Edgar Filing: Planet Fitness, Inc.

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Accelerated filer

Non-accelerated filer

☐ (Do not check if a small reporting company)

Smaller reporting company

Emerging growth company

plnt-10q_20170331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

☐	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 ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

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

As of April 26, 2017 there were 72,552,901 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 25,795,641 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	21
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	33
ITEM 4.	Controls and Procedures	34
	PART II – OTHER INFORMATION	35
ITEM 1.	Legal Proceedings	35
ITEM 1A.	Risk Factors	35
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM 3.	Defaults Upon Senior Securities	35
ITEM 4.	Mine Safety Disclosures	35
ITEM 5.	Other Information	35
ITEM 6.	Exhibits	35
	Signatures	36

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, 2016 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)

	March 31,			December 31,
	2017			2016
Assets
Current assets:
Cash and cash equivalents	$	60,236		$	40,393
Accounts receivable, net of allowance for bad debts of $118 and $687 at March 31, 2017 and December 31, 2016, respectively		14,988			26,873
Due from related parties		2,914			2,864
Inventory		1,331			1,802
Restricted assets – national advertising fund		2,502			3,074
Other receivables		9,715			7,935
Other current assets		7,905			8,284
Total current assets		99,591			91,225
Property and equipment, net of accumulated depreciation of $33,794 as of March 31, 2017 and $30,987 as of December 31, 2016		61,104			61,238
Intangible assets, net		249,148			253,862
Goodwill		176,981			176,981
Deferred income taxes		561,342			410,407
Other assets, net		8,186			7,729
Total assets	$	1,156,352		$	1,001,442
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt	$	7,185		$	7,185
Accounts payable		13,278			28,507
Accrued expenses		10,263			19,190
Equipment deposits		10,739			2,170
Deferred revenue, current		18,226			17,780
Payable to related parties pursuant to tax benefit arrangements, current		11,283			8,072
Other current liabilities		536			369
Total current liabilities		71,510			83,273
Long-term debt, net of current maturities		700,672			702,003
Deferred rent, net of current portion		5,213			5,108
Deferred revenue, net of current portion		8,445			8,351
Deferred tax liabilities		1,052			1,238
Payable to related parties pursuant to tax benefit arrangements, net of current portion		552,213			410,999
Other liabilities		5,271			5,225
Total noncurrent liabilities		1,272,866			1,132,924
Commitments and contingencies (note 11)
Stockholders' equity (deficit):
Class A common stock, $.0001 par value - 300,000 shares authorized, 72,473 and 61,314 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		7			6
Class B common stock, $.0001 par value - 100,000 shares authorized, 26,026 and 37,185 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively		3			4
Accumulated other comprehensive loss		(1,274	)		(1,174	)
Additional paid in capital		23,087			34,467
Accumulated deficit		(155,288	)		(164,062	)
Total stockholders' deficit attributable to Planet Fitness Inc.		(133,465	)		(130,759	)
Non-controlling interests		(54,559	)		(83,996	)
Total stockholders' deficit		(188,024	)		(214,755	)
Total liabilities and stockholders' deficit	$	1,156,352		$	1,001,442

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 March 31,
	2017			2016
Revenue:
Franchise	$	30,281		$	21,491
Commission income		6,516			6,186
Corporate-owned stores		27,041			25,697
Equipment		27,264			29,969
Total revenue		91,102			83,343
Operating costs and expenses:
Cost of revenue		21,124			23,639
Store operations		15,184			14,732
Selling, general and administrative		13,820			11,845
Depreciation and amortization		7,951			7,703
Other gain		(32	)		(186	)
Total operating costs and expenses		58,047			57,733
Income from operations		33,055			25,610
Other expense, net:
Interest expense, net		(8,763	)		(6,367	)
Other income		682			393
Total other expense, net		(8,081	)		(5,974	)
Income before income taxes		24,974			19,636
Provision for income taxes		7,108			3,291
Net income		17,866			16,345
Less net income attributable to non-controlling interests		9,024			12,977
Net income attributable to Planet Fitness, Inc.	$	8,842		$	3,368

Net income per share of Class A common stock:
Basic & diluted	$	0.14		$	0.09
Weighted-average shares of Class A common stock outstanding:
Basic		64,121			36,598
Diluted		64,150			36,598

