation and amortization
Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements.
Depreciation and amortization expense was $25.9 million in the nine months ended September 30, 2018 compared to $24.0 million in the nine months ended September 30, 2017, an increase of $2.0 million, or 8.2%. The increase was primarily attributable the acquisition and opening of corporate-owned stores since January 1, 2017.
Other loss
Other loss was $1.0 million in the nine months ended September 30, 2018 compared to $0.3 million in the nine months ended September 30, 2017. In the nine months ended September 30, 2018, this amount includes $0.6 million due to write off of certain assets that were being tested for possible use across the system and $0.4 million related to the loss on reacquired franchise rights recorded in relation to the acquisition of six franchisee-owned stores on January 1, 2018.
Interest income
Interest income was $2.5 million in the nine months ended September 30, 2018 compared to $0 in the nine months ended September 30, 2017. The increase was due to the increase in cash balance in connection with the securitized debt transaction.
Interest expense
Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.  
Interest expense was $35.7 million in the nine months ended September 30, 2018 compared to $26.7 million in the nine months ended September 30, 2017. Included in interest expense in the nine months ended September 30, 2018 was $4.6 million of losses on extinguishment of debt recorded in connection with the repayment of our Term Loan B, which was repaid in August 2018 as well as higher interest expense related to our $1.2 billion of Class A-2 Notes.
Other (expense) income
Other (expense) income was $0.3 million of expense in the nine months ended September 30, 2018 and income of $0.2 million in the nine months ended September 30, 2017.
Provision for income taxes
Income tax expense was $23.3 million in the nine months ended September 30, 2018, compared to $23.9 million in the nine months ended September 30, 2017, a decrease of $0.6 million. The decrease in the provision for income taxes was primarily attributable to the decrease in the tax rate effective January 1, 2018 as evidenced by our lower effective tax rate of 23.9% for the nine months ended September 30, 2018 compared to 30.4% for the nine months ended September 30, 2017, partially offset by the Company’s increased income before taxes and increased pro rata share of income from Pla-Fit Holdings in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.
Segment results
Franchise
Segment EBITDA for the franchise segment was $113.8 million in the nine months ended September 30, 2018 compared to $94.4 million in the nine months ended September 30, 2017, an increase of $19.3 million, or 20.5%. This increase was primarily the result of growth in our franchise segment revenue of $20.7 million which was primarily attributable to higher royalty rates on monthly dues and $8.3 million was attributable to higher royalties on annual fees, primarily as a result of the Rebate to Royalty Amendment. Additionally, $7.2 million was attributable to royalties from new stores in 2018, as well as stores that opened in 2017 that were not included in the same store sales base, and $5.9 million was attributable to a same store sales increase of 10.5% in franchisee-owned stores. The increase in revenue was partially offset by $10.7 million of lower commission income and $7.4 million of lower franchise and other fee revenue in conjunction with the Rebate to Royalty Amendment mentioned above, and

45


$5.1 million of higher franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $5.9 million and $6.4 million for the nine months ended September 30, 2018 and 2017, respectively.
Corporate-owned stores
Segment EBITDA for the corporate-owned stores segment was $42.1 million in the nine months ended September 30, 2018 compared to $35.6 million in the nine months ended September 30, 2017, an increase of $6.5 million, or 18.4%. Of this increase, $4.1 million of the increase is attributable to the stores acquired, opened and planned to open since January 1, 2017. An additional $3.5 million was related to stores included in our same store sales base in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Partially offsetting these increases is $0.7 million of foreign currency losses and a $0.4 million loss on reacquired franchise rights recorded in connection with the acquisition of ten franchisee-owned stores in 2018. Depreciation and amortization was $15.0 million and $11.7 million for the nine months ended September 30, 2018 and 2017, respectively. The increase in depreciation and amortization was primarily attributable the acquisition and opening of corporate-owned stores since January 1, 2017.
Equipment
Segment EBITDA for the equipment segment was $28.6 million in the nine months ended September 30, 2018 compared to $23.6 million in the nine months ended September 30, 2017, an increase of $5.0 million, or 21.2%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, in addition to 23 additional equipment sales to new franchisee-owned stores in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Depreciation and amortization was $3.8 million and $4.7 million for the nine months ended September 30, 2018 and 2017, respectively.
Liquidity and capital resources
As of September 30, 2018, we had $572.7 million of cash and cash equivalents. In addition, as of September 30, 2018, we had borrowing capacity of $75.0 million under our Variable Funding Note.
We require cash principally to fund day-to-day operations, to finance capital investments, to service our outstanding debt and tax benefit arrangements and to address our working capital needs. Based on our current level of operations and anticipated growth, we believe that with the available cash balance, the cash generated from our operations, and amounts available under our Variable Funding Note will be adequate to meet our anticipated debt service requirements and obligations under the tax benefit arrangements, capital expenditures and working capital needs for at least the next 12 months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk factors” in the Annual Report and elsewhere in this Quarterly Report on Form 10-Q. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our Variable Funding Note or otherwise to enable us to service our indebtedness, including our Class A-2 Notes, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
The following table presents summary cash flow information for the nine months ended September 30, 2018 and 2017:
 
