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Actionable news in PLNT: Planet Fitness Inc,

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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

For the quarterly period ended September 30, 2017

OR

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

4 Liberty Lane West, Hampton, NH 03842

(Address of Principal Executive Offices and Zip Code)

(603) 750-0001

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a small reporting company)

Smaller reporting company

Emerging growth company

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

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

As of November 1, 2017 there were 85,783,274 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 12,580,088 shares of the Registrant’s Class B Common Stock, par value $0.0001 per share, outstanding.

1

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

37

ITEM 4.

Controls and Procedures

38

PART II – OTHER INFORMATION

39

ITEM 1.

Legal Proceedings

39

ITEM 1A.

Risk Factors

39

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

ITEM 3.

Defaults Upon Senior Securities

39

ITEM 4.

Mine Safety Disclosures

39

ITEM 5.

Other Information

39

ITEM 6.

Exhibits

39

Signatures

40

2

Cautionary Note Regarding Forward-Looking Statements

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

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:

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

3

PART I-FINANCIAL INFORMATION

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,

2017

2016

Assets

Current assets:

Cash and cash equivalents

$

93,267

$

40,393

Accounts receivable, net of allowance for bad debts of $95 and $687 at

September 30, 2017 and December 31, 2016, respectively

16,358

26,873

Due from related parties

2,984

2,864

Inventory

550

1,802

Restricted assets – national advertising fund

3,014

3,074

Other receivables

10,768

7,935

Other current assets

8,623

8,284

Total current assets

135,564

91,225

Property and equipment, net of accumulated depreciation of $33,546 as of

September 30, 2017 and $30,987 as of December 31, 2016

72,426

61,238

Intangible assets, net

239,741

253,862

Goodwill

176,981

176,981

Deferred income taxes

731,131

410,407

Other assets, net

10,177

7,729

Total assets

$

1,366,020

$

1,001,442

Liabilities and stockholders' equity (deficit)

Current liabilities:

Current maturities of long-term debt

$

7,185

$

7,185

Accounts payable

12,826

28,507

Accrued expenses

13,357

19,190

Equipment deposits

8,121

2,170

Restricted liabilities – national advertising fund

3,008

134

Deferred revenue, current

17,124

17,780

Payable to related parties pursuant to tax benefit arrangements, current

24,487

8,072

Other current liabilities

438

235

Total current liabilities

86,546

83,273

Long-term debt, net of current maturities

697,876

702,003

Deferred rent, net of current portion

5,289

5,108

Deferred revenue, net of current portion

8,180

8,351

Deferred tax liabilities

751

1,238

Payable to related parties pursuant to tax benefit arrangements, net of current portion

702,906

410,999

Other liabilities

4,111

5,225

Total noncurrent liabilities

1,419,113

1,132,924

Commitments and contingencies (note 11)

Stockholders' equity (deficit):

Class A common stock, $.0001 par value - 300,000 shares authorized, 85,682 and 61,314

shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

9

6

Class B common stock, $.0001 par value - 100,000 shares authorized, 12,682 and 37,185

shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

1

4

Accumulated other comprehensive loss

(1,013

)

(1,174

)

Additional paid in capital

11,693

34,467

Accumulated deficit

(127,513

)

(164,062

)

Total stockholders' deficit attributable to Planet Fitness Inc.

(116,823

)

(130,759

)

Non-controlling interests

(22,816

)

(83,996

)

Total stockholders' deficit

(139,639

)

(214,755

)

Total liabilities and stockholders' deficit

$

1,366,020

$

1,001,442

See accompanying notes to condensed consolidated financial statements.

4

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of operations

(Unaudited)

(Amounts in thousands, except per share amounts)

For the three months ended

September 30,

For the nine months ended

September 30,

2017

2016

2017

2016

Revenue:

Franchise

$

31,413

$

23,046

$

94,485

$

70,042

Commission income

4,149

4,179

15,668

14,338

Corporate-owned stores

28,560

26,675

83,886

78,756

Equipment

33,374

33,107

101,875

98,686

Total revenue

97,496

87,007

295,914

261,822

Operating costs and expenses:

Cost of revenue

25,819

25,925

78,395

77,365

Store operations

15,551

15,181

45,339

45,673

Selling, general and administrative

14,071

12,244

42,659

36,470

Depreciation and amortization

8,137

7,745

23,982

23,127

Other loss (gain)

(36

)

(241

)

280

(406

)

Total operating costs and expenses

63,542

60,854

190,655

182,229

Income from operations

33,954

26,153

105,259

79,593

Other expense, net:

Interest expense, net

(8,920

)

(6,291

)

(26,711

)

(18,819

)

Other (expense) income

408

(204

)

157

30

Total other expense, net

(8,512

)

(6,495

)

(26,554

)

(18,789

)

Income before income taxes

25,442

19,658

78,705

60,804

Provision for income taxes

6,540

4,795

23,933

11,504

Net income

18,902

14,863

54,772

49,300

Less net income attributable to non-controlling interests

3,557

11,438

18,173

38,374

Net income attributable to Planet Fitness, Inc.

$

15,345

$

3,425

$

36,599

$

10,926

Net income per share of Class A common stock:

Basic

$

0.18

$

0.08

$

0.48

$

0.28

Diluted

$

0.18

$

0.08

$

0.48

$

0.28

Weighted-average shares of Class A common stock outstanding:

Basic

85,663

44,669

76,391

39,394

Diluted

85,734

44,686

76,435

39,397

See accompanying notes to condensed consolidated financial statements.