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 March 31,
	2017			2016
Net income including non-controlling interests	$	17,866		$	16,345
Other comprehensive income (loss), net:
Unrealized gain (loss) on interest rate caps, net of tax		177			(583	)
Foreign currency translation adjustments		(8	)		(93	)
Total other comprehensive income (loss), net		169			(676	)
Total comprehensive income including non-controlling interests		18,035			15,669
Less: total comprehensive income attributable to non-controlling interests		9,114			12,491
Total comprehensive income attributable to Planet Fitness, Inc.	$	8,921		$	3,178

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 three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	17,866		$	16,345
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,951			7,703
Amortization of deferred financing costs		465			371
Amortization of favorable leases and asset retirement obligations		94			99
Amortization of interest rate caps		432			75
Deferred tax expense		5,298			1,354
Gain on re-measurement of tax benefit arrangement		(541	)		—
Provision for bad debts		27			7
Gain on disposal of property and equipment		—			(186	)
Equity-based compensation		380			576
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable		11,859			8,864
Notes receivable and due from related parties		(99	)		3,544
Inventory		471			3,081
Other assets and other current assets		(2,187	)		(4,632	)
Accounts payable and accrued expenses		(21,244	)		(16,202	)
Other liabilities and other current liabilities		188			30
Income taxes		310			(2,314	)
Payable to related parties pursuant to tax benefit arrangements		—			(2,113	)
Equipment deposits		8,569			(334	)
Deferred revenue		527			(1,091	)
Deferred rent		106			85
Net cash provided by operating activities		30,472			15,262
Cash flows from investing activities:
Additions to property and equipment		(5,336	)		(865	)
Proceeds from sale of property and equipment		—			20
Net cash used in investing activities		(5,336	)		(845	)
Cash flows from financing activities:
Principal payments on capital lease obligations		—			(12	)
Repayment of long-term debt		(1,796	)		(1,275	)
Premiums paid for interest rate caps		(366	)		—
Dividend equivalent payments		(20	)		—
Distributions to Continuing LLC Members		(3,142	)		(6,411	)
Net cash used in financing activities		(5,324	)		(7,698	)
Effects of exchange rate changes on cash and cash equivalents		31			119
Net increase in cash and cash equivalents		19,843			6,838
Cash and cash equivalents, beginning of period		40,393			31,430
Cash and cash equivalents, end of period	$	60,236		$	38,268

Supplemental cash flow information:
Net cash paid for income taxes	$	1,595		$	4,336
Cash paid for interest	$	7,857		$	5,815
Non-cash investing activities:
Non-cash additions to property and equipment	$	38		$	170

See accompanying notes to condensed consolidated financial statements.

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of changes in equity (deficit)

(Unaudited)

(Amounts in thousands)

	Class A common stock				Class B common stock
	Shares		Amount		Shares			Amount			Accumulated other comprehensive (loss) income			Additional paid- in capital			Accumulated deficit			Non-controlling interests			Total (deficit) equity
Balance at December 31, 2016		61,314	$	6		37,185		$	4		$	(1,174	)	$	34,467		$	(164,062	)	$	(83,996	)	$	(214,755	)
Net income		—		—		—			—			—			—			8,842			9,024			17,866
Equity-based compensation expense		—		—		—			—			—			400			(20	)		—			380
Exchanges of Class B common stock		11,159		1		(11,159	)		(1	)		(179	)		(23,286	)					23,465			—
Tax benefit arrangement liability and deferred taxes arising from secondary offerings and other exchanges		—		—		—			—			—			11,506			—			—			11,506
Distributions paid to members of Pla-Fit Holdings		—		—		—			—			—			—			(48	)		(3,142	)		(3,190	)
Other comprehensive income (loss)		—		—		—			—			79			—			—			90			169
Balance at March 31, 2017		72,473	$	7		26,026		$	3		$	(1,274	)	$	23,087		$	(155,288	)	$	(54,559	)	$	(188,024	)

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 10.1 million members and 1,367 owned and franchised locations (referred to as stores) in 48 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of March 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.

•

Selling fitness-related equipment to franchisee-owned stores.

