PLANET FITNESS, INC., 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 22, 2018
Class A Common Stock [Member]
Feb. 22, 2018
Class B Common Stock [Member]
Document Information [Line Items]
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Trading Symbol
PLNT 
 
 
 
Entity Registrant Name
PLANET FITNESS, INC. 
 
 
 
Entity Central Index Key
0001637207 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Public Float
 
$ 2.0 
 
 
Entity Common Stock, Shares Outstanding
 
 
87,490,563 
10,892,740 
Consolidated balance sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 113,080 
$ 40,393 
Accounts receivable, net of allowance for bad debts of $32 and $687 at December 31, 2017 and 2016, respectively
37,272 
26,873 
Due from related parties
3,020 
2,864 
Inventory
2,692 
1,802 
Restricted assets – NAF (note 4)
499 
3,074 
Prepaid expenses
3,929 
3,591 
Other receivables
9,562 
7,935 
Income tax receivable
6,947 
4,693 
Total current assets
177,001 
91,225 
Property and equipment, net
83,327 
61,238 
Intangible assets, net
235,657 
253,862 
Goodwill
176,981 
176,981 
Deferred income taxes
407,782 
410,407 
Other assets, net
11,717 
7,729 
Total assets
1,092,465 
1,001,442 
Current liabilities:
 
 
Current maturities of long-term debt
7,185 
7,185 
Accounts payable
28,648 
28,507 
Accrued expenses
18,590 
19,190 
Equipment deposits
6,498 
2,170 
Restricted liabilities - NAF (note 4)
490 
134 
Deferred revenue, current
19,083 
17,780 
Payable pursuant to tax benefit arrangements, current
31,062 
8,072 
Other current liabilities
474 
235 
Total current liabilities
112,030 
83,273 
Long-term debt, net of current maturities
696,576 
702,003 
Deferred rent, net of current portion
6,127 
5,108 
Deferred revenue, net of current portion
8,440 
8,351 
Deferred tax liabilities
1,629 
1,238 
Payable pursuant to tax benefit arrangements, net of current portion
400,298 
410,999 
Other liabilities
4,302 
5,225 
Total noncurrent liabilities
1,117,372 
1,132,924 
Commitments and contingencies (note 15)
   
   
Stockholders' equity:
 
 
Accumulated other comprehensive loss
(648)
(1,174)
Additional paid in capital
12,118 
34,467 
Accumulated deficit
(130,966)
(164,062)
Total stockholders' deficit attributable to Planet Fitness, Inc.
(119,486)
(130,759)
Non-controlling interests
(17,451)
(83,996)
Total stockholders' deficit
(136,937)
(214,755)
Total liabilities and stockholders' deficit
1,092,465 
1,001,442 
Class A Common Stock [Member]
 
 
Stockholders' equity:
 
 
Common stock, value
Class B Common Stock [Member]
 
 
Stockholders' equity:
 
 
Common stock, value
$ 1 
$ 4 
Consolidated balance sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Accounts receivable, allowance for bad debts
$ 32 
$ 687 
Class A Common Stock [Member]
 
 
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
300,000,000 
300,000,000 
Common stock, shares issued
87,188,000 
61,314,000 
Common stock, shares outstanding
87,188,000 
61,314,000 
Class B Common Stock [Member]
 
 
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
11,193,000 
37,185,000 
Common stock, shares outstanding
11,193,000 
37,185,000 
Consolidated statements of operations (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue:
 
 
 
Franchise
$ 131,983,000 
$ 97,374,000 
$ 71,762,000 
Commission income
18,172,000 
19,114,000 
16,323,000 
Corporate-owned stores
112,114,000 
104,721,000 
98,390,000 
Equipment
167,673,000 
157,032,000 
144,062,000 
Total revenue
429,942,000 
378,241,000 
330,537,000 
Operating costs and expenses:
 
 
 
Cost of revenue
129,266,000 
122,317,000 
113,492,000 
Store operations
60,657,000 
60,121,000 
57,485,000 
Selling, general and administrative
60,369,000 
50,008,000 
55,573,000 
Depreciation and amortization
31,761,000 
31,502,000 
32,158,000 
Other (gain) loss
353,000 
(1,369,000)
(273,000)
Total operating costs and expenses
282,406,000 
262,579,000 
258,435,000 
Income from operations
147,536,000 
115,662,000 
72,102,000 
Other income (expense), net:
 
 
 
Interest expense, net
(35,283,000)
(27,125,000)
(24,549,000)
Other income (expense), net
316,928,000 
1,371,000 
(275,000)
Total other income (expense), net
281,645,000 
(25,754,000)
(24,824,000)
Income before income taxes
429,181,000 
89,908,000 
47,278,000 
Provision for income taxes
373,580,000 
18,661,000 
9,148,000 
Net income
55,601,000 
71,247,000 
38,130,000 
Less net income attributable to non-controlling interests
22,455,000 
49,747,000 
19,612,000 
Net income attributable to Planet Fitness, Inc.
$ 33,146,000 
$ 21,500,000 
$ 18,518,000 
Class A Common Stock [Member]
 
 
 
Net income per share of Class A common stock:
 
 
 
Basic
$ 0.42 1
$ 0.50 1
$ 0.11 1
Diluted
$ 0.42 1
$ 0.50 1
$ 0.11 1
Weighted-average shares of Class A common stock outstanding:
 
 
 
Basic
78,910,390 1
43,300,288 1
36,244,000 1
Diluted
78,971,550 1
43,304,685 1
36,244,000 1
Consolidated statements of comprehensive income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income including non-controlling interests
$ 55,601 
$ 71,247 
$ 38,130 
Other comprehensive (loss) income, net:
 
 
 
Unrealized gain (loss) on interest rate caps, net of tax
1,143 
(78)
(1,388)
Foreign currency translation adjustments
26 
(72)
314 
Total other comprehensive income (loss), net
1,169 
(150)
(1,074)
Total comprehensive income including non-controlling interests
56,770 
71,097 
37,056 
Less: total comprehensive income attributable to non-controlling interests
22,707 
49,560 
19,557 
Total comprehensive income attributable to Planet Fitness, Inc.
$ 34,063 
$ 21,537 
$ 17,499 
Consolidated statements of cash flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net income
$ 55,601 
$ 71,247 
$ 38,130 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
31,761 
31,502 
32,158 
Amortization of deferred financing costs
1,935 
1,544 
1,596 
Amortization of favorable leases and asset retirement obligations
334 
392 
478 
Amortization of interest rate caps
1,755 
797 
28 
Deferred tax expense
372,422 
15,606 
6,135 
Loss (gain) on re-measurement of tax benefit arrangement
(317,354)
72 
(2,549)
Provision for bad debts
(19)
59 
667 
Gain on disposal of property and equipment
(159)
(514)
(273)
Loss on extinguishment of debt
79 
606 
 
Third party debt refinancing expense
1,021 
3,001 
 
Equity-based compensation
2,531 
1,728 
4,877 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(10,481)
(7,754)
(414)
Due from related parties
(604)
1,897 
4,210 
Inventory
(890)
2,755 
(1,545)
Other assets and other current assets
(2,981)
(7,944)
(5,720)
Accounts payable and accrued expenses
4,210 
7,428 
263 
Other liabilities and other current liabilities
(470)
2,747 
99 
Income taxes
(3,027)
(5,993)
115 
Payments pursuant to tax benefit arrangements
(11,446)
(6,922)
 
Equipment deposits
4,328 
(3,417)
(1,088)
Deferred revenue
1,276 
(652)
2,994 
Deferred rent
1,199 
632 
1,502 
Net cash provided by operating activities
131,021 
108,817 
81,663 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(37,722)
(15,377)
(19,488)
Proceeds from sale of property and equipment
680 
683 
327 
Net cash used in investing activities
(37,042)
(14,694)
(19,161)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and commissions
 