5

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of comprehensive income (loss)

(Unaudited)

(Amounts in thousands)

For the three months ended

September 30,

For the nine months ended

September 30,

2017

2016

2017

2016

Net income including non-controlling interests

$

18,902

$

14,863

$

54,772

$

49,300

Other comprehensive income (loss), net:

Unrealized gain (loss) on interest rate caps, net of tax

374

193

730

(469

)

Foreign currency translation adjustments

20

11

25

(84

)

Total other comprehensive income (loss), net

394

204

755

(553

)

Total comprehensive income including non-controlling

interests

19,296

15,067

55,527

48,747

Less: total comprehensive income attributable to non-controlling

interests

3,631

11,572

18,384

37,964

Total comprehensive income attributable to Planet

Fitness, Inc.

$

15,665

$

3,495

$

37,143

$

10,783

See accompanying notes to condensed consolidated financial statements.

6

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of cash flows

(Unaudited)

(Amounts in thousands)

For the nine months ended

September 30,

2017

2016

Cash flows from operating activities:

Net income

$

54,772

$

49,300

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

23,982

23,127

Amortization of deferred financing costs

1,439

1,114

Amortization of favorable leases and asset retirement obligations

260

297

Amortization of interest rate caps

1,552

459

Deferred tax expense

21,344

11,062

Loss on extinguishment of debt

79

Third party debt refinancing expense

1,021

Gain on re-measurement of tax benefit arrangement

(541

)

Provision for bad debts

44

44

Gain on disposal of property and equipment

(357

)

(347

)

Equity-based compensation

1,800

1,373

Changes in operating assets and liabilities, excluding effects of acquisitions:

Accounts receivable

11,099

4,898

Due to and due from related parties

(580

)

8,494

Inventory

1,253

3,798

Other assets and other current assets

(2,413

)

(1,635

)

Accounts payable and accrued expenses

(16,985

)

(10,172

)

Other liabilities and other current liabilities

(724

)

(30

)

Income taxes

(1,462

)

(7,543

)

Payable to related parties pursuant to tax benefit arrangements

(7,909

)

(6,007

)

Equipment deposits

5,951

(1,609

)

Deferred revenue

(958

)

(1,264

)

Deferred rent

361

379

Net cash provided by operating activities

93,028

75,738

Cash flows from investing activities:

Additions to property and equipment

(23,229

)

(9,266

)

Proceeds from sale of property and equipment

166

402

Net cash used in investing activities

(23,063

)

(8,864

)

Cash flows from financing activities:

Principal payments on capital lease obligations

(37

)

Repayment of long-term debt

(5,388

)

(3,825

)

Payment of deferred financing and other debt-related costs

(1,278

)

Premiums paid for interest rate caps

(366

)

Proceeds from issuance of Class A common stock

172

79

Repurchase and retirement of Class B common stock

(1,583

)

Dividend equivalent payments

(1,322

)

Distributions to Continuing LLC Members

(9,308

)

(27,071

)

Net cash used in financing activities

(17,490

)

(32,437

)

Effects of exchange rate changes on cash and cash equivalents

399

87

Net increase in cash and cash equivalents

52,874

34,524

Cash and cash equivalents, beginning of period

40,393

31,430

Cash and cash equivalents, end of period

$

93,267

$

65,954

Supplemental cash flow information:

Net cash paid for income taxes

$

3,769

$

8,121

Cash paid for interest

$

23,637

$

17,187

Non-cash investing activities:

Non-cash additions to property and equipment

$

482

$

127

See accompanying notes to condensed consolidated financial statements.

7

Planet Fitness, Inc. and subsidiaries

Condensed consolidated statements of changes in equity (deficit)

(Unaudited)

(Amounts in thousands)

See accompanying notes to condensed consolidated financial statements.

8

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

(1) Business organization

Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 10.5 million members and 1,432 owned and franchised locations (referred to as stores) in 49 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of September 30, 2017.

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

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 May 2017, the Company completed a secondary offering (“May Secondary Offering”) of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors, funds affiliated with 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 May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

In addition to the March Secondary Offering and May Secondary Offering, during the nine months ended September 30, 2017, certain existing holders of Holdings Units have exercised their exchange rights and exchanged 3,273,955 Holdings Units for 3,273,955 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,273,955 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 3,273,955 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

9

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

Following the completion of the March Secondary Offering, May Secondary Offering and other exchanges described above, and as of September 30, 2017, Planet Fitness, Inc. held 100% of the voting interest and 87.1% of the economic interest of Pla-Fit Holdings and the holders of Holdings Units of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 12.9% 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 (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, 2017 and 2016 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.

(c) Fair Value

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

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

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

10

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

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

The table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

September 30,

markets

inputs

inputs

2017

(Level 1)

(Level 2)

(Level 3)

Interest rate caps

$

194

$

$

194

$

Quoted

Significant

Total fair

prices

other

Significant

value at

in active

observable

unobservable

December 31,

markets

inputs

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 utilizing the cumulative effect method. 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 related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company also expects the adoption of this new guidance to change the reporting of national advertising fund contributions from franchisees and the related national advertising fund expenditures, which are not currently included in the consolidated statements of operations. The Company expects the new guidance to require these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. We expect this change to have a material impact to our total revenues and expenses. However, we expect such contributions and expenditures to be largely offsetting and are continuing to evaluate the impact on our reported net income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions.