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

Subsequent to the IPO and the related recapitalization transactions, the Company is a holding company whose principal asset is a controlling equity interest in Pla-Fit Holdings. As the sole managing member of Pla-Fit Holdings, the Company operates and controls all of the business and affairs of Pla-Fit Holdings, and through Pla-Fit Holdings, conducts its business. As a result, the Company consolidates Pla-Fit Holdings’ financial results and reports a non-controlling interest related to the portion of limited liability company units of Pla-Fit Holdings (“Holdings Units”) not owned by the Company. Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.

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 TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”), funds affiliated with TSG Consumer Partners, LLC (“TSG”). 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 addition to the March Secondary Offering, during the three months ended March 31, 2017, certain existing holders of Holdings Units have exercised their exchange rights and exchanged 949,861 Holdings Units for 949,861 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 949,861 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and canceled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 949,861 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

Following the completion of the March Secondary Offering and other exchanges, and as of March 31, 2017, Planet Fitness, Inc. held 100% of the voting interest and 73.6% of the economic interest of Pla-Fit Holdings and the existing equity owners of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 26.4% 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 months ended March 31, 2017 are unaudited. The condensed consolidated balance sheet as of December 31, 2016 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, 2016 (the “Annual Report”) filed with the SEC on March 6, 2017. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

As discussed in Note 1, as a result of the recapitalization transactions, Planet Fitness, Inc. consolidates Pla-Fit Holdings. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the 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 March 31, 2017 and December 31, 2016:

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

March 31,

markets

inputs

2017

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

473

—

473

—

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

December 31,

markets

inputs

2016

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

306

—

306

—

(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 annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company expects to adopt this new guidance in fiscal year 2018 and is still evaluating the most appropriate transition method to be utilized. The Company expects the adoption of the new guidance to change the timing of recognition of area development agreement and initial franchise fees. Currently, these fees are generally recognized upfront upon either a store opening or upon execution of the property lease for an area development agreement, 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 geographic exclusivity right and the related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions, including the impact this guidance may have on the presentation of national advertising fund revenues and expenses.

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. This guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company has adopted the guidance as of January 1, 2017 on a modified retrospective 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, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. This guidance eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

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.

(3) Variable interest entities

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

	March 31, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
PF Melville	$	4,158	$	—	$	4,071	$	—
MMR		3,207		—		3,156		—
Total	$	7,365	$	—	$	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 $1,241 and $1,350 as of March 31, 2017 and December 31, 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.

(4) Goodwill and intangible assets

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

	Weighted
	average	Gross
	amortization	carrying		Accumulated			Net carrying
March 31, 2017	period (years)	amount		amortization			Amount
Customer relationships	11.1	$	171,782		(76,163	)	$	95,619
Noncompete agreements	5.0		14,500		(12,752	)		1,748
Favorable leases	7.5		2,935		(1,735	)		1,200
Order backlog	0.4		3,400		(3,400	)		—
Reacquired franchise rights	5.8		8,950		(4,669	)		4,281
			201,567		(98,719	)		102,848
Indefinite-lived intangible:
Trade and brand names	N/A		146,300		—			146,300
Total intangible assets		$	347,867	$	(98,719	)	$	249,148
Goodwill		$	176,981	$	—		$	176,981

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

	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

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

Amortization expense related to the intangible assets totaled $4,715 and $4,940 for the three months ended March 31, 2017 and 2016, respectively. Included within these total amortization expense amounts are $94 and $99 related to amortization of favorable and unfavorable leases for the three months ended March 31, 2017 and 2016, respectively. Amortization of favorable and unfavorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense to be recognized in future years as of March 31, 2017 is as follows:

	Amount
Remainder of 2017	$	13,500
2018		14,583
2019		14,215
2020		12,517
2021		12,422
Thereafter		35,611
Total	$	102,848

(5) Long-term debt

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

	March 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
(4.53% at March 31, 2017 and 4.33% at December 31, 2016)	$	714,858		$	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 March 31, 2017 and 6.00% December 31, 2016)		—			—
Total debt, excluding deferred financing costs	$	714,858			716,654
Deferred financing costs, net of accumulated amortization		(7,001	)		(7,466	)
Total debt		707,857			709,188
Current portion of long-term debt and line of credit