Edgar Filing: Planet Fitness, Inc.

plnt-10q_20160630.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 June 30, 2016

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 August 4, 2016 there were 44,489,145 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 54,079,804 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	22
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	38
ITEM 4.	Controls and Procedures	39
	PART II – OTHER INFORMATION	40
ITEM 1.	Legal Proceedings	40
ITEM 1A.	Risk Factors	40
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
ITEM 3.	Defaults Upon Senior Securities	40
ITEM 4.	Mine Safety Disclosures	40
ITEM 5.	Other Information	40
ITEM 6.	Exhibits	40
	Signatures	41

Cautionary Note Regarding Forward-Looking Statements

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

future financial position;

business strategy;

budgets, projected costs and plans;

future industry growth;

financing sources;

the impact of litigation, government inquiries and investigations; and

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

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

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

risks relating to damage to our brand and reputation;

our ability to successfully implement our growth strategy;

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

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

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

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

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

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

the other factors identified under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission.

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

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)

	June 30,			December 31,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	55,664		$	31,430
Accounts receivable, net of allowance for bad debts of $643 and $629 at June 30, 2016 and December 31, 2015, respectively		11,575			19,079
Due from related parties		973			4,940
Inventory		893			4,557
Restricted assets – national advertising fund		1,656			1,962
Other current assets		17,626			10,977
Total current assets		88,387			72,945
Property and equipment, net of accumulated depreciation of $26,285 as of June 30, 2016 and $23,525 as of December 31, 2015		54,931			56,139
Intangible assets, net		263,739			273,619
Goodwill		176,981			176,981
Deferred income taxes		194,240			117,358
Other assets, net		1,133			2,135
Total assets	$	779,411		$	699,177
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt	$	5,100		$	5,100
Accounts payable		11,992			23,950
Accrued expenses		9,100			13,667
Due to related parties		3,966			—
Equipment deposits		4,519			5,587
Deferred revenue, current		20,619			14,717
Payable to related parties pursuant to tax benefit arrangements, current		7,389			3,019
Other current liabilities		313			212
Total current liabilities		62,998			66,252
Long-term debt, net of current maturities		477,969			479,779
Deferred rent, net of current portion		4,799			4,554
Deferred revenue, net of current portion		8,456			12,016
Deferred tax liabilities		1,167			—
Payable to related parties pursuant to tax benefit arrangements, net of current portion		204,947			137,172
Other liabilities		484			484
Total noncurrent liabilities		697,822			634,005
Commitments and contingencies (note 11)
Stockholders' equity (deficit):
Class A common stock, $.0001 par value - 300,000 shares authorized, 44,489 shares issued and outstanding as of June 30, 2016 and 36,598 shares issued and outstanding as of December 31, 2015		4			4
Class B common stock, $.0001 par value - 100,000 shares authorized, 54,080 shares issued and outstanding as of June 30, 2016, and 62,112 shares issued and outstanding as of December 31, 2015		6			6
Accumulated other comprehensive loss		(1,067	)		(1,710	)
Additional paid in capital		7,981			352
Accumulated deficit		(7,673	)		(14,032	)
Total stockholders' deficit attributable to Planet Fitness Inc.		(749	)		(15,380	)
Non-controlling interests		19,340			14,300
Total stockholders' equity (deficit)		18,591			(1,080	)
Total liabilities and stockholders' equity (deficit)	$	779,411		$	699,177

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 June 30,						For the six months ended June 30,
	2016			2015			2016			2015
Revenue:
Franchise	$	25,506		$	18,691		$	46,997		$	35,658
Commission income		3,973			3,188			10,159			7,978
Corporate-owned stores		26,383			24,975			52,080			48,521
Equipment		35,610			32,099			65,579			63,718
Total revenue		91,472			78,953			174,815			155,875
Operating costs and expenses:
Cost of revenue		27,801			25,300			51,440			51,246
Store operations		15,760			14,708			30,492			29,049
Selling, general and administrative		12,381			12,354			24,226			26,492
Depreciation and amortization		7,678			7,983			15,382			16,184
Other loss (gain)		21			(61	)		(165	)		(67	)
Total operating costs and expenses		63,641			60,284			121,375			122,904
Income from operations		27,831			18,669			53,440			32,971
Other expense, net:
Interest expense, net		(6,161	)		(6,560	)		(12,528	)		(11,316	)
Other income (expense)		(160	)		(76	)		234			(812	)
Total other expense, net		(6,321	)		(6,636	)		(12,294	)		(12,128	)
Income before income taxes		21,510			12,033			41,146			20,843
Provision for income taxes		3,419			419			6,709			691
Net income		18,091			11,614			34,437			20,152
Less net income attributable to non-controlling interests		13,959			113			26,936			226
Net income attributable to Planet Fitness, Inc.	$	4,132		$	11,501		$	7,501		$	19,926

Net income per share of Class A common stock⁽¹⁾:
Basic	$	0.11					$	0.20
Diluted	$	0.11					$	0.20
Weighted-average shares of Class A common stock outstanding⁽¹⁾:
Basic		36,771						36,685
Diluted		36,773						36,686

(1)	Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period following the recapitalization transactions and IPO (see Note 9).