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 is 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.

11

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

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 goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017. The guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. This guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

(3) Variable interest entities

The carrying values of VIEs included in the consolidated financial statements as of September 30, 2017 and December 31, 2016 are as follows:

September 30, 2017

December 31, 2016

Assets

Liabilities

Assets

Liabilities

PF Melville

$

4,333

$

$

4,071

$

MMR

3,309

3,156

Total

$

7,642

$

$

7,227

$

The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $1,039 and $1,350 as of September 30, 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 September 30, 2017 and December 31, 2016 is as follows:

Weighted

average

Gross

amortization

carrying

Accumulated

Net carrying

September 30, 2017

period (years)

amount

amortization

Amount

Customer relationships

11.1

$

171,782

(83,179

)

$

88,603

Noncompete agreements

5.0

14,500

(14,201

)

299

Favorable leases

7.5

2,935

(1,898

)

1,037

Order backlog

0.4

3,400

(3,400

)

Reacquired franchise rights

5.8

8,950

(5,448

)

3,502

201,567

(108,126

)

93,441

Indefinite-lived intangible:

Trade and brand names

N/A

146,300

146,300

Total intangible assets

$

347,867

$

(108,126

)

$

239,741

Goodwill

$

176,981

$

$

176,981

12

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 $4,697 and $4,940 for the three months ended September 30, 2017 and 2016, respectively, and $14,122 and $14,820 for the nine months ended September 30, 2017 and 2016, respectively. Included within these total amortization expense amounts are $75 and $97 related to amortization of favorable and unfavorable leases for the three months ended September 30, 2017 and 2016, respectively, and $255 and $292 for the nine months ended September 30, 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 September 30, 2017 is as follows:

Amount

Remainder of 2017

$

4,093

2018

14,583

2019

14,215

2020

12,517

2021

12,422

Thereafter

35,611

Total

$

93,441

(5) Long-term debt

Long-term debt as of September 30, 2017 and December 31, 2016 consists of the following:

September 30, 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

(4.26% at September 30, 2017 and 4.33% at December 31, 2016)

$

711,266

$

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

(6.00% at both September 30, 2017 and December 31, 2016)

Total debt, excluding deferred financing costs

$

711,266

716,654

Deferred financing costs, net of accumulated amortization

(6,205

)

(7,466

)

Total debt

705,061

709,188

Current portion of long-term debt and line of credit

7,185

7,185

Long-term debt, net of current portion

$

697,876

$

702,003

13

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

On May 26, 2017, the Company amended the credit agreement governing its senior secured credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment to the credit agreement also reduced the interest rate margin for revolving loan borrowings by 25 basis points. In connection with the amendment to the credit agreement, during the three months ended June 30, 2017, the Company capitalized deferred financing costs of $257, recorded expense of $1,021 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $79 included in interest expense on the consolidated statement of operations. Term loan B payments are payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due on March 31, 2021.

Future annual principal payments of long-term debt as of September 30, 2017 are as follows:

Amount

Remainder of 2017

$

1,796

2018

7,185

2019

7,185

2020

7,185

2021

687,915

Total

$

711,266

(6) Derivative instruments and hedging activities

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

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

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

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

In order to manage the market risk arising from the outstanding term loans, the Company has entered into a series of interest rate caps. The Company entered into two additional interest rate caps effective March 31, 2017 and terminating on March 31, 2019 with variable notional amounts in order to hedge one month LIBOR greater than 2.5%. As of September 30, 2017, the Company had interest rate cap agreements with notional amounts of $175,000 outstanding that were entered into in order to hedge three month LIBOR greater than 1.5%, and interest rate cap agreements with notional amounts of $181,531 that were entered into in order to hedge one month LIBOR greater than 2.5%.

The interest rate cap balances of $194 and $306 were recorded within other assets in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded an increase to the value of its interest rate caps of $356, net of tax of $145 and $193, net of tax of $45, within other comprehensive income (loss) during the three months ended September 30, 2017 and 2016, respectively, and an increase to the value of its interest rate caps of $730, net of tax of $344 and a reduction to the value of its interest rate caps of $469, net of tax of $83, within other comprehensive income (loss) during the nine months ended September 30, 2017 and 2016, respectively.

14

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

As of September 30, 2017, the Company does not expect to reclassify any amounts included in accumulated other comprehensive income (loss) into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that could necessitate reclassifying these derivatives’ loss to earnings include the re-pricing of variable-rate debt.

(7) Related party transactions

Amounts due from related parties of $2,984 and $2,864 as of September 30, 2017 and December 31, 2016, respectively, primarily relate to currently due or potential reimbursements for certain taxes accrued or paid by the Company (see Note 10).

Activity with entities considered to be related parties is summarized below:

For the three months ended

September 30,

For the nine months ended

September 30,

2017

2016

2017

2016

Franchise revenue

$

344

$

359

$

1,174

$

1,174

Equipment revenue

4

3

577

770

Total revenue from related parties

$

348

$

362

$

1,751

$

1,944

Additionally, the Company had deferred area development agreement revenue from related parties of $257 and $422 as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017, the Company had $727,393 payable to related parties pursuant to tax benefit arrangements (see Note 10).