 
 
Nine months ended September 30,
(in thousands)
 
2018
 
2017
Net cash (used in) provided by:
 
 

 
 

Operating activities
 
$
143,886

 
$
93,028

Investing activities
 
(64,157
)
 
(23,063
)
Financing activities
 
416,071

 
(17,490
)
Effect of foreign exchange rates on cash
 
(234
)
 
399

Net increase in cash
 
$
495,566

 
$
52,874

Operating activities
For the nine months ended September 30, 2018, net cash provided by operating activities was $143.9 million compared to $93.0 million in the nine months ended September 30, 2017, an increase of $50.9 million. Of the increase, $27.3 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, and $23.5 million was due to lower cash used for working capital in accounts payable and accrued expenses, other assets and other current assets, and

46


deferred revenue, partially offset by higher cash used in payables pursuant to tax benefit arrangements in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Investing activities
Cash flow used in investing activities related to the following capital expenditures for the nine months ended September 30, 2018 and 2017
 
 
Nine months ended September 30,
(in thousands)
 
2018
 
2017
New corporate-owned stores and corporate-owned stores not yet opened
 
$
4,567

 
$
1,313

Existing corporate-owned stores
 
8,580

 
14,651

Information systems
 
5,362

 
1,070

Corporate and all other
 
92

 
6,195

Total capital expenditures
 
$
18,601

 
$
23,229

 
For the nine months ended September 30, 2018, net cash used in investing activities was $64.2 million compared to $23.1 million in the nine months ended September 30, 2017, an increase of $41.1 million, and was primarily related to the acquisition of six franchisee-owned stores on January 1, 2018 for $28.5 million and the acquisition of four franchisee-owned stores on August 10, 2018 for $17.2 million, partially offset by $4.6 million lower cash used for additions to property, plant and equipment.
Financing activities
For the nine months ended September 30, 2018, net cash provided by financing activities was $416.1 million compared to cash used of $17.5 million in the nine months ended September 30, 2017, an increase of $433.6 million. Of the increase, $463.3 million was primarily due to the completion of the Company's securitized financing facility and repayment of its Term Loan B during the nine months ended September 30, 2018. Offsetting the increase, the Company spent $42.1 million on share repurchases during the nine months ended September 30, 2018. Continuing LLC Owner distributions were $5.4 million in the nine months ended September 30, 2018 compared to $9.3 million in the nine months ended September 30, 2017.
2018 Refinancing
On August 1, 2018, Planet Fitness Master Issuer LLC (the “Master Issuer”), a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary of Pla-Fit Holdings, LLC, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2018-1 4.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $575 million and Series 2018-1 4.666% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $625 million. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility that allows for the issuance of up to $75 million in Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes” and together iwth the Class A-2 Notes, the "Series 2018-1 Senior Notes"), and certain letters of credit, all of which is currently undrawn. The Series 2018-1 Senior Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic revenue-generating assets, consisting principally of franchise-related agreements, certain corporate-owned store assets, equipment supply agreements and intellectual property and license agreements for the use of intellectual property, were assigned to the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Series 2018-1 Senior Notes and that have pledged substantially all of their assets to secure the 2018-1 Senior Notes.
The legal final maturity date of the Class A-2 Notes is in August 2048, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in August 2022 and the Class A-2-II Notes will be repaid in August 2025.
A portion of the proceeds of the Class A-2 Notes was used to repay the remaining $705.9 million of principal outstanding on the then-existing senior secured credit facility. The additional proceeds, net of transaction costs, are being used for general corporate purposes, and may include a return of capital to the Company’s shareholders. See Note 6 for further information related to the Company's refinancing.