 
156,946 
Use of proceeds from issuance of Class A common stock to purchase Holdings Units
 
 
(156,946)
Proceeds from issuance of long-term debt
 
230,000 
120,000 
Proceeds from issuance of Class A common stock
480 
136 
 
Principal payments on capital lease obligations
(22)
(46)
(376)
Repayment of long-term debt
(7,185)
(5,621)
(14,800)
Payment of deferred financing and other debt-related costs
(1,278)
(5,220)
(1,698)
Premiums paid for interest rate caps
(366)
 
(880)
Repurchase and retirement of Class B common stock
 
(1,583)
 
Dividend paid to holders of Class A common stock
 
(169,282)
 
Dividend equivalent paid to members of Pla-Fit Holdings
(1,974)
(101,729)
(140,000)
Distributions to members of Pla-Fit Holdings
(11,358)
(31,838)
(36,486)
Net cash used in financing activities
(21,703)
(85,183)
(74,240)
Effects of exchange rate changes on cash and cash equivalents
411 
23 
(123)
Net increase (decrease) in cash and cash equivalents
72,687 
8,963 
(11,861)
Cash and cash equivalents, beginning of period
40,393 
31,430 
43,291 
Cash and cash equivalents, end of period
113,080 
40,393 
31,430 
Supplemental cash flow information:
 
 
 
Net cash paid for income taxes
3,722 
7,040 
2,834 
Cash paid for interest
31,418 
24,302 
23,220 
Non-cash investing activities:
 
 
 
Non-cash additions to property and equipment
861 
2,203 
207 
Non-cash financing activities:
 
 
 
Non-cash dividend equivalent payments
 
$ 3,899 
 
Consolidated statement of changes in equity (USD $)
In Thousands, except Share data
Total
USD ($)
Members' Equity [Member]
USD ($)
Accumulated Other Comprehensive Income (Loss) [Member]
USD ($)
Additional Paid-in capital [Member]
USD ($)
Accumulated Deficit [Member]
USD ($)
Non-Controlling Interests [Member]
USD ($)
Class A Common Stock [Member]
Class A Common Stock [Member]
Common Stock [Member]
USD ($)
Class B Common Stock [Member]
Class B Common Stock [Member]
Common Stock [Member]
USD ($)
Beginning balance at Dec. 31, 2014
$ 151,749 
$ 146,156 
$ (636)
 
 
$ 6,229 
 
 
 
 
Net income including non-controlling interests
38,130 
 
 
 
 
 
 
 
 
 
Distributions to members prior to the recapitalization transactions
(164,693)
(164,693)
 
 
 
 
 
 
 
 
Net income prior to the recapitalization transactions
14,676 
14,412 
 
 
 
264 
 
 
 
 
Other comprehensive loss prior to the recapitalization transactions
(1,054)
 
(1,054)
 
 
 
 
 
 
 
Equity-based compensation expense recorded in connection with recapitalization transactions
4,525 
4,525 
 
 
 
 
 
 
 
 
Effect of the recapitalization transactions
 
(400)
 
 
138 
252 
 
 
Effect of the recapitalization transactions, shares
 
 
 
 
 
 
26,107,000 
 
72,603,000 
 
Issuance of Class A common stock in IPO, net of commissions
 
 
 
 
 
 
 
 
 
Issuance of Class A common stock, shares
 
 
 
 
 
 
10,491,000 
 
 
 
Exchanges of Class B common stock, shares exchanged
 
 
 
 
 
 
 
 
(10,491,000)
 
Exchanges of Class B common stock, value exchanged
 
 
 
 
 
 
 
 
 
(1)
Tax benefit arrangement liability and deferred taxes arising from the recapitalization transactions and IPO
(18,276)
 
 
 
(18,276)
 
 
 
 
 
Net income subsequent to the recapitalization transactions
23,454 
 
 
 
4,106 
19,348 
 
 
 
 
Equity-based compensation expense
352 
 
 
352 
 
 
 
 
 
 
Distributions paid to members of Pla-Fit Holdings subsequent to the recapitalization transactions
(11,793)
 
 
 
 
(11,793)
 
 
 
 
Other comprehensive loss subsequent to the recapitalization transactions
(20)
 
(20)
 
 
 
 
 
 
 
Other comprehensive loss
(1,074)
 
 
 
 
 
 
 
 
 
Ending balance at Dec. 31, 2015
(1,080)
 
(1,710)
352 
(14,032)
14,300 
 
 
Ending balance (shares) at Dec. 31, 2015
 
 
 
 
 
 
36,598,000 
 
62,112,000 
 
Net income including non-controlling interests
71,247 
 
 
 
21,500 
49,747 
 
 
 
 
Issuance of Class A common stock, shares
 
 
 
 
 
 
1,271,146 
 
 
 
Exchanges of Class B common stock, shares exchanged
 
 
 
 
 
 
 
 
(24,705,000)
 
Exchanges of Class B common stock, value exchanged
 
 
 
 
 
(11,475)
 
 
 
(2)
Equity-based compensation expense
1,728 
 
 
1,749 
(21)
 
 
 
 
 
Repurchase and retirement of Class B common stock
(1,583)
 
 
(441)
(1,142)
 
 
 
 
 
Repurchase and retirement of Class B common stock, shares
 
 
 
 
 
 
 
 
(222,000)
 
Exchanges of Class B common stock, value issued
 
 
499 
10,976 
 
 
 
 
 
Exchanges of Class B common stock, shares issued
 
 
 
 
 
 
24,705,000 
 
 
 
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges
21,695 
 
 
21,695 
 
 
 
 
 
 
Exercise of stock options and vesting of restricted share units
136 
 
 
136 
 
 
 
 
 
 
Exercise of stock options and vesting of restricted share units, shares
 
 
 
 
 
 
11,000 
 
 
 
Dividend paid to holders of Class A common stock
(169,282)
 
 
 
(169,282)
 
 
 
 
 
Dividend equivalents paid or payable
(105,628)
 
 
 
(1,085)
(104,543)
 
 
 
 
Distributions paid to members of Pla-Fit Holdings
(31,838)
 
 
 
 
(31,838)
 
 
 
 
Other comprehensive loss
(150)
 
37 
 
 
(187)
 
 
 
 
Ending balance at Dec. 31, 2016
(214,755)
 
(1,174)
34,467 
(164,062)
(83,996)
 
 
Ending balance (shares) at Dec. 31, 2016
 
 
 
 
 
 
61,314,000 
 
37,185,000 
 
Net income including non-controlling interests
55,601 
 
 
 
33,146 
22,455 
 
 
 
 
Issuance of Class A common stock, shares
 
 
 
 
 
 
4,762,943 
 
 
 
Exchanges of Class B common stock, shares exchanged
 
 
 
 
 
 
 
 
(25,842,000)
 
Exchanges of Class B common stock, value exchanged
 
 
(391)
(54,042)
 
 
 
 
 
(3)
Equity-based compensation expense
2,531 
 
 
2,565 
(34)
 
 
 
 
 
Repurchase and retirement of Class B common stock, shares
 
 
 
 
 
 
 
 
(150,000)
 
Exchanges of Class B common stock, value issued
 
 
 
 
 
54,433 
 
 
 
Exchanges of Class B common stock, shares issued
 
 
 
 
 
 
25,842,000 
 
 
 
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges
28,648 
 
 
28,648 
 
 
 
 
 
 
Exercise of stock options and vesting of restricted share units
480 
 
 
480 
 
 
 
 
 
 
Exercise of stock options and vesting of restricted share units, shares
 
 
 
 
 
 
32,000 
 
 
 
Forfeiture of Dividend Equivalents
449 
 
 
 
32 
417 
 
 
 
 
Distributions paid to members of Pla-Fit Holdings
(11,060)
 
 
 
(48)
(11,012)
 
 
 
 
Other comprehensive loss
1,169 
 
917 
 
 
252 
 
 
 
 
Ending balance at Dec. 31, 2017
$ (136,937)
 
$ (648)
$ 12,118 
$ (130,966)
$ (17,451)
 
$ 9 
 
$ 1 
Ending balance (shares) at Dec. 31, 2017
 
 
 
 
 
 
87,188,000 
 
11,193,000 
 
Business organization
Business organization

(1) Business organization

Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with approximately 10.6 million members and 1,518 owned and franchised locations (referred to as stores) in all 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic and Panama as of December 31, 2017.