The Company provides administrative services to the Planet Fitness NAF, LLC (“NAF”) and charges NAF a fee for providing those services. These services include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted to $643 and $438 for the three months ended September 30, 2017 and 2016, respectively, and $1,645 and $1,313 for the nine months ended September 30, 2017 and 2016, respectively.

(8) Stockholder’s equity

Pursuant to the exchange agreement between the Company and the Continuing LLC Owners, the Continuing LLC Owners (or certain permitted transferees thereof) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, along with a corresponding number of shares of Class B common stock, for shares of Class A common stock (or cash at the option of the Company) on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. In connection with any exchange by a Continuing LLC Owner of Holdings Units for shares of Class A common stock, the number of Holdings Units held by the Company is correspondingly increased as it acquires the exchanged Holdings Units, and a corresponding number of shares of Class B common stock are cancelled.

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

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

15

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

In addition to the March Secondary Offering and May Secondary Offering, during the nine months ended September 30, 2017, certain existing holders of Holdings Units exercised their exchange rights and exchanged 3,273,955 Holdings Units for 3,273,955 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,273,955 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 3,273,955 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.

As a result of these transactions, as of September 30, 2017:

(9) Earnings per share

Basic earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Planet Fitness, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related Holdings Units, are exchangeable into shares of Class A common stock on a one-for-one basis.

The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Numerator

Net income

$

18,902

$

14,863

$

54,772

$

49,300

Less: net income attributable to non-controlling interests

3,557

11,438

18,173

38,374

Net income attributable to Planet Fitness, Inc.

$

15,345

$

3,425

$

36,599

$

10,926

Denominator

Weighted-average shares of Class A common stock outstanding - basic

85,662,650

44,668,875

76,391,277

39,394,318

Effect of dilutive securities:

Stock options

66,610

12,539

38,524

138

Restricted stock units

5,196

4,282

5,018

3,030

Weighted-average shares of Class A common stock outstanding - diluted

85,734,456

44,685,696

76,434,819

39,397,486

Earnings per share of Class A common stock - basic

$

0.18

$

0.08

$

0.48

$

0.28

Earnings per share of Class A common stock - diluted

$

0.18

$

0.08

$

0.48

$

0.28

Weighted average shares of Class B common stock of 12,693,076 and 53,902,808 for the three months ended September 30, 2017 and 2016, respectively, and 22,010,095 and 59,221,157 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the if-converted method for potential dilutive effects and were not determined to be dilutive. Weighted average stock options outstanding of 466,278 and 250,141 for the three months ended September 30, 2017 and 2016, respectively, and 423,870 and 230,633 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive. Weighted average RSUs outstanding of 2,924 and 0 for the three months ended September 30, 2017 and 2016, respectively, and 985 and 518 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive.

16

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

(10) Income taxes

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

The Company incurs U.S. federal and state income taxes on its pro rata share of income flowed through from Pla-Fit Holdings. Our effective tax rate on such income was approximately 39.5% for the three and nine months ended September 30, 2017 and 2016. The provision for income taxes also reflects an effective state tax rate of 2.1% for the three and nine months ended September 30, 2017 and 2016, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings. Undistributed earnings of foreign operations were not material for the three and nine months ended September 30, 2017 and 2016.

Net deferred tax assets of $731,131 and $410,407 as of September 30, 2017 and December 31, 2016, respectively, relate primarily to the tax effects of temporary differences in the book basis as compared to the tax basis of our investment in Pla-Fit Holdings as a result of the secondary offerings, other exchanges, recapitalization transactions and IPO. As of September 30, 2017, the Company does not have any material net operating loss carryforwards.

As of September 30, 2017 and December 31, 2016, the total liability related to uncertain tax positions was $2,608. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of September 30, 2017, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next 12 months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. Interest and penalties for the three and nine months ended September 30, 2017 and 2016 were not material.

17

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

Tax benefit arrangements

The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings.

In connection with the March Secondary Offering, May Secondary Offering, and related and other exchanges during the nine months ended September 30, 2017, 24,353,016 Holdings Units were redeemed by the TRA Holders for newly issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $22,538 during the nine months ended September 30, 2017. As a result of these exchanges, during the nine months ended September 30, 2017, we also recognized deferred tax assets in the amount of $365,399, and corresponding tax benefit arrangement liabilities of $316,772, representing 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges was to equity.

As of September 30, 2017 and December 31, 2016, the Company had a liability of $727,393 and $419,071, respectively, related to its projected obligations under the tax benefit arrangements. Projected future payments under the tax benefit arrangements are as follows:

Amount

Remainder of 2017

$

3,507

2018

29,972

2019

35,740

2020

35,503

2021

36,548

Thereafter

586,123

Total

$

727,393

(11) Commitments and contingencies

From time to time, and in the ordinary course of business, the Company is subject to various claims, charges, and litigation, such as employment-related claims and slip and fall cases. The Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.

(12) Segments

The Company has three reportable segments: (i) Franchise; (ii) Corporate-owned stores; and (iii) Equipment.

The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.

The Franchise segment includes operations related to the Company’s franchising business in the United States, Puerto Rico, Canada and the Dominican Republic. The Corporate-owned stores segment includes operations with respect to all Corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to franchisee-owned stores.

