Edgar Filing: Planet Fitness, Inc.

plnt-10q_20150930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

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

For the transition period from ___________to ______________

Commission file number: 001-37534

PLANET FITNESS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

38-3942097

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

26 Fox Run Road, Newington, NH 03801

(Address of Principal Executive Offices and Zip Code)

(603) 750-0001

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	o

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

As of November 6, 2015 there were 36,597,985 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 62,111,755 shares of the Registrant’s Class B Common Stock, par value $0.0001 per share, outstanding.

PLANET FITNESS, INC.

TABLE OF CONTENTS

		Page

	Cautionary Note Regarding Forward-Looking Statements	3
	PART I – FINANCIAL INFORMATION	4
ITEM 1.	Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	40
ITEM 4.	Controls and Procedures	40
	PART II – OTHER INFORMATION	42
ITEM 1.	Legal Proceedings	42
ITEM 1A.	Risk Factors	42
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 3.	Defaults Upon Senior Securities	42
ITEM 4.	Mine Safety Disclosures	42
ITEM 5.	Other Information	42
ITEM 6.	Exhibits	43
	Signatures	44

Cautionary Note Regarding Forward-Looking Statements

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

future financial position;

business strategy;

budgets, projected costs and plans;

future industry growth;

financing sources;

the impact of litigation, government inquiries and investigations; and

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

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

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

risks relating to damage to our brand and reputation;

our ability to successfully implement our growth strategy;

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

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

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

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

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

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

the other factors identified under the heading “Risk Factors” in our Registration Statement on Form S-1 (File No. 333-205141) and other filings we make with the Securities and Exchange Commission.

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

PART I-FINANCIAL INFORMATION

ITEM 1. Financial Statements

Planet Fitness, Inc. and subsidiaries

Condensed consolidated balance sheets

(Unaudited)

(Amounts in thousands, except per share amounts)

	September 30,			December 31,
	2015			2014
Assets
Current assets:
Cash and cash equivalents	$	28,461		$	43,291
Accounts receivable, net of allowance for bad debts of $946 and $399 at September 30, 2015 and December 31, 2014, respectively		9,890			19,275
Due from related parties		4,708			1,141
Inventory		2,775			3,012
Restricted assets – NAF (note 5)		5,018			—
Other current assets		8,949			8,599
Total current assets		59,801			75,318
Property and equipment, net		54,335			49,579
Intangible assets, net		278,986			295,162
Goodwill		176,981			176,981
Deferred income taxes		120,792			—
Other assets, net		10,248			12,236
Total assets	$	701,143		$	609,276
Liabilities and stockholders' deficit/members' equity
Current liabilities:
Current maturities of long-term debt	$	5,100		$	3,900
Accounts payable		14,695			26,738
Accrued expenses		8,358			8,494
Current maturities of obligations under capital leases		70			376
Equipment deposits		7,498			6,675
Restricted liabilities – NAF (note 5)		5,018			—
Deferred revenue, current		12,362			14,549
Payable to related parties pursuant to tax benefit arrangements, current		3,022			—
Taxes payable		4,203			—
Other current liabilities		682			153
Total current liabilities		61,008			60,885
Long-term debt, net of current maturities		498,450			383,175
Obligations under capital leases, net of current portion		9			45
Deferred rent, net of current portion		4,373			3,012
Deferred revenue, net of current portion		12,033			9,330
Deferred tax liabilities – non current		—			606
Payable to related parties pursuant to tax benefit arrangements, net of current portion		138,989			—
Other liabilities		483			474
Total noncurrent liabilities		654,337			396,642
Commitments and contingencies (note 16)
Stockholders' deficit/members' equity:
Members’ equity		—			146,156
Class A common stock, $.0001 par value - 300,000 shares authorized, 36,598 shares issued and outstanding as of September 30, 2015		4			—
Class B common stock, $.0001 par value - 100,000 shares authorized, 62,112 shares issued and outstanding as of September 30, 2015		6			—
Accumulated other comprehensive income (loss)		(1,888	)		(636	)
Additional paid in capital		122			—
Accumulated deficit		(17,376	)		—
Total stockholders' deficit attributable to Planet Fitness Inc./members' equity		(19,132	)		145,520
Non-controlling interests		4,930			6,229
Total stockholders' deficit/members' equity		(14,202	)		151,749
Total liabilities and stockholders' deficit/members' equity	$	701,143		$	609,276

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of operations

(Unaudited)

(Amounts in thousands, except per share amounts)