The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:

Licensing and selling franchises under the Planet Fitness trade name;

Owning and operating fitness centers under the Planet Fitness trade name; and

Selling fitness-related equipment to franchisee-owned stores.

In 2012 investment funds affiliated with TSG Consumer Partners, LLC (“TSG”), purchased interests in Pla-Fit Holdings.

The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) and related transactions in order to carry on the business of Pla-Fit Holdings, LLC and its subsidiaries (“Pla-Fit Holdings”). As of August 5, 2015, in connection with the recapitalization transactions discussed below, 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.

Initial Public Offering

On August 11, 2015, the Company completed an IPO pursuant to which the Company and selling stockholders sold an aggregate of 15,525,000 shares of Class A common stock at a public offering price of $16.00 per share. The Company received $156,946 in proceeds from its sale of 10,491,055 shares of Class A common stock, net of underwriting discounts and commissions, which were used to purchase an equal number of limited liability company units (“Holdings Units”) from existing holders (“Continuing LLC Owners”) of interests in Pla-Fit Holdings, at a purchase price per unit equal to the IPO price per share of Class A common stock, net of underwriting discounts and commissions. 

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 Holdings Units not owned by the Company.

The recapitalization transactions are considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the recapitalization transactions are the financial statements of Pla-Fit Holdings as the predecessor to the Company for accounting and reporting purposes.  Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.

Secondary offerings

In June 2016, the Company completed a secondary offering (“June Secondary Offering”) of 11,500,000 shares of its Class A common stock at a price of $16.50 per share. All of the shares sold in the June Secondary Offering were offered by certain Continuing LLC Owners and TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”). The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating Continuing LLC Owners. The shares sold in the June Secondary Offering consisted of (i) 3,608,840 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 7,891,160 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the June Secondary Offering. Simultaneously, and in connection with the exchange, 7,891,160 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the June Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 7,891,160 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings. Immediately preceding the June Secondary Offering, Planet Fitness, Inc. held 100% of the voting interest and 37.1% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 62.9% economic interest in Pla-Fit Holdings. Immediately following the completion of the June Secondary Offering, Planet Fitness, Inc. held 100% of the voting interest and 45.1% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 54.9% economic interest in Pla-Fit Holdings.

In September 2016, the Company completed a secondary offering (“September Secondary Offering”) of 8,000,000 shares of its Class A common stock at a price of $19.62 per share. All of the shares sold in the September Secondary Offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the Continuing LLC Owners that participating in the September Secondary Offering. The shares sold in the September Secondary Offering consisted of (i) 2,593,981 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 5,406,019 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the September Secondary offering. Simultaneously, and in connection with the exchange, 5,406,019 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the September Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 5,406,019 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings. Immediately preceding the September Secondary Offering, Planet Fitness, Inc. held 100% of the voting interest and 45.1% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 54.9% economic interest in Pla-Fit Holdings. Immediately following the completion of the September Secondary Offering and as of September 30, 2016, Planet Fitness, Inc. held 100% of the voting interest and 50.6% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 49.4% economic interest in Pla-Fit Holdings.

In November 2016, the Company completed a secondary offering (“November Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $23.22 per share. All of the shares sold in the November Secondary Offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the Continuing LLC Owners that participating in the September Secondary Offering. The shares sold in the November Secondary Offering consisted of (i) 4,863,715 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,136,285 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the November Secondary offering. Simultaneously, and in connection with the exchange, 10,136,285 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the November Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,136,285 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings. Immediately preceding the November Secondary Offering, Planet Fitness, Inc. held 100% of the voting interest and 51.5% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 48.5% economic interest in Pla-Fit Holdings. Immediately following the completion of the November Secondary Offering and as of November 22, 2016, Planet Fitness, Inc. held 100% of the voting interest and 61.8% of the economic interest of Pla-Fit Holdings and the Continuing LLC Owners held the remaining 38.2% economic interest in Pla-Fit Holdings.

In March 2017, the Company completed a secondary offering (“March Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

In May 2017, the Company completed a secondary offering (“May Secondary Offering”) of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

 

In addition to the secondary offering transactions described above, during the years ended December 31, 2017 and 2016, certain Continuing LLC Owners have exercised their exchange rights and exchanged 4,762,943 and 1,271,146 Holdings Units, respectively, for 4,762,943 and 1,271,146 newly-issued shares of Class A common stock, respectively. Simultaneously, and in connection with these exchanges, 4,762,943 and 1,271,146 shares of Class B common stock were surrendered by the Continuing LLC Owners that exercised their exchange rights and canceled during the years ended December 31, 2017 and 2016, respectively. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 4,762,943 and 1,271,146 Holdings Units during the years ended December 31, 2017 and 2016, respectively, increasing its total ownership interest in Pla-Fit Holdings.

As of December 31, 2017, the Company held 100% of the voting interest, and approximately 88.6% of the economic interest in Pla-Fit Holdings and the Continuing LLC Owners held the remaining 11.4% economic interest in Pla-Fit Holdings. As future exchanges of Holdings Units occur, the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. will increase.

Summary of significant accounting policies
Summary of significant accounting policies

(2) Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany balances and transactions have been eliminated in consolidation.

As discussed in Note 1, as a result of the recapitalization transactions, Planet Fitness, Inc. consolidates Pla-Fit Holdings and Pla-Fit Holdings is considered to be the predecessor to Planet Fitness, Inc. for accounting and reporting purposes. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include franchise entities and certain other entities. The Company is not deemed to be the primary beneficiary for Planet Fitness franchise entities. Therefore, these entities are not consolidated.

The results of the Company have been consolidated with Matthew Michael Realty LLC (“MMR”) and PF Melville LLC (“PF Melville”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. These entities are real estate holding companies that derive a majority of their financial support from the Company through lease agreements for corporate stores. See Note 3 for further information related to the Company’s VIEs.

(b) Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Significant areas where estimates and judgments are relied upon by management in the preparation of the consolidated financial statements include revenue recognition, valuation of equity-based compensation awards, the evaluation of the recoverability of goodwill and long-lived assets, including intangible assets, income taxes, including deferred tax assets and liabilities and reserves for unrecognized tax benefits, and the liability for the Company’s tax benefit arrangements.

(c) Concentrations

Cash and cash equivalents are financial instruments, which potentially subject the Company to a concentration of credit risk. The Company invests its excess cash in several major financial institutions, which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company maintains balances in excess of these limits, but does not believe that such deposits with its banks are subject to any unusual risk.

The credit risk associated with trade receivables is mitigated due to the large number of customers, generally our franchisees, and their broad dispersion over many different geographic areas. We do not have any concentrations with respect to our revenues.

The Company purchases equipment, both for corporate-owned stores and for sales to franchisee-owned stores from various equipment vendors. For the year ended December 31, 2017 purchases from one equipment vendor comprised 91% of total equipment purchases. For the year ended December 31, 2016 purchases from two equipment vendors comprised 83% and 13%, respectively, of total equipment purchases and for the year ended December 31, 2015 purchases from two equipment vendors comprised 79% and 18%, respectively, of total equipment purchases.

The Company, including Planet Fitness NAF, LLC (“NAF”) uses one primary vendor for advertising services. For the year ended December 31, 2017, purchases from this vendor comprised 63% of total equipment purchases. For the year ended December 31, 2016 purchases from two vendors comprised 25% and 16%, respectively, of total advertising purchases and for the year ended December 31, 2015 purchases from one vendor comprised 49% of total advertising purchases (see Note 4 for further discussion of NAF).