47


Share repurchase program
On August 3, 2018, our board of directors approved an increase to the total amount of the share repurchase program to $500 million. Pursuant to the share repurchase program, during the nine months ended September 30, 2018, the Company repurchased and retired 824,312 shares of Class A common stock for a total cost of $42.1 million. The timing of the purchases and the amount of stock repurchased is subject to the Company’s discretion and depends on market and business conditions, the Company’s general working capital needs, stock price, applicable legal requirements and other factors. Our ability to repurchase shares at any particular time is also subject to the terms of the indenture governing the Series 2018-1 Senior Notes. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. Planet Fitness is not obligated under the program to acquire any particular amount of stock and can suspend or terminate the program at any time.
Off-balance sheet arrangements
As of September 30, 2018, our off-balance sheet arrangements consisted of operating leases and certain guarantees. In a limited number of cases, we have guaranteed certain leases and debt agreements of entities related through common ownership. These guarantees relate to leases for operating space, equipment and other operating costs of franchises operated by the related entities. Our maximum total commitment under these agreements is approximately $0.8 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at September 30, 2018 was not material, and no accrual has been recorded for our potential obligation under these arrangements.
Critical accounting policies and use of estimates
There have been no material changes to our critical accounting policies and use of estimates from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.  
 
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Interest rate risk
The securitized financing facility includes the Series 2018-1 Class A-2 Notes which are comprised of fixed interest rate notes and the Variable Funding Notes which allow for the issuance up to $75.0 million of Variable Funding Notes. The issuance of the fixed-rate Class A-2 Notes has reduced the Company's exposure to interest rate increases that could adversely affect its earnings and cash flows. However, the Company is exposed to interest rate increases on borrowings under the Variable Funding Notes.
Foreign exchange risk
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian entities. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of September 30, 2018, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would increase or decrease net income by a negligible amount.
Inflation risk
Although we do not believe that inflation has had a material effect on our income from continuing operations, we have a substantial number of hourly employees in our corporate-owned stores that are paid wage rates at or based on the applicable federal or state minimum wage. Any increases in these minimum wages will subsequently increase our labor costs. We may or may not be able to offset cost increases in the future.


48


ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2018, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


49


PART II-OTHER INFORMATION
 
 
ITEM 1. Legal Proceedings
We are currently involved in various claims and legal actions that arise in the ordinary course of business, most of which are covered by insurance. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, financial condition, results of operations, liquidity or capital resources nor do we believe that there is a reasonable possibility that we will incur material loss as a result of such actions. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could have a material adverse effect on our business, financial condition and results of operations.
 
 
ITEM 1A. Risk Factors.
The following risk factors, which have been updated to reflect the refinancing of our existing senior secured credit facilities with a securitized financing facility, should be read in conjunction with the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
The Company and certain of its subsidiaries are subject to various restrictions, and substantially all of the assets of certain subsidiaries are security, under the terms of a securitization transaction that was completed on August 1, 2018.
On August 1, 2018, Planet Fitness Master Issuer LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, indirect subsidiary of the Company, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer issued $575 million in aggregate principal amount of Series 2018-1 4.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $625 million in aggregate principal amount of Series 2018-1 4.666% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and together with the Class A-2-I Notes, the “Class A-2 Notes”) in an offering exempt from registration under the Securities Act of 1933, as amended. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility that allows for the issuance of up to $75 million in Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes”), and certain letters of credit. The Class A-2 Notes and the Variable Funding Notes are referred to collectively as the “Notes.”
The Notes were issued in a securitization transaction pursuant to which substantially all of the Company’s revenue-generating assets in the United States were assigned to the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly-owned direct and indirect subsidiaries of the Master Issuer that act as guarantors of the Notes and that have pledged substantially all of their assets to secure the Notes.
The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the transfers of the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain a stated debt service coverage ratio, the sum of system-wide sales being below certain levels on certain measurement dates, certain manager termination events (including in certain cases a change of control of Planet Fitness Holdings, LLC), an event of default and the failure to repay or refinance the Notes on the applicable anticipated repayment date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments.
In the event that a rapid amortization event occurs under the Indenture (including, without limitation, upon an event of default under the Indenture or the failure to repay the securitized debt at the end of the applicable term), the funds available to the Company would be reduced or eliminated, which would in turn reduce our ability to operate or grow our business. If the Company’s subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If the Company’s subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations.