	For the three months ended September 30,						For the nine months ended September 30,
	2015			2014			2015			2014
Revenue:
Franchise	$	16,148		$	13,009		$	51,806		$	40,834
Commission income		3,646			2,771			11,624			9,873
Corporate-owned stores		25,153			22,692			73,674			62,823
Equipment		23,870			24,995			87,588			70,228
Total revenue		68,817			63,467			224,692			183,758
Operating costs and expenses:
Cost of revenue		18,858			20,163			70,104			57,837
Store operations		14,305			12,494			43,354			35,818
Selling, general and administrative		17,348			8,582			43,840			23,296
Depreciation and amortization		7,976			8,542			24,160			23,585
Other (gain) loss		(9	)		(269	)		(76	)		1,024
Total operating costs and expenses		58,478			49,512			181,382			141,560
Income from operations		10,339			13,955			43,310			42,198
Other expense, net:
Interest expense, net		(6,556	)		(5,097	)		(17,872	)		(16,705	)
Other expense		(1,815	)		(447	)		(2,627	)		(1,089	)
Total other expense, net		(8,371	)		(5,544	)		(20,499	)		(17,794	)
Income before income taxes		1,968			8,411			22,811			24,404
Provision for income taxes		1,230			108			1,921			892
Net income		738			8,303			20,890			23,512
Less net income attributable to non-controlling interests		4,631			176			4,857			494
Net income (loss) attributable to Planet Fitness, Inc.	$	(3,893	)	$	8,127		$	16,033		$	23,018

Net income (loss) per share of Class A common stock⁽¹⁾:
Basic	$	0.05					$	0.05
Diluted	$	0.04					$	0.04
Weighted-average shares of Class A common stock outstanding⁽¹⁾:
Basic		35,661						35,661
Diluted		98,710						98,710

(1)	Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from August 6, 2015 through September 30, 2015, the period following the recapitalization transactions and IPO (see Note 14).

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of comprehensive income (loss)

(Unaudited)

(Amounts in thousands)

	For the three months ended September 30,						For the nine months ended September 30,
	2015			2014			2015			2014
Net income including non-controlling interests	$	738		$	8,303		$	20,890		$	23,512
Other comprehensive loss, net:
Losses on interest rate swaps		—			—			—			(92	)
Unrealized loss on interest rate caps, net of tax		(557	)		(29	)		(1,497	)		(29	)
Foreign currency translation adjustments		198			5			245			5
Total other comprehensive loss, net		(359	)		(24	)		(1,252	)		(116	)
Total comprehensive income including non-controlling interests		379			8,279			19,638			23,396
Less: total comprehensive income attributable to non-controlling interests		4,423			176			4,649			494
Total comprehensive income (loss) attributable to Planet Fitness, Inc.	$	(4,044	)	$	8,103		$	14,989		$	22,902

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of cash flows

(Unaudited)

(Amounts in thousands)

	For the nine months ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	20,890		$	23,512
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,160			23,585
Amortization of deferred financing costs		1,070			1,006
Amortization of favorable leases and asset retirement obligations		380			251
Deferred tax (benefit) expense		(141	)		2
Provision for bad debts		547			74
Gain on disposal of property and equipment		(76	)		(269	)
Unrealized gain on interest rate swaps		—			29
Loss on extinguishment of debt		—			4,697
Equity-based compensation		4,647			—
Changes in operating assets and liabilities, excluding effects of acquisitions:
State income taxes		969			(2,243	)
Accounts receivable		8,830			4,187
Notes receivable and due from related parties		4,532			1,280
Inventory		237			471
Other assets and other current assets		(563	)		(197	)
Accounts payable and accrued expenses		(11,745	)		(10,573	)
Other liabilities and other current liabilities		57			(241	)
Equipment deposits		823			3,782
Deferred revenue		626			(1,300	)
Deferred rent		1,330			1,022
Net cash provided by operating activities		56,573			49,075
Cash flows from investing activities:
Additions to property and equipment		(13,830	)		(7,667	)
Acquisition of franchises		—			(38,638	)
Proceeds from sale of property and equipment		76			274
Net cash used in investing activities		(13,754	)		(46,031	)
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		120,000			390,000
Principal payments on capital lease obligations		(343	)		(997	)
Repayment of long-term debt		(3,525	)		(184,825	)
Payment of deferred financing and other debt-related costs		(1,698	)		(7,785	)
Premiums paid for interest rate caps		(880	)		(2,373	)
Distributions to variable interest entities		—			(458	)
Distributions to Continuing LLC Members		(171,101	)		(193,981	)
Net cash used in financing activities		(57,547	)		(419	)
Effects of exchange rate changes on cash and cash equivalents		(102	)		4
Net (decrease) increase in cash and cash equivalents		(14,830	)		2,629
Cash and cash equivalents, beginning of period		43,291			31,267
Cash and cash equivalents, end of period	$	28,461		$	33,896