(d) Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash held within the NAF is recorded as a restricted asset (see Note 4).

(e) Revenue recognition

Franchise revenue

The following revenues are generated as a result of transactions with or related to the Company’s franchisees.

Area development fees

Franchisees contractually enter into area development agreements (ADAs) to secure the exclusive right to open franchise stores within a defined geographical area. ADAs establish the timing and number of stores to be developed within the defined geographical area. Pursuant to an ADA, a franchisee is generally required to pay an initial nonrefundable development fee for a minimum number of stores to be developed, as outlined in the respective ADA. ADA fees collected in advance are deferred until the Company provides substantially all required obligations pursuant to the ADA. As the efforts and total cost relating to initial services are affected significantly by the number of stores opened in an area, the respective ADA is treated as a divisible contract. As each new site is accepted under an ADA, a franchisee signs a franchise operating agreement for the respective franchise location. As each store opened under an ADA typically has performance obligations associated with it, the Company recognizes ADA revenue as each individual franchise location is developed in proportion to the total number of stores to be developed under the ADA. These obligations are typically completed once the store is opened or the franchisee executes the individual property lease. As of December 31, 2017 and 2016, the deferred revenue for ADAs was $10,121 and $10,026, respectively. ADAs generally have an initial term equal to the number of years over which the franchisee is required to open franchise stores, which is typically 5 to 10 years. There is no right of refund for an executed ADA. Upon default, as defined in the agreement, the Company may reacquire the rights pursuant to an ADA, and all remaining deferred revenue is recognized at that time.

Franchise fees and performance fees

The Company generally charges an initial upfront nonrefundable franchise fee. Nonrefundable franchise fees are typically deferred until the franchisee executes a lease and receives initial training for the location, which is the point at which the Company has determined it has provided all of its material obligations required to recognize revenue. As of December 31, 2017 and 2016, the Company has recorded deferred franchise fees of $510 and $260, respectively, relating to stores to be opened in future years. These amounts are included in deferred revenue as of December 31, 2017 and 2016.

The individual franchise agreements typically have a 10-year initial term, but provide the franchisee with an opportunity to enter into successive renewals subject to certain conditions.

Transfer fees

The Company’s current franchise agreement provides that upon the transfer of a Planet Fitness store to a different franchisee, the Company is entitled to a transfer fee in the amount of the greater of $25, or $10 per store being transferred, if more than one, in addition to reimbursement of out-of-pocket expenses, including external legal and administrative costs incurred in connection with the transfer. Transfer-related fees and expenses are due, payable, and recognized at the time the transfer is effectuated.

Royalties

Royalties, which represent recurring fees paid by franchisees based on the franchisee-owned stores’ monthly and annual membership billings, are recognized on a monthly basis over the term of the franchise agreement. As specified under certain franchise agreements, the Company recognizes additional royalty fees as the franchisee-owned stores attain contractual monthly membership billing threshold amounts. Beginning in 2010, for all new franchise agreements entered into pursuant to a newly executed ADA or outside an ADA, the Company began charging a fixed royalty percentage based upon gross membership billings.

Other fees

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.

Billing transaction fees are paid to the Company for the processing of franchisee membership dues and annual fees through the Company’s third-party hosted point-of-sale system.

Placement

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.

Commission income

The Company recognizes commission income from its franchisees’ use of certain preferred vendor arrangements. Commissions are recognized when amounts have been earned and collectability from the vendor is reasonably assured.

Corporate-owned stores revenue

The following revenues are generated from stores owned and operated by the Company.

Membership dues revenue

Customers are offered multiple membership choices varying in length. Membership dues are earned and recognized over the membership term on a straight-line basis.

Enrollment fee revenue

Enrollment fees are charged to new members at the commencement of their membership. The Company recognizes enrollment fees ratably over the estimated duration of the membership life, which is generally two years.

Annual membership fee revenue

Annual membership fees are annual fees charged to members in addition to and in order to maintain low monthly membership dues. The Company recognizes annual membership fees ratably over the 12-month membership period.

Retail sales

The Company sells Planet Fitness branded apparel, food, beverages, and other accessories. The revenue for these items is recognized at the point of sale.

Equipment revenue

The Company sells and delivers equipment purchased from third-party equipment manufacturers to U.S. based franchisee-owned stores. Equipment revenue is recognized upon the equipment being delivered to and assembled at each store and accepted by the franchisee. Franchisees are charged for all freight costs incurred for the delivery of equipment. Freight revenue is recorded within equipment revenue and freight costs are recorded within cost of revenue. The Company recognizes revenue on a gross basis in these transactions as management has determined the Company to be the principal in these transactions. Management determined the Company to be the principal because the Company is the primary obligor in these transactions, the Company has latitude in establishing prices for the equipment sales to franchisees, the Company has supplier selection discretion and is involved in determination of product specifications, and the Company bears all credit risk associated with obligations to the equipment manufacturers.

Equipment deposits are recognized as a liability on the accompanying consolidated balance sheets until delivery, assembly (if required), and acceptance by the franchisee. As of December 31, 2017 and 2016, equipment deposits were $6,498 and $2,170, respectively.

Sales tax

All revenue amounts are recorded net of applicable sales tax.

(f) Deferred revenue

Deferred revenue represents cash received from franchisees for ADAs and franchise fees for which revenue recognition criteria has not yet been met and cash received from members for enrollment fees, membership dues and annual fees for the portion not yet earned based on the membership period.

(g) Cost of revenue

Cost of revenue consists of direct costs associated with equipment sales (including freight costs), the cost of retail merchandise sold in corporate-owned stores, and prior to 2016 also included direct costs related to the maintenance and support of the Company’s proprietary system-wide point-of-sale system. Costs related to the point-of-sale system were $0, $0, and $1,236 for the years ended December 31, 2017, 2016 and 2015 respectively. Costs related to retail merchandise sales were immaterial in all periods presented. Rebates from equipment vendors where the Company has recognized the related equipment revenue and costs are recorded as a reduction to the cost of revenue.

(h) Store operations

Store operations consists of the direct costs related to operating corporate-owned stores, including our store management and staff, rent expense, utilities, supplies, maintenance, and local advertising.

(i) Selling, general and administrative

Selling, general and administrative expenses consist of costs associated with administrative and franchisee support functions related to our existing business as well as growth and development activities. These costs primarily consist of payroll, IT related, marketing, legal and accounting expenses. These expenses include costs related to placement services of $4,601, $3,974, and $3,452, for the years ended December 31, 2017, 2016 and 2015, respectively.

(j) Accounts receivable

Accounts receivable is primarily comprised of amounts owed to the Company resulting from equipment, placement, and commission revenue. The Company evaluates its accounts receivable on an ongoing basis and may establish an allowance for doubtful accounts based on collections and current credit conditions. Accounts are written off as uncollectible when it is determined that further collection efforts will be unsuccessful. Historically, the Company has not had a significant amount of write-offs.

(k) Leases and asset retirement obligations

The Company recognizes rent expense related to leased office and operating space on a straight-line basis over the term of the lease. The difference between rent expense and rent paid, if any, as a result of escalation provisions and lease incentives, such as tenant improvements provided by lessors, and is recorded as deferred rent in the Company’s consolidated balance sheets.

In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations, the Company establishes assets and liabilities for the present value of estimated future costs to return certain leased facilities to their original condition. Such assets are depreciated on a straight-line basis over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs.