The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its segments and allocates resources to them based on revenue and earnings before interest, taxes, depreciation, and amortization, referred to as

18

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

Segment EBITDA. Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues.

The tables below summarize the financial information for the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016. The “Corporate and other” category, as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services which are not directly attributable to any individual segment.

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Revenue

Franchise segment revenue - U.S.

$

35,025

$

26,940

$

108,470

$

83,312

Franchise segment revenue - International

537

285

1,683

1,068

Franchise segment total

35,562

27,225

110,153

84,380

Corporate-owned stores - U.S.

27,414

25,591

80,597

75,595

Corporate-owned stores - International

1,146

1,084

3,289

3,161

Corporate-owned stores total

28,560

26,675

83,886

78,756

Equipment segment - U.S.

33,374

33,107

101,875

98,686

Equipment segment total

33,374

33,107

101,875

98,686

Total revenue

$

97,496

$

87,007

$

295,914

$

261,822

Franchise segment revenue includes franchise revenue and commission income.

Franchise revenue includes revenue generated from placement services of $2,433 and $2,224 for the three months ended September 30, 2017 and 2016, respectively, and $7,410 and $6,952 for the nine months ended September 30, 2017 and 2016, respectively.

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Segment EBITDA

Franchise

$

29,925

$

22,814

$

94,444

$

71,308

Corporate-owned stores

12,046

10,550

35,579

30,259

Equipment

7,683

7,153

23,587

21,330

Corporate and other

(7,155

)

(6,823

)

(24,212

)

(20,147

)

Total Segment EBITDA

$

42,499

$

33,694

$

129,398

$

102,750

The following table reconciles total Segment EBITDA to income before taxes:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Total Segment EBITDA

$

42,499

$

33,694

$

129,398

$

102,750

Less:

Depreciation and amortization

8,137

7,745

23,982

23,127

Other (income) expense

408

(204

)

157

30

Income from operations

33,954

26,153

105,259

79,593

Interest expense, net

(8,920

)

(6,291

)

(26,711

)

(18,819

)

Other (income) expense

408

(204

)

157

30

Income before income taxes

$

25,442

$

19,658

$

78,705

$

60,804

19

Planet Fitness, Inc. and subsidiaries

Notes to Condensed Consolidated financial statements

(Unaudited)

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

The following table summarizes the Company’s assets by reportable segment:

September 30, 2017

December 31, 2016

Franchise

$

237,682

$

202,580

Corporate-owned stores

155,533

153,761

Equipment

184,012

208,809

Unallocated

788,793

436,292

Total consolidated assets

$

1,366,020

$

1,001,442

The table above includes $2,638 and $2,795 of long-lived assets located in the Company’s corporate-owned stores in Canada as of September 30, 2017 and December 31, 2016, respectively. All other assets are located in the U.S.

The following table summarizes the Company’s goodwill by reportable segment:

September 30, 2017

December 31, 2016

Franchise

$

16,938

$

16,938

Corporate-owned stores

67,377

67,377

Equipment

92,666

92,666

Consolidated goodwill

$

176,981

$

176,981

(13) Corporate-owned and franchisee-owned stores

The following table shows changes in our corporate-owned and franchisee-owned stores for the three and nine months ended September 30, 2017 and 2016:

For the three months ended

September 30,

For the nine months ended

September 30,

2017

2016

2017

2016

Franchisee-owned stores:

Stores operated at beginning of period

1,345

1,148

1,255

1,066

New stores opened

31

37

122

121

Stores debranded or consolidated(1)

(2

)

(1

)

(3

)

(3

)

Stores operated at end of period

1,374

1,184

1,374

1,184

Corporate-owned stores:

Stores operated at beginning of period

58

58

58

58

New stores opened

Stores operated at end of period

58

58

58

58

Total stores:

Stores operated at beginning of period

1,403

1,206

1,313

1,124

New stores opened

31

37

122

121

Stores debranded or consolidated(1)

(2

)

(1

)

(3

)

(3

)

Stores operated at end of period

1,432

1,242

1,432

1,242

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to Planet Fitness, Inc. and its consolidated subsidiaries.

Overview

We are one of the largest and fastest-growing franchisors and operators of fitness centers in the United States by number of members and locations, with a highly recognized national brand. Our mission is to enhance people’s lives by providing a high-quality fitness experience in a welcoming, non-intimidating environment, which we call the Judgement Free Zone, where anyone—and we mean anyone—can feel they belong. Our bright, clean stores are typically 20,000 square feet, with a large selection of high-quality, purple and yellow Planet Fitness-branded cardio, circuit- and weight-training equipment and friendly staff trainers who offer unlimited free fitness instruction to all our members in small groups through our PE@PF program. We offer this differentiated fitness experience at only $10 per month for our standard membership. This exceptional value proposition is designed to appeal to a broad population, including occasional gym users and the approximately 80% of the U.S. and Canadian populations over age 14 who are not gym members, particularly those who find the traditional fitness club setting intimidating and expensive. We and our franchisees fiercely protect Planet Fitness’ community atmosphere—a place where you do not need to be fit before joining and where progress toward achieving your fitness goals (big or small) is supported and applauded by our staff and fellow members.