Supplemental cash flow information:
Net cash paid for income taxes	$	1,105		$	1,824
Cash paid for interest	$	17,063		$	14,061
Non-cash investing activities:
Non-cash consideration for acquisition of franchises	$	—		$	3,000
Non-cash additions to property and equipment	$	709		$	—

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statement of changes in equity

(Unaudited)

(Amounts in thousands)

				Class A common stock				Class B common stock
	Members' equity			Shares		Amount		Shares			Amount			Accumulated other comprehensive loss			Additional paid- in capital		Accumulated deficit			Non-controlling interests			Total equity
Balance at December 31, 2014	$	146,156			—	$	—		—		$	—		$	(636	)	$	—	$	—		$	6,229		$	151,749
Distributions to members prior to the recapitalization transactions		(164,693	)		—		—		—			—			—			—		—			—			(164,693	)
Net income prior to the recapitalization transactions		14,412			—		—		—			—			—			—		—			264			14,676
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	)		26,107		3		72,603			7			—			—		138			252			—
Issuance of Class A common stock in IPO, net of commissions		—			10,491		1		(10,491	)		(1	)		—			—		—			—			—
Net income subsequent to the recapitalization transactions		—			—		—		—			—			—			—		1,621			4,593			6,214
Tax benefit arrangement liability and deferred taxes arising from the recapitalization transactions and IPO		—			—		—		—			—			—			—		(19,135	)		—			(19,135	)
Equity-based compensation expense subsequent to the recapitalization transactions		—			—		—		—			—			—			122		—			—			122
Distributions paid to non- controlling unit holders		—			—		—		—			—			—			—		—			(6,408	)		(6,408	)
Other comprehensive loss subsequent to the recapitalization transactions		—			—		—		—			—			(198	)		—		—			—			(198	)
Balance at September 30, 2015	$	—			36,598	$	4		62,112		$	6		$	(1,888	)	$	122	$	(17,376	)	$	4,930		$	(14,202	)

See accompanying notes to condensed consolidated financial statements

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

(1) Business organization

Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 7.1 million members and 1,040 owned and franchised locations (referred to as stores) in 47 states, the District of Columbia, Puerto Rico and Canada as of September 30, 2015.

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

Licensing and selling franchises under the Planet Fitness trade name.

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

Selling fitness-related equipment to franchisee-owned stores.

The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) 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 and 37.1% of the economic interest. Pla-Fit Holdings owns 100% of Planet Intermediate, LLC which has no operations but is the 100% owner of Planet Fitness Holdings, LLC, a franchisor and operator of fitness centers. With respect to the Company, Pla-Fit Holdings and Planet Intermediate, LLC, each entity owns nothing other than the respective entity below it in the corporate structure and each entity has no other material operations, assets, or liabilities.

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.

Recapitalization Transactions

In connection with the IPO, the Company and Pla-Fit Holdings completed a series of recapitalization transactions on August 5, 2015 which are described below (also see Note 12):

Pla-Fit Holdings amended and restated the limited liability company agreement to, among other things, (i) provide for a new single class of limited liability company units, Holdings Units, (ii) exchange all membership interests of the then-existing holders of Pla-Fit Holdings membership interests for Holdings Units and (iii) appoint the Company as the sole managing member of Pla-Fit Holdings.

The Company issued 72,602,810 shares of Class B common stock with voting rights but no economic rights to Pla-Fit Holdings’ existing owners on a one-to-one basis for each Holdings Unit owned.

The Company merged with Planet Fitness Holdings L.P., a predecessor entity to the Company that held indirect interests in Pla-Fit Holdings, for which the Company issued 26,106,930 shares of Class A common stock to the holders of interests in Planet Fitness Holdings L.P. (the “Direct TSG Investors”).

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. As of September 30, 2015, the Company owned 100% of the voting interest, and approximately 37.1% of the economic interest of Pla-Fit Holdings. As future exchanges of Holdings Units occur, the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. will increase.

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

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.

Variable Interest Entities

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 variable interest entities (“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.

(2) Summary of significant accounting policies

(a) Basis of presentation and consolidation

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

The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2015 and 2014 are unaudited. The condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2014 and related notes included in our final prospectus for the Company’s IPO dated August 6, 2015 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), with the SEC (the “Prospectus”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

As discussed in Note 1, as a result of the recapitalization transactions, Planet Fitness, Inc. consolidates Pla-Fit Holdings and Pla-Fit Holdings is considered to be the predecessor to Planet Fitness, Inc. for accounting and reporting purposes. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for 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 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. See Note 3 for further information related to the Company’s VIEs.

(b) Use of estimates

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

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

The table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

September 30,

markets

inputs

2015

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

1,010

—

1,010

—

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

December 31,

markets

inputs