(l) Property and equipment

Property and equipment is recorded at cost and depreciated using the straight-line method over its related estimated useful life. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset, whichever is shorter. Upon sale or retirement, the asset cost and related accumulated depreciation are removed from the respective accounts, and any related gain or loss is reflected in the consolidated statements of operations. Ordinary maintenance and repair costs are expensed as incurred. The estimated useful lives of the Company’s fixed assets by class of asset are as follows:

 

 

 

Years

Buildings and building improvements

 

20–40

Computers and equipment

 

3-5

Furniture and fixtures

 

5

Leasehold improvements

 

Useful life or term of lease

whichever is shorter

Fitness equipment

 

5–7

Vehicles

 

5

 

(m) Advertising expenses

The Company expenses advertising costs as incurred. Advertising expenses, net of amounts reimbursed by franchisees, are included within store operations and selling, general and administrative expenses and totaled $9,906, $8,270, and $9,349 for the years ended December 31, 2017, 2016 and 2015, respectively. See Note 4 for discussion of the national advertising fund.

(n) Goodwill, long-lived assets, and other intangible assets

Goodwill and other intangible assets that arise from acquisitions are recorded in accordance with ASC Topic 350, Intangibles—Goodwill and Other. In accordance with this guidance, specifically identified intangible assets must be recorded as a separate asset from goodwill if either of the following two criteria is met: (1) the intangible asset acquired arises from contractual or other legal rights; or (2) the intangible asset is separable. Intangibles are typically trade and brand names, customer relationships, noncompete agreements, reacquired franchise rights, and favorable or unfavorable leases. Transactions are evaluated to determine whether any gain or loss on reacquired franchise rights, based on their fair value, should be recognized separately from identified intangibles. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.

Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives on either a straight-line or accelerated basis as deemed appropriate, and are reviewed for impairment when events or circumstances suggest that the assets may not be recoverable.

The Company performs its annual test for impairment of goodwill and indefinite lived intangible assets on December 31 of each year. For goodwill, the first step of the impairment test is to determine whether the carrying amount of a reporting unit exceeds the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, the Company would be required to perform a second step of the impairment test as this is an indication that the reporting unit’s goodwill may be impaired. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. Any impairment loss would be recognized in an amount equal to the excess of the carrying value of the goodwill over the implied fair value of the goodwill. The Company is also permitted to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If the Company concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.

For indefinite lived intangible assets, the impairment assessment consists of comparing the carrying value of the asset to its estimated fair value. To the extent that the carrying value exceeds the fair value of the asset, an impairment is recorded to reduce the carrying value to its fair value. The Company is also permitted to make a qualitative assessment of whether it is more likely than not an indefinite lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If based on the Company’s qualitative assessment it is not more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment is not required.

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

The Company applies the provisions of ASC Topic 360, Property, Plant and Equipment, which requires that long-lived assets, including amortizable intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for impairment, then assets are required to be grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the undiscounted future net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no events or changes in circumstances that required the Company to test for impairment during any of the periods presented.

(o) Income taxes

The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from acquisitions and the recapitalization transactions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

As a result of the recapitalization transactions, Planet Fitness, Inc. became the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including Planet Fitness, Inc. following the recapitalization transactions, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings following the recapitalization transactions. The Company is also subject to taxes in foreign jurisdictions.

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs (see Note 14).

(p) Tax benefit arrangements

The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings, LLC who are unaffiliated with TSG (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings. Also, pursuant to the exchange agreement, to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the TRA Holders have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such tax liability (up to 3.5% of the value received upon exchange). If and when the Company subsequently realizes a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant Continuing LLC Owner in respect of its contribution. Due to changes in New Hampshire tax law, the Company no longer expects to incur any such liability under the New Hampshire business profits tax.

Based on current projections, the Company anticipates having sufficient taxable income to utilize these tax attributes and receive corresponding tax deductions in future periods. Accordingly, as of December 31, 2017 the Company has recorded a liability of $431,360, which includes the impact of remeasurement related to the 2017 Tax Act, payable to the TRA Holders under the tax benefit obligations, representing approximately 85% of the calculated tax savings based on the original basis adjustments the Company anticipates being able to utilize in future years. Changes in the projected liability resulting from these tax benefit arrangements may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and impact the expected future tax benefits to be received by the Company. Changes in the projected liability under these tax benefit arrangements will be recorded as a component of other income (expense) each period. The projection of future taxable income involves significant judgment. Actual taxable income may differ from estimates, which could significantly impact the liability under the tax benefit arrangements and the Company’s consolidated results of operations.  

(q) Fair value

ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016: 

 

 

 

 

 

 

Quoted prices

 

 

Significant

 

 

Significant

 

 

 

Total fair value at

 

 

in active markets

 

 

other observable

 

 

unobservable

 

 

 

December 31, 2017

 

 

markets (Level 1)

 

 

inputs (Level 2)

 

 

inputs (Level 3)

 

Interest rate caps

 

$

340

 

 

$

 

 

$

340

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted prices

 

 

Significant

 

 

Significant

 

 

 

Total fair value at

 

 

in active markets

 

 

other observable

 

 

unobservable

 

 

 

December 31, 2016

 

 

markets (Level 1)

 

 

inputs (Level 2)

 

 

inputs (Level 3)

 

Interest rate caps

 

$

306

 

 

$

 

 

$

306

 

 

$

 

 

(r) Financial instruments

The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The carrying value of debt also approximates fair value as it is variable rate debt.

(s) Derivative instruments and hedging activities

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.

The Company only enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 8 for further information.

(t) Equity-based compensation

The Company has an equity-based compensation plan under which it receives services from employees and directors as consideration for equity instruments of the Company. The compensation expense is determined based on the fair value of the award as of the grant date. Compensation expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. For awards with graded vesting, the fair value of each tranche is recognized over its respective vesting period. The Company accounts for forfeitures as they occur by reversing compensation cost when the award is forfeited. See Note 12 for further information.

(u) Guarantees

The Company, as a guarantor, is required to recognize, at inception of the guaranty, a liability for the fair value of the obligation undertaken in issuing the guarantee. See Notes 3 and 15 for further discussion of such obligations guaranteed.

(v) Contingencies

The Company records estimated future losses related to contingencies when such amounts are probable and estimable. The Company includes estimated legal fees related to such contingencies as part of the accrual for estimated future losses.

(w) Reclassifications

Certain amounts have been reclassified to conform to current year presentation.

(x) Recent accounting pronouncements

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company will adopt this new guidance in fiscal year 2018 utilizing the modified retrospective method. The adoption of the new guidance will change the timing of recognition of ADA and initial franchise fees, transfer fees and other fees. Currently, these fees are generally recognized upfront upon either store opening or upon execution of the property lease for an ADA, and upon execution of a lease and delivery of training for franchise fees. The new guidance will generally require these fees to be recognized over the contractual terms of the franchise license. The Company has evaluated the impact of the adoption of this new guidance as it relates to various forms of franchise fee revenue, including ADA and initial franchise fees, transfer fees and other fees and has concluded that the impact will be approximately $13,500 of incremental revenue deferred as of January 1, 2018 in connection with the adoption of this guidance. The Company does not expect this new guidance to impact the recognition of royalty income. Additionally, the adoption of this new guidance will change the way the Company reports receipts and expenses of the national advertising fund. Currently, the cash inflows and expenses related to the national advertising fund are not presented on the Company’s consolidated statement of operations. This guidance will require the Company to report all national advertising fund cash inflows as revenues and all national advertising fund expenses as expenses on the consolidated statement of operations. Under this guidance, the Company expects approximately $45,000 of incremental revenues and expenses in 2018 related to the national advertising fund.

The FASB issued ASU No. 2016-02, Leases, in February 2016. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public companies. Early application of the amendments in this update is permitted for all entities. The Company anticipates that adoption of this guidance will bring all current operating leases onto the statement of financial position as a right of use asset and related rent liability, and is currently evaluating the effect that implementation of this guidance will have on its consolidated statement of operations.