As of September 30, 2017, we had more than 10.5 million members and 1,432 stores in 49 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. Of our 1,432 stores, 1,374 are franchised and 58 are corporate-owned. As of September 30, 2017, we had commitments to open more than 1,000 new stores under existing area development agreements.

Our segments

We operate and manage our business in three business segments: Franchise, Corporate-owned stores and Equipment. Our Franchise segment includes operations related to our franchising business in the United States, Puerto Rico, Canada and the Dominican Republic. Our Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to our United States franchisee-owned stores. We evaluate the performance of our segments and allocate resources to them based on revenue and earnings before interest, taxes, depreciation and amortization, referred to as Segment EBITDA. Revenue and Segment EBITDA for all operating segments include only transactions with unaffiliated customers and do not include intersegment transactions. The tables below summarize the financial information for our segments for the three and nine months ended September 30, 2017 and 2016. “Corporate and other,” as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment.

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands)

Revenue

Franchise segment

$

35,562

$

27,225

$

110,153

$

84,380

Corporate-owned stores segment

28,560

26,675

83,886

78,756

Equipment segment

33,374

33,107

101,875

98,686

Total revenue

$

97,496

$

87,007

$

295,914

$

261,822

Segment EBITDA

Franchise

$

29,925

$

22,814

$

94,444

$

71,308

Corporate-owned stores

12,046

10,550

35,579

30,259

Equipment

7,683

7,153

23,587

21,330

Corporate and other

(7,155

)

(6,823

)

(24,212

)

(20,147

)

Total Segment EBITDA(1)

$

42,499

$

33,694

$

129,398

$

102,750

A reconciliation of income from operations to Segment EBITDA is set forth below:

(in thousands)

Franchise

Corporate-owned

stores

Equipment

Corporate and

other

Total

Three months ended September 30, 2017:

Income from operations

$

27,801

$

7,729

$

6,024

$

(7,600

)

$

33,954

Depreciation and amortization

2,140

4,038

1,552

407

8,137

Other income (expense)

(16

)

279

107

38

408

Segment EBITDA(1)

$

29,925

$

12,046

$

7,683

$

(7,155

)

$

42,499

Three months ended September 30, 2016:

Income from operations

$

20,662

$

6,715

$

5,602

$

(6,826

)

$

26,153

Depreciation and amortization

2,142

3,913

1,551

139

7,745

Other income (expense)

10

(78

)

-

(136

)

(204

)

Segment EBITDA(1)

$

22,814

$

10,550

$

7,153

$

(6,823

)

$

33,694

Nine months ended September 30, 2017:

Income from operations

$

88,045

$

23,358

$

18,826

$

(24,970

)

$

105,259

Depreciation and amortization

6,424

11,722

4,654

1,182

23,982

Other income (expense)

(25

)

499

107

(424

)

157

Segment EBITDA(1)

$

94,444

$

35,579

$

23,587

$

(24,212

)

$

129,398

Nine months ended September 30, 2016:

Income from operations

$

64,951

$

18,313

$

16,678

$

(20,349

)

$

79,593

Depreciation and amortization

6,395

11,667

4,652

413

23,127

Other income (expense)

(38

)

279

-

(211

)

30

Segment EBITDA(1)

$

71,308

$

30,259

$

21,330

$

(20,147

)

$

102,750

How we assess the performance of our business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing include the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, EBITDA, Adjusted EBITDA, Segment EBITDA, Adjusted net income, and Adjusted net income per share, diluted. See “—Non-GAAP financial measures” below for our definition of EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted and why we present EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, and a reconciliation of Adjusted net income per share, diluted to net income per share, diluted, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.

Number of new store openings

The number of new store openings reflects stores opened during a particular reporting period for both corporate-owned and franchisee-owned stores. Opening new stores is an important part of our growth strategy and we expect the majority of our future new stores will be franchisee-owned. Before we obtain the certificate of occupancy or report any revenue for new corporate-owned stores, we incur pre-opening costs, such as rent expense, labor expense and other operating expenses. Some of our stores open with an initial start-up period of higher than normal marketing and operating expenses, particularly as a percentage of monthly revenue. New stores may not be profitable and their revenue may not follow historical patterns. The following table shows the change in our corporate-owned and franchisee-owned store base for the three and nine months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Franchisee-owned stores:

Stores operated at beginning of period

1,345

1,148

1,255

1,066

New stores opened

31

37

122

121

Stores debranded or consolidated(1)

(2

)

(1

)

(3

)

(3

)

Stores operated at end of period

1,374

1,184

1,374

1,184

Corporate-owned stores:

Stores operated at beginning of period

58

58

58

58

New stores opened

-

-

-

-

Stores operated at end of period

58

58

58

58

Total stores:

Stores operated at beginning of period

1,403

1,206

1,313

1,124

New stores opened

31

37

122

121

Stores debranded or consolidated(1)

(2

)

(1

)

(3

)

(3

)

Stores operated at end of period

1,432

1,242

1,432

1,242

Same store sales

Same store sales refers to year-over-year sales comparisons for the same store sales base of both corporate-owned and franchisee-owned stores. We define the same store sales base to include those stores that have been open and for which monthly membership dues have been billed for longer than 12 months. We measure same store sales based solely upon monthly dues billed to members of our corporate-owned and franchisee-owned stores.