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of comprehensive income

(Unaudited)

(Amounts in thousands)

	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
Net income including non-controlling interests	$	18,091		$	11,614		$	34,437		$	20,152
Other comprehensive income (loss), net:
Unrealized loss on interest rate caps, net of tax		(79	)		(161	)		(662	)		(940	)
Foreign currency translation adjustments		(3	)		(54	)		(96	)		47
Total other comprehensive loss, net		(82	)		(215	)		(758	)		(893	)
Total comprehensive income including non-controlling interests		18,009			11,399			33,679			19,259
Less: total comprehensive income attributable to non-controlling interests		13,899			113			26,392			226
Total comprehensive income attributable to Planet Fitness, Inc.	$	4,110		$	11,286		$	7,287		$	19,033

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 six months ended June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	34,437		$	20,152
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,382			16,184
Amortization of deferred financing costs		741			686
Amortization of favorable leases and asset retirement obligations		198			235
Amortization of interest rate caps		221			—
Deferred tax expense		6,703			21
Provision for bad debts		13			546
Gain on disposal of property and equipment		(165	)		(67	)
Equity-based compensation		960			—
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable		7,785			7,352
Due to and due from related parties		7,531			1,958
Inventory		3,664			2,245
Other assets and other current assets		(3,074	)		(587	)
Accounts payable and accrued expenses		(13,931	)		(13,164	)
Other liabilities and other current liabilities		4			42
Income taxes		(5,822	)		431
Payable to related parties pursuant to tax benefit arrangements		(6,007	)		—
Equipment deposits		(1,068	)		(3,870	)
Deferred revenue		2,232			3,230
Deferred rent		282			1,242
Net cash provided by operating activities		50,086			36,636
Cash flows from investing activities:
Additions to property and equipment		(4,487	)		(8,538	)
Proceeds from sale of property and equipment		142			67
Net cash used in investing activities		(4,345	)		(8,471	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			120,000
Principal payments on capital lease obligations		(25	)		(258	)
Repayment of long-term debt		(2,550	)		(2,250	)
Payment of deferred financing and other debt-related costs		—			(1,698	)
Repurchase and retirement of Class B common stock		(1,583	)		—
Distributions to Continuing LLC Members		(17,472	)		(155,088	)
Net cash used in financing activities		(21,630	)		(39,294	)
Effects of exchange rate changes on cash and cash equivalents		123			(14	)
Net increase (decrease) in cash and cash equivalents		24,234			(11,143	)
Cash and cash equivalents, beginning of period		31,430			43,291
Cash and cash equivalents, end of period	$	55,664		$	32,148

Supplemental cash flow information:
Net cash paid for income taxes	$	5,971		$	288
Cash paid for interest	$	11,479		$	10,826
Non-cash investing activities:
Non-cash additions to property and equipment	$	226		$	—

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statement of changes in equity (deficit)

(Unaudited)

(Amounts in thousands)

	Class A common stock				Class B common stock					Accumulated other comprehensive loss			Additional paid- in capital			Accumulated deficit			Non-controlling interests			Total equity (deficit)
	Shares		Amount		Shares			Amount
Balance at December 31, 2015		36,598	$	4		62,112		$	6	$	(1,710	)	$	352		$	(14,032	)	$	14,300		$	(1,080	)
Net income		—		—		—			—		—			—			7,501			26,936			34,437
Equity-based compensation expense		—		—		—			—		—			960			—			—			960
Repurchase and retirement of Class B common stock		—		—		(141	)		—		—			(441	)		(1,142	)		—			(1,583	)
Exchange of Class B common stock		7,891		—		(7,891	)		—		857			3,023			—			(3,880	)		—
Tax benefit arrangement liability and deferred taxes arising from the secondary offering		—		—		—			—		—			4,087			—			—			4,087
Distributions paid to members of Pla-Fit Holdings		—		—		—			—		—			—			—			(17,472	)		(17,472	)
Other comprehensive loss		—		—		—			—		(214	)		—			—			(544	)		(758	)
Balance at June 30, 2016		44,489	$	4		54,080		$	6	$	(1,067	)	$	7,981		$	(7,673	)	$	19,340		$	18,591

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 8.6 million members and 1,206 owned and franchised locations (referred to as stores) in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of June 30, 2016.