50


The Company has a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of its subsidiaries, could adversely affect the Company’s business, financial condition and results of operations, as well as the ability of certain of the Company’s subsidiaries to meet debt payment obligations.
After giving effect to the closing of the securitization transactions, the Master Issuer has $1.2 billion of outstanding debt. Additionally, the Variable Funding Notes allow the Master Issuer to borrow amounts from time to time on a revolving basis, up to an aggregate principal amount of $75 million.
This level of debt could have significant consequences on the Company’s future operations, including:
resulting in an event of default if the Company’s subsidiaries fail to comply with the financial and other restrictive covenants contained in debt agreements, which event of default could result in all of the Company’s subsidiaries’ debt becoming immediately due and payable;
reducing the availability of the Company’s cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting the Company’s ability to obtain additional financing for these purposes;
limiting the Company’s flexibility in planning for, or reacting to, and increasing its vulnerability to, changes in the Company’s business, the industry in which it operates and the general economy;
placing the Company at a competitive disadvantage compared to its competitors that are less leveraged; and
subjecting the Company to the risk of increased sensitivity to interest rate increases on indebtedness with variable interest rates.
The ability to meet payment and other obligations under the debt instruments of the Company’s subsidiaries depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond the Company’s control. The Company cannot assure that its business will generate cash flow from operations, or that future borrowings will be available to it under existing or any future credit facilities or otherwise, in an amount sufficient to enable its subsidiaries to meet our debt payment obligations and to fund other liquidity needs. If the Company’s subsidiaries are not able to generate sufficient cash flow to service our debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If the Company’s subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations.
In addition, the Company may incur additional indebtedness in the future. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify.
The securitization transaction documents impose certain restrictions on the activities of the Company and its subsidiaries.
The Indenture and the management agreement entered into between certain subsidiaries of the Company and the Indenture trustee (the “Management Agreement”) contain various covenants that limit the Company’s and its subsidiaries’ ability to engage in specified types of transactions. For example, the Indenture and the Management Agreement contain covenants that, among other things, restrict, subject to certain exceptions, the ability of certain subsidiaries to:
incur or guarantee additional indebtedness;
sell certain assets;
create or incur liens on certain assets to secure indebtedness; or
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
As a result of these restrictions, the Company may not have adequate resources or flexibility to continue to manage the business and provide for growth of the Planet Fitness system, including product development and marketing for the Planet Fitness brand, which could have a material adverse effect on the Company’s future growth prospects, financial condition, results of operations and liquidity.
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
The following table provides information regarding purchases of shares of our Class A common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the three months ended September 30, 2018.
 

51


 
 
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(1)
07/01/18 - 07/31/18
 

 

 

 
$100,000,000
08/01/18 - 08/31/18
 
707,249

 
$
51.24

 
707,249

 
$463,763,283
09/01/18 - 09/30/18
 
117,063

 
$
50.00

 
117,063

 
$457,910,178
Total
 
824,312

 
$
51.06

 
824,312

 
$457,910,178

(1)On August 3, 2018, our board of directors approved an increase to the total amount of the previously announced share repurchase program from $100,000,000 to $500,000,000. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing.

In connection with our IPO, we and the existing holders of Holdings Units entered into an exchange agreement under which they (or certain permitted transferees) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, together with a corresponding number of shares of Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions. As an existing holder of Holdings Units exchanges Holdings Units for shares of Class A common stock, the number of Holdings Units held by Planet Fitness, Inc. is correspondingly increased, and a corresponding number of shares of Class B common stock are cancelled.
 
ITEM 3. Defaults Upon Senior Securities.
None.
 
ITEM 4. Mine Safety Disclosures.
None.
 
ITEM 5. Other Information.
None.
 
ITEM 6. Exhibits
 
 
 
 
Description of Exhibit Incorporated
 
 
 
 
Herein by Reference
Exhibit
 
 
 
 
 
 
 
 
 
Exhibit
 
Filed
Number
 
Exhibit Description
 
Form
 
File No.
 
Filing Date
 
Number
 
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
1.1
 
 
8-K
 
001-37534
 
July 20, 2018
 
1.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
 
8-K
 
001-37534
 
August 1, 2018
 
4.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

52


4.2
 
 
8-K
 
001-37534
 
August 1, 2018
 
4.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
 
8-K
 
001-37534
 
July 20, 2018
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
 
8-K
 
001-37534
 
August 1, 2018
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
 
8-K
 
001-37534
 
August 1, 2018
 
10.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101
 
Interactive Data Files pursuant to Rule 405 of regulation S-T (XBRL)
 
 
 
 
 
 
 
 
 
X


53


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Planet Fitness, Inc.
 
 
 
 
(Registrant)
 
 
 
Date: November 7, 2018
 
 
 
/s/ Dorvin Lively
 
 
 
 
Dorvin Lively
 
 
 
 
President and Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer)


54