The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions, including the recognition of the tax effects resulting from the settlement of stock-based awards, and allowing companies to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company adopted ASU No. 2016-09 as of January 1, 2017 on a prospective basis, noting no material impact to the consolidated financial statements.

The FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company does not expect the adoption of the standard to have a material impact on its consolidated financial statements.

The FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, in January 2017. This guidance eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

The FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, in August 2017. The guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. This guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

Variable interest entities
Variable interest entities

(3) Variable interest entities

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

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

PF Melville

 

$

4,420

 

 

$

 

 

$

4,071

 

 

$

 

MMR

 

$

3,360

 

 

 

 

 

$

3,156

 

 

 

 

Total

 

$

7,780

 

 

$

 

 

$

7,227

 

 

$

 

 

The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements as well as financing provided by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $979 and $1,350 as of December 31, 2017 and 2016, respectively.

The amount of the Company’s maximum obligation represents a loss that the Company could incur from the variability in credit exposure without consideration of possible recoveries through insurance or other means. In addition, the amount bears no relation to the ultimate settlement anticipated to be incurred from the Company’s involvement with these entities, which is estimated at $0.

National advertising fund
National advertising fund

(4) National advertising fund

On July 26, 2011, the Company established Planet Fitness NAF, LLC (“NAF”) for the creation and development of marketing, advertising, and related programs and materials for all Planet Fitness stores located in the United States and Puerto Rico. On behalf of the NAF, the Company collects 2% of gross monthly membership billings from franchisees, in accordance with the provisions of the franchise agreements. The Company also contributes 2% of monthly membership billings from stores owned by the Company to the NAF. The use of amounts received by NAF is restricted to advertising, product development, public relations, merchandising, and administrative expenses and programs to increase sales and further enhance the public reputation of the Planet Fitness brand. The Company consolidates and reports all assets and liabilities held by the NAF within the consolidated financial statements. Amounts received or receivable by NAF are reported as restricted assets and restricted liabilities within current assets and current liabilities on the consolidated balance sheets. The Company provides administrative services to NAF and charges NAF a fee for providing those services. These services include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted $2,150, $1,700 and $1,340 for the years ended December 31, 2017, 2016 and 2015, respectively. The fees paid to the Company by NAF are included in the consolidated statements of operations as a reduction in general and administrative expense, where the expense incurred by the Company was initially recorded.

Property and equipment
Property and equipment

(5) Property and equipment

Property and equipment as of December 31, 2017 and 2016 consists of the following: 

 

 

December 31, 2017

 

 

December 31, 2016

 

Land

 

$

910

 

 

$

910

 

Equipment

 

 

32,403

 

 

 

27,283

 

Leasehold improvements

 

 

60,181

 

 

 

41,249

 

Buildings and improvements

 

 

5,107

 

 

 

5,107

 

Furniture & fixtures

 

 

9,790

 

 

 

3,708

 

Other

 

 

7,923

 

 

 

5,673

 

Construction in progress

 

 

3,241

 

 

 

8,295

 

 

 

 

119,555

 

 

 

92,225

 

Accumulated Depreciation

 

 

(36,228

)

 

 

(30,987

)

Total

 

$

83,327

 

 

$

61,238

 

 

The Company recorded depreciation expense of $13,886, $12,131, and $11,088 for the years ended December 31, 2017, 2016 and 2015, respectively.

Goodwill and intangible assets
Goodwill and intangible assets

(6) Goodwill and intangible assets

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

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

December 31, 2017

 

period (years)

 

amount

 

 

amortization

 

 

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

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average

 

Gross

 

 

 

 

 

 

 

 

 

 

 

amortization

 

carrying

 

 

Accumulated

 

 

Net carrying

 

December 31, 2016

 

period (years)

 

amount

 

 

amortization

 

 

Amount

 

Customer relationships

 

11.1

 

$

171,782

 

 

 

(72,655

)

 

$

99,127

 

Noncompete agreements

 

5.0

 

 

14,500

 

 

 

(12,027

)

 

 

2,473

 

Favorable leases

 

7.5

 

 

2,935

 

 

 

(1,643

)

 

 

1,292

 

Order backlog

 

0.4

 

 

3,400

 

 

 

(3,400

)

 

 

 

Reacquired franchise rights

 

5.8

 

 

8,950

 

 

 

(4,280

)

 

 

4,670

 

 

 

 

 

 

201,567

 

 

 

(94,005

)

 

 

107,562

 

Indefinite-lived intangible:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and brand names

 

N/A

 

 

146,300

 

 

 

 

 

 

146,300

 

Total intangible assets

 

 

 

$

347,867

 

 

$

(94,005

)

 

$

253,862

 

Goodwill

 

 

 

$

176,981

 

 

$

 

 

$

176,981

 

 

There were no changes in the carrying amount of goodwill during the years ended December 31, 2017 or 2016.

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

Amortization expense related to the intangible assets totaled $18,205, $19,757, and $21,543 for the years ended December 31, 2017, 2016 and 2015, respectively. Included within these total amortization expense amounts are $330, $386, and $473 related to amortization of favorable and unfavorable leases for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization of favorable and unfavorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense to be recognized in future years as of December 31, 2017 is as follows:

 

 

Amount

 

2018

 

$

14,583

 

2019

 

 

14,215

 

2020

 

 

12,517

 

2021

 

 

12,422

 

2022

 

 

12,419

 

Thereafter

 

 

23,201

 

Total

 

$

89,357

 

 

Long-term debt
Long-term debt

(7) Long-term debt

Long-term debt as of December 31, 2017 and 2016 consists of the following:  

 

 

December 31, 2017

 

 

December 31, 2016

 

Term loan B requires quarterly installments plus interest through the

   term of the loan, maturing March 31, 2021. Outstanding borrowings

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

   election of the borrower (4.59% at December 31, 2017 and 4.33% at

   December 31, 2016)

 

$

709,470

 

 

$

716,654

 

Revolving credit line, requires interest only payments through the

   term of the loan, maturing March 31, 2019. Outstanding borrowings

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

   election of the borrower (6.25% at December 31, 2017 and 6.0% at

   December 31, 2016)

 

 

 

 

 

 

Total debt, excluding deferred financing costs

 

 

709,470

 

 

 

716,654

 

Deferred financing costs, net of accumulated amortization

 

 

(5,709

)

 

 

(7,466

)

Total debt

 

 

703,761

 

 

 

709,188

 

Current portion of long-term debt and line of credit

 

 

7,185

 

 

 

7,185

 

Long-term debt, net of current portion

 

$

696,576

 

 

$

702,003

 

 

On March 31, 2014, the Company entered into a five-year $430,000 credit facility with a consortium of banks and lenders to refinance its existing indebtedness, as well as to provide funds for working capital, capital expenditures, acquisitions, a $173,900 dividend and general corporate purposes. The facility consisted of a $390,000 Term Loan and a $40,000 Revolving Credit Facility. On March 31, 2015, the Company amended this credit facility to increase the Term Loan to $510,000 to fund a cash dividend of $140,000.

On November 10, 2016, the Company amended the credit facility to increase the Revolving Credit Facility to $75,000, reduce the interest rate margin for term loan borrowings by 25 basis points, and increase the Term Loan to $718,450 primarily in order to fund a cash dividend and other equivalent payments totaling $271,011. In connection with the amendment, during the year ended December 31, 2016, the Company capitalized and deferred financing costs of $2,219, recorded expense of $3,001 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $606 included in interest expense on the consolidated statement of operations. The unused portion of the Revolving Credit Facility as of December 31, 2017 was $75,000. The Term Loan calls for quarterly principal installment payments of $1,796 through March 2021.

On May 26, 2017, the Company amended the credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, to LIBOR plus 300 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment to the credit agreement also reduced the interest rate margin for revolving loan borrowings by 25 basis points. In connection with the amendment to the credit agreement, in the year ended December 31, 2017, the Company capitalized deferred financing costs of $257, recorded expense of $1,021 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $79 included in interest expense on the consolidated statement of operations.