Several factors affect our same store sales in any given period, including the following:

Consistent with common industry practice, we present same store sales as compared to the same period in the prior year for all stores that have been open and for which monthly membership dues have been billed for longer than 12 months, beginning with the 13th month and thereafter, as applicable. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year’s same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance.

Stores acquired from or sold to franchisees are removed from the franchisee-owned or corporate-owned same store sales base, as applicable, upon the ownership change and for the 12 months following the date of the ownership change. These stores are included in the corporate-owned or franchisee-owned same store sales base, as applicable, following the 12th month after the acquisition or sale. These stores remain in the system-wide same store sales base in all periods.

The following table shows our same store sales for the three and nine months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Same store sales data

Same store sales growth:

Franchisee-owned stores

9.6

%

10.3

%

10.1

%

8.4

%

Corporate-owned stores

5.1

%

5.4

%

4.6

%

5.0

%

Total stores

9.3

%

10.0

%

9.8

%

8.2

%

Number of stores in same store sales base:

Franchisee-owned stores

1,170

975

1,170

975

Corporate-owned stores

58

58

58

58

Total stores

1,228

1,033

1,228

1,033

Non-GAAP financial measures

We refer to EBITDA and Adjusted EBITDA as we use these measures to evaluate our operating performance and we believe these measures provide useful information to investors in evaluating our performance. EBITDA and Adjusted EBITDA as presented in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for U.S. GAAP metrics such as net income or any other performance measures derived in accordance with U.S. GAAP. Also, in the future we may incur expenses or charges such as those used to calculate Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in “Our Segments” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA.

We define EBITDA as net income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our Board of Directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain additional non-cash and other items that we do not consider in our evaluation of ongoing performance of the Company’s core operations. These items include certain purchase accounting adjustments, stock offering-related costs, severance costs, and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. Four-wall EBITDA is an assessment of store-level profitability for stores included in the same-store-sales base, which adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance.

A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the three and nine months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands)

Net income

$

18,902

$

14,863

$

54,772

$

49,300

Interest expense, net

8,920

6,291

26,711

18,819

Provision for income taxes

6,540

4,795

23,933

11,504

Depreciation and amortization

8,137

7,745

23,982

23,127

EBITDA

42,499

33,694

129,398

102,750

Purchase accounting adjustments-revenue(1)

336

450

1,116

458

Purchase accounting adjustments-rent(2)

174

202

561

664

Transaction fees(3)

-

-

1,021

-

Stock offering-related costs(4)

41

1,078

977

2,105

Severance costs(5)

-

-

-

423

Pre-opening costs(6)

421

-

421

-

Equipment discount(7)

(107

)

-

(107

)

-

Early lease termination costs(8)

-

-

719

-

Other(9)

-

-

(573

)

72

Adjusted EBITDA

$

43,364

$

35,424

$

133,533

$

106,472

(1)

Represents the impact of revenue-related purchase accounting adjustments associated with the acquisition of Pla-Fit Holdings on November 8, 2012 by TSG (the “2012 Acquisition”). At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.

(2)

Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 – Business Combinations, in connection with the 2012 Acquisition, the Company’s deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of $100, $105, $306, and $372 in the three and nine months ended September 30, 2017 and 2016, respectively, reflect the difference between the higher rent expense recorded in accordance with U.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $75, $97, $255, and $292 for the three and nine months ended September 30, 2017 and 2016, respectively, are due to the amortization of favorable and unfavorable lease intangible assets which were recorded in connection with the 2012 Acquisition and the acquisition of eight franchisee-owned stores on March 31, 2014. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations.

As a result of the recapitalization transactions that occurred prior to our IPO, the limited liability company agreement of Pla-Fit Holdings was amended and restated (the “New LLC Agreement”) to, among other things, designate Planet Fitness, Inc. as the sole managing member of Pla-Fit Holdings. As sole managing member, Planet Fitness, Inc. exclusively operates and controls the business and affairs of Pla-Fit Holdings. As a result of the recapitalization transactions and the New LLC Agreement, Planet Fitness, Inc. now consolidates Pla-Fit Holdings, and Pla-Fit Holdings is considered the predecessor to Planet Fitness, Inc. for accounting purposes. Our presentation of Adjusted net income and Adjusted net income per share, diluted, gives effect to the consolidation of Pla-Fit Holdings with Planet Fitness, Inc. resulting from the recapitalization transactions and the New LLC Agreement as if they had occurred on January 1, 2016. In addition, Adjusted net income assumes that all net income is attributable to Planet Fitness, Inc., which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock of Planet Fitness, Inc., adjusted for certain non-recurring items that we do not believe directly reflect our core operations. Adjusted net income per share, diluted, is calculated by dividing Adjusted net income by the total shares of Class A common stock outstanding plus any dilutive options and restricted stock units as calculated in accordance with U.S. GAAP and assuming the full exchange of all outstanding Holdings Units and corresponding Class B common stock as of the beginning of each period presented. Adjusted net income and Adjusted net income per share, diluted, are supplemental measures of operating performance that do not represent, and should not be considered, alternatives to net income and earnings per share, as calculated in accordance with U.S. GAAP. We believe Adjusted net income and Adjusted net income per share, diluted, supplement U.S. GAAP measures and enable us to more effectively evaluate our performance period-over-period. A reconciliation of Adjusted net income to net income, the most directly comparable U.S. GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below.