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

Licensing and selling franchises under the Planet Fitness trade name.

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

Selling fitness-related equipment to franchisee-owned stores.

The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) which was completed on August 11, 2015 and related transactions in order to carry on the business of Pla-Fit Holdings, LLC and its subsidiaries (“Pla-Fit Holdings”). As of August 5, 2015, in connection with the recapitalization transactions that occurred prior to the IPO, the Company became the sole managing member and holder of 100% of the voting power of Pla-Fit Holdings. Pla-Fit Holdings owns 100% of Planet Intermediate, LLC which has no operations but is the 100% owner of Planet Fitness Holdings, LLC, a franchisor and operator of fitness centers. With respect to the Company, Pla-Fit Holdings and Planet Intermediate, LLC, each entity owns nothing other than the respective entity below it in the corporate structure and each entity has no other material operations.

Subsequent to the IPO and the related recapitalization transactions, the Company is a holding company whose principal asset is a controlling equity interest in Pla-Fit Holdings. As the sole managing member of Pla-Fit Holdings, the Company operates and controls all of the business and affairs of Pla-Fit Holdings, and through Pla-Fit Holdings, conducts its business. As a result, the Company consolidates Pla-Fit Holdings’ financial results and reports a non-controlling interest related to the portion of limited liability company units of Pla-Fit Holdings, LLC (“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.

In June 2016, the Company completed a 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 offering were offered by existing holders of Holdings Units (“Continuing LLC Owners”) and certain holders of Class A common stock (“Direct TSG Investors”), together referred to as the “Selling Stockholders.” The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Selling Stockholders. 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 offering. Simultaneously, and in connection with the exchange, 7,891,160 shares of Class B common stock were surrendered by the Continuing LLC Owners 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 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 secondary offering and as of June 30, 2016, 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. As future exchanges of Holdings Units occur, Planet Fitness Inc.’s economic interest in Pla-Fit Holdings will increase.

(2) Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

(consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements as of and for the three and six months ended June 30, 2016 and 2015 are unaudited. The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Annual Report”) filed with the SEC on March 4, 2016. 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 variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include franchise entities and certain other entities. The Company is not deemed to be the primary beneficiary for Planet Fitness franchise entities. Therefore, these entities are not consolidated.

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

(b) Use of estimates

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

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.

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 June 30, 2016 and December 31, 2015:

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

June 30,

markets

inputs

2016

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

134

—

134

—

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

December 31,

markets

inputs

2015

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

1,147

—

1,147

—

(d) Recent accounting pronouncements

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 for public companies. In March 2016, the FASB issued ASU 2016-08, which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. This guidance is to be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

The FASB issued ASU No. 2015-02, Income Statement—Consolidation, in February 2015. This guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the guidance 1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, 2) eliminates the presumption that a general partner should consolidate a limited partnership, 3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and 4) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU No. 2015-02 as of January 1, 2016, noting no material impact to the consolidated financial statements.

The FASB issued ASU No. 2015-05: Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, in April 2015. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. The guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU No. 2015-05 as of January 1, 2016 on a prospective basis, noting no material impact to the consolidated financial statements.

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 is currently evaluating the effect that implementation of this guidance will have on its consolidated financial statements.

The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. This guidance will be effective for fiscal years beginning after December 15, 2016,

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

including interim periods within that year. The Company is currently evaluating the effect of the standard on its consolidated financial statements.

(3) Variable interest entities

The carrying values of VIEs included in the consolidated financial statements as of June 30, 2016 and December 31, 2015 are as follows:

	June 30, 2016				December 31, 2015
	Assets		Liabilities		Assets		Liabilities
PF Melville	$	3,897	$	—	$	3,728	$	—
MMR		3,055		—		2,953		—
Total	$	6,952	$	—	$	6,681	$	—

The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements as well as financing provided by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $1,600 and $1,871 as of June 30, 2016 and December 31, 2015, respectively.

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

(4) Goodwill and intangible assets

A summary of goodwill and intangible assets at June 30, 2016 and December 31, 2015 is as follows:

	Weighted
	average	Gross
	amortization	carrying		Accumulated			Net carrying
June 30, 2016	period (years)	amount		amortization			Amount
Customer relationships	11.1	$	171,782		(65,198	)	$	106,584
Noncompete agreements	5.0		14,500		(10,577	)		3,923
Favorable leases	7.5		2,935		(1,451	)		1,484
Order backlog	0.4		3,400		(3,400	)		—
Reacquired franchise rights	5.8		8,950		(3,502	)		5,448
			201,567		(84,128	)		117,439
Indefinite-lived intangible:
Trade and brand names	N/A		146,300