The credit facility requires the Company to meet certain financial covenants, which the Company was in compliance with as of December 31, 2017. The facility is secured by all of the Company’s assets, excluding the assets attributable to the consolidated VIEs (see Note 3).

Future annual principal payments of long-term debt as of December 31, 2017 are as follows:  

 

 

Amount

 

2018

 

$

7,185

 

2019

 

 

7,185

 

2020

 

 

7,185

 

2021

 

 

687,915

 

2022

 

 

-

 

Thereafter

 

 

-

 

Total

 

$

709,470

 

 

Derivative instruments and hedging activities
Derivative instruments and hedging activities

(8) Derivative instruments and hedging activities

The Company utilizes interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.

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

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

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

In order to manage the market risk arising from the outstanding term loans, the Company has entered into a series of interest rate caps. During the year ended December 31, 2017, the Company entered into two additional interest rate caps effective March 31, 2017 and terminating on March 31, 2019 with variable notional amounts in order to hedge one month LIBOR greater than 2.5%. As of December 31, 2017, the Company had interest rate cap agreements with notional amounts of $134,000 outstanding that were entered into in order to hedge three month LIBOR greater than 1.5%, and interest rate cap agreements with notional amounts of $221,633 that were entered into in order to hedge one month LIBOR greater than 2.5%.

Changes in the fair value of interest rate swaps and caps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings.

The interest rate cap balances of $340 and $306 were recorded within other assets in the consolidated balance sheets as of December 31, 2017 and 2016, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded an increase to the value of its interest rate caps of $1,143, net of tax of $280, for the year ended December 31, 2017, and reductions to the value of its interest rate caps of $78 net of tax of $35, and $1,388, net of tax of $29, during the years ended December 31, 2016, and 2015, respectively, within other comprehensive income (loss).

As of December 31, 2017, the Company expects to reclassify immaterial gains included in accumulated other comprehensive income (loss) into earnings during the next 12 months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivatives’ gains to earnings include quarterly payments on interest rate caps that are in the money.

Deferred revenue
Deferred revenue

(9) Deferred revenue

The summary set forth below represents the balances in deferred revenue as of December 31, 2017 and 2016:

 

 

December 31, 2017

 

 

December 31, 2016

 

Prepaid membership fees

 

$

5,198

 

 

$

5,034

 

Enrollment fees

 

 

1,014

 

 

 

1,240

 

Equipment discount

 

 

2,567

 

 

 

2,796

 

Annual membership fees

 

 

8,113

 

 

 

6,775

 

Area development and franchise fees

 

 

10,631

 

 

 

10,286

 

Total deferred revenue

 

 

27,523

 

 

 

26,131

 

Long-term portion of deferred revenue

 

 

8,440

 

 

 

8,351

 

Current portion of deferred revenue

 

$

19,083

 

 

$

17,780

 

 

Equipment deposits received in advance of delivery, placement and customer acceptance as of December 31, 2017 and 2016 were $6,498 and $2,170, respectively and are expected to be recognized as revenue in the next twelve months.

The Company wrote-off $107 and $1,754 of expiring equipment discounts in the years ended December 31, 2017 and 2016, respectively, that were originally recorded in connection with the March 31, 2014 acquisition of eight franchisee-owned stores. These amounts are included as a gain in other expense on the consolidated statement of operations.

Related party transactions
Related party transactions

(10) Related party transactions

Amounts due from related parties of $3,020 and $2,864 as of December 31, 2017 and 2016, respectively, primarily relate to currently due or potential reimbursements for certain taxes accrued or paid by the Company (see note 14).

Activity with franchisees considered to be related parties is summarized below.  

 

 

For the Year Ended

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Franchise revenue

 

$

2,130

 

 

$

1,760

 

 

$

1,232

 

Equipment revenue

 

 

3,464

 

 

 

1,338

 

 

 

1,686

 

Total revenue from related parties

 

$

5,594

 

 

$

3,098

 

 

$

2,918

 

 

Additionally, the Company had deferred ADA revenue from related parties of $389 and $422 as of December 31, 2017 and 2016, respectively.

The Company entered into a consulting agreement that continues through December 31, 2018 with a shareholder and former executive officer of the Company.

The Company paid rent and lease termination costs for its former headquarters to MMC Fox Run, LLC, which is currently owned by Chris Rondeau, our CEO, and Marc Grondahl, a shareholder and former executive officer and former member of our board of directors, in the amounts of $898, $406, and $412, for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company paid management fees to TSG totaling $0, $0, and $1,899 during the years ended December 31, 2017, 2016 and 2015, respectively. In connection with the IPO, the Company paid a $1,000 termination fee related to the termination of its management agreement with TSG, which is included in the management fees paid for the year ended December 31, 2015.

As of December 31, 2017 and 2016, the Company had $44,794 and $419,071, respectively, payable to related parties pursuant to tax benefit arrangements, see Note 14.

A member of the Company’s board of directors, who is also a franchisee, holds an approximate 10.5% ownership of a company that sells amenity tracking compliance software to Planet Fitness stores. As of December 31, 2017, the software was being utilized at 15 corporate-owned stores and approximately 300 franchise stores.

Stockholder's equity
Stockholder's equity

(11) Stockholder’s equity

The recapitalization transactions

The Company refers to the Merger, Reclassification and entry into the Exchange agreement, each as described below, as the “recapitalization transactions.” The Merger was effected pursuant to a merger agreement by and among the Company and Planet Fitness Holdings, L.P. (a predecessor entity to the Company) and the recapitalization transactions were effected pursuant to a recapitalization agreement by and among the Company, Pla-Fit Holdings, the Continuing LLC Owners and Direct TSG Investors.

Merger

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

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

Reclassification

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

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

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

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

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

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

Exchange agreement

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

IPO transactions

In connection with the completion of the IPO on August 11, 2015, in order to facilitate the disposition of equity interests in Pla-Fit Holdings held by Continuing LLC Owners affiliated with TSG, the Company used the net proceeds received to purchase issued and outstanding Holdings Units from these Continuing LLC Owners that they received in the Reclassification. In connection with the IPO, the Company purchased 10,491,055 issued and outstanding Holdings Units from these Continuing LLC Owners for an aggregate of $156,946. This is in addition to the 26,106,930 Holdings Units that the Company acquired in the Reclassification on a one-for-one basis in relation to the number of shares of Class A common stock issued to the Direct TSG Investors in the Merger. Accordingly, following the IPO, the Company held 36,597,985 Holdings Units, which is equal to the number of shares of Class A common stock that were issued to the Direct TSG Investors and investors in the IPO. The Direct TSG Investors, who did not receive Holdings Units in the Reclassification but received shares of Class A common stock in the Merger, sold 5,033,945 shares of Class A common stock in the IPO as selling stockholders. All expenses of the IPO, other than underwriter discounts and commissions, were borne by Pla-Fit Holdings or reimbursed by Pla-Fit Holdings to the Company and amounted to $7,697 for the year ended December 31, 2015. These amounts were recorded in selling, general, and administrative expense in the accompanying statements of operations and could not be capitalized and offset against the proceeds from the offering because the Company did not retain any of the proceeds from the IPO.

June 2016 Secondary Offering

As described in Note 1, on June 28, 2016 the Company completed the June Secondary Offering of 11,500,000 shares of our Class A common stock at a price of $16.50 per share. All of the shares sold in the offering were offered by Direct TSG Investors and the participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating Continuing LLC Owners. The shares sold in the offering consisted of (i) 3,608,840 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 7,891,160 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the June Secondary Offering. Simultaneously, and in connection with the exchange, 7,891,160 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the June Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 7,891,160 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

September 2016 Secondary Offering

As described in Note 1, on September 28, 2016, the Company completed the September Secondary Offering of 8,000,000 shares of our Class A common stock at a price of 19.62 per share. All of the shares sold in the offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating Continuing LLC Owners. The shares sold in the offering consisted of (i) 2,593,981 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 5,406,019 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the September Secondary Offering. Simultaneously, and in connection with the exchange, 5,406,019 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the September Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 5,406,019 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

November 2016 Secondary Offering

As described in Note 1, on November 22, 2016, the Company completed the November Secondary Offering of 15,000,000 shares of our Class A common stock at a price of $23.22 per share. All of the shares sold in the offering were offered by the Direct TSG Investors and participating Continuing LLC Owners. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating Continuing LLC Owners. The shares sold in the offering consisted of (i) 4,863,715 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,136,285 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the Continuing LLC Owners that participated in the November Secondary Offering. Simultaneously, and in connection with the exchange, 10,136,285 shares of Class B common stock were surrendered by the Continuing LLC Owners that participated in the November Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,136,285 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

March 2017 Secondary Offering

As described in Note 1, on March 14, 2017, the Company completed the March Secondary Offering of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

May 2017 Secondary Offering

As described in Note 1, on May 10, 2017, the Company completed the May Secondary Offering of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

Other Exchanges

In addition to the secondary offerings mentioned above, during the year ended December 31, 2017 and 2016, respectively, certain Continuing LLC Owners have exercised their exchange right and exchanged 4,762,943 and 1,271,146 Holdings Units for 4,762,943 1,271,146 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 4,762,943 and 1,271,146 shares of Class B common stock were surrendered by the Continuing LLC Owners that exercised their exchange right and cancelled in the years ended December 31, 2017 and 2016, respectively. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 4,762,943 and 1,271,146 Holdings Units, during the years ended December 31, 2017 and 2016, respectively, increasing its total ownership in Pla-Fit Holdings. Future exchanges of Holdings Units by the Continuing LLC Owners will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital on our consolidated balance sheets.

As a result of the recapitalization transactions, the IPO, completion of our secondary offerings, and other exchanges and equity activity, as of December 31, 2017:

the investors in the IPO, the Company’s secondary offerings, other exchanges and equity activity collectively owned 87,188,160 shares of our Class A common stock, representing 88.6% of the voting power in the Company and, through the Company, 88.6% of the economic interest in Pla-Fit Holdings;

the Continuing LLC Owners collectively hold 11,192,740 Holdings Units, representing 11.4% of the economic interest in Pla-Fit Holdings and 11,192,740 shares of our Class B common stock, representing 11.4% of the voting power in the Company; and

the Direct TSG Investors own zero shares of our Class A common stock, representing 0% of the voting power in the Company and, through the Company, 0% of the economic interest in Pla-Fit Holdings.

Dividends

The Company did not declare or pay any dividends during the year ended December 31, 2017. Dividends declared and paid to holders of the Company’s Class A common stock during the year ended December 31, 2016 were $169,282, or $2.78 per share of Class A common stock. The dividend was declared on November 10, 2016 and paid on December 5, 2016 to Class A common stock holders of record as of November 22, 2016. The Company also paid cash dividend equivalents of $101,729, or $2.78 per share, to holders of Holdings Units on December 5, 2016 and accrued $3,899 of dividend equivalents for future payment to holders of unvested share awards to be paid upon vesting of the related awards.

Equity-based Compensation
Equity-based Compensation

(12) Equity-based compensation

2013 Equity Incentive Plan

In 2013, the Company’s Board of Directors adopted the 2013 Equity Incentive Plan (the “2013 Plan”). Under the 2013 Plan, the Company granted awards in the form of Class M Units to certain employees and directors of the Company and its subsidiaries. The Class M Units received distributions (other than tax distributions) only upon a liquidity event, as defined, that exceeded a threshold equivalent to the fair value of the Company, as determined by the Company’s Board of Directors, at the grant date. Eighty percent of the awards vest over five years of continuous employment or service while the other twenty percent only vest in the event of an initial public offering of the Company’s common stock or that of its parent or one of its subsidiaries, subject to the holder of the Class M Units remaining employed or providing services on the date of such initial public offering. All awards include a repurchase option at the election of the Company for the vested portion upon termination of employment or service, and have a ten year contractual term. These awards are accounted for as equity at their fair value as of the grant date. In connection with the IPO and related recapitalization transactions as described in Note 1, all of the outstanding Class M Units were converted into Holdings Units and Class B common shares of Planet Fitness, Inc. in accordance with the terms of the awards. The Company’s IPO constituted a qualifying event under the terms of the awards and as a result 4,238,338 Holdings Units and corresponding Class B Common shares were issued to the existing Class M Unit holders with a weighted-average grant date fair value of $1.52 per share. The Company recorded $152 and $784 of compensation expense in the years ended December 31, 2017 and 2016, respectively, related to these awards.

The fair value of each award was estimated on the date of grant using a Monte Carlo simulation model.  

During the year ended December 31, 2016, the Company modified the vesting terms of 22,527 outstanding Holdings Units such that those units were fully vested immediately. In connection with the modification, the Company recorded $337 of compensation expense in the year ended December 31, 2016. During the year ended December 31, 2015, the Company modified the vesting terms of 10.737 outstanding Class M Units such that those units were fully vested and eligible to receive distributions following a liquidity event.

A summary of unvested Holdings Unit activity is presented below:

 

 

Holdings Units

 

 

Weighted average grant date fair value

 

 

Weighted average remaining contractual term (years)

 

 

Aggregate intrinsic value

 

Unvested outstanding at January 1, 2017

 

 

1,025,016

 

 

$

1.52

 

 

 

 

 

 

 

 

 

Units granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units forfeited

 

 

(150,181

)

 

$

1.52

 

 

 

 

 

 

 

 

 

Units vested

 

 

(604,614

)

 

$

1.52

 

 

 

 

 

 

 

 

 

Unvested outstanding at December 31, 2017

 

 

270,221

 

 

$

1.52

 

 

 

0.7

 

 

$

9,358

 

The amount of total unrecognized compensation cost related to all awards under this plan was $53 as of December 31, 2017, which is expected to be recognized over a weighted-average period of 0.7 years.

2015 Omnibus Incentive Plan

Stock Options

In August 2015, the Company adopted the 2015 Omnibus Incentive Plan (the "2015 Plan") under which the Company may grant options and other equity-based awards to purchase up to 7,896,800 shares to employees, directors and officers. All stock options awarded vest annually, on a tranche by tranche basis, over a period of four years with a maximum contractual term of 10 years.

The fair value of stock option awards granted were determined on the grant date using the Black-Scholes valuation model based on the following assumptions:

 

 

Year ended December 31,

 

 

 

2017

 

 

2016

 

Expected term (years) (1)

 

 

6.25

 

 

 

6.25

 

Expected volatility (2)

 

28.6% - 32.9%

 

 

33.2% - 34.4%

 

Risk-free interest rate (3)

 

1.86% - 2.10%

 

 

1.31% - 1.76%

 

Dividend yield (4)

 

 

 

 

 

 

 

(1)

Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.

(2)

Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term.

(3)

The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.

(4)

Based on an assumed a dividend yield of zero at the time of grant.

A summary of stock option activity for the year ended December 31, 2017: 

 

 

Stock Options

 

 

Weighted average

exercise price

 

 

Weighted average remaining contractual term (years)

 

 

Aggregate intrinsic value

 

Outstanding at January 1, 2017

 

 

404,470

 

 

$

17.49

 

 

 

 

 

 

 

 

 

Granted

 

 

617,904

 

 

$

20.97

 

 

 

 

 

 

 

 

 

Exercised

 

 

(27,191

)

 

$

17.63

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(76,977

)

 

$

20.32

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

918,206

 

 

$

19.59

 

 

 

8.7

 

 

$

13,811

 

Vested or expected to vest at December 31, 2017