Three months ended September 30,

Nine months ended September 30,

(in thousands, except per share amounts)

2017

2016

2017

2016

Net income

$

18,902

$

14,863

$

54,772

$

49,300

Provision for income taxes, as reported

6,540

4,795

23,933

11,504

Purchase accounting adjustments-revenue(1)

336

450

1,116

458

Purchase accounting adjustments-rent(2)

174

202

561

664

Transaction fees(3)

-

-

1,021

-

Stock offering-related costs(4)

41

1,078

977

2,105

Severance costs(5)

-

-

-

423

Pre-opening costs(6)

421

-

421

-

Equipment discount(7)

(107

)

-

(107

)

-

Early lease termination costs(8)

-

-

1,143

-

Other(9)

-

-

(573

)

72

Purchase accounting amortization(10)

4,622

4,843

13,867

14,528

Adjusted income before income taxes

$

30,929

$

26,231

$

97,131

$

79,054

Adjusted income taxes(11)

12,217

10,361

38,367

31,226

Adjusted net income

$

18,712

$

15,870

$

58,764

$

47,828

Adjusted net income per share, diluted

$

0.19

$

0.16

$

0.60

$

0.48

Adjusted weighted-average shares outstanding(12)

98,428

98,572

98,445

98,615

(1)

Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.

(2)

Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 – Business Combinations, in connection with the 2012 Acquisition, the Company’s deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of $100, $105, $306, and $372 in the three and nine months ended September 30, 2017 and 2016, respectively, reflect the difference between the higher rent expense recorded in accordance with U.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $75, $97, $255, and $292 for the three and nine months ended September 30, 2017 and 2016, respectively, are due to the amortization of favorable and unfavorable lease intangible assets which were recorded in connection with the 2012 Acquisition and the acquisition of eight franchisee-owned stores on March 31, 2014. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations.

A reconciliation of net income per share, diluted, to Adjusted net income per share, diluted is set forth below for three and nine months ended September 30, 2017 and 2016:

For the three months ended

September 30, 2017

For the three months ended

September 30, 2016

Net income

Weighted Average Shares

Net income per share, diluted

Net income

Weighted Average Shares

Net income per share, diluted

Net income attributable to Planet Fitness, Inc.(1)

$

15,345

85,734

$

0.18

$

3,425

44,669

$

0.08

Assumed exchange of shares(2)

3,557

12,694

11,438

53,903

Net Income

18,902

14,863

Adjustments to arrive at adjusted income

before income taxes(3)

12,027

11,368

Adjusted income before income taxes

30,929

26,231

Adjusted income taxes(4)

12,217

10,361

Adjusted Net Income

$

18,712

98,428

$

0.19

$

15,870

98,572

$

0.16

For the nine months ended

September 30, 2017

For the nine months ended

September 30, 2016

Net income

Weighted Average Shares

Net income per share, diluted

Net income

Weighted Average Shares

Net income per share, diluted

Net income attributable to Planet Fitness, Inc.(1)

$

36,599

76,435

$

0.48

$

10,926

39,394

$

0.28

Assumed exchange of shares(2)

18,173

22,010

38,374

59,221

Net Income

54,772

49,300

Adjustments to arrive at adjusted income

before income taxes(3)

42,359

29,754

Adjusted income before income taxes

97,131

79,054

Adjusted income taxes(4)

38,367

31,226

Adjusted Net Income

$

58,764

98,445

$

0.60

$

47,828

98,615

$

0.48

Results of operations

The following table sets forth our condensed consolidated statements of operations as a percentage of total revenue for the three and nine months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Revenue:

Franchise revenue

32.2

%

26.5

%

31.9

%

26.7

%

Commission income

4.3

%

4.8

%

5.3

%

5.5

%

Franchise segment

36.5

%

31.3

%

37.2

%

32.2

%

Corporate-owned stores

29.3

%

30.6

%

28.4

%

30.1

%

Equipment

34.2

%

38.1

%

34.4

%

37.7

%

Total revenue

100.0

%

100.0

%

100.0

%

100.0

%

Operating costs and expenses:

Cost of revenue

26.5

%

29.8

%

26.5

%

29.5

%

Store operations

16.0

%

17.4

%

15.3

%

17.4

%

Selling, general and administrative

14.4

%

14.1

%

14.4

%

13.9

%

Depreciation and amortization

8.3

%

8.9

%

8.1

%

8.8

%

Other loss (gain)

0.0

%

(0.3

%)

0.1

%

(0.2

%)

Total operating costs and expenses

65.2

%

69.9

%

64.4

%

69.4

%

Income from operations

34.8

%

30.1

%

35.6

%

30.6

%

Other income (expense), net:

Interest expense, net

(9.1

%)

(7.2

%)

(9.0

%)

(7.2

%)

Other (expense) income

0.4

%

(0.2

%)

0.1

%

0.0

%

Total other expense, net

(8.7

%)

(7.4

%)

(8.9

%)

(7.2

%)

Income before income taxes

26.1

%

22.7

%

26.7

%

23.4

%

Provision for income taxes

6.7

%

5.5

%

8.1

%

4.4

%

Net income

19.4

%

17.2

%

18.6

%

19.0

%

Less net income attributable to non-controlling interests

3.6

%

13.1

%

6.1

%

14.7

%

Net income attributable to Planet Fitness, Inc.

15.8

%

4.1

%

12.5

%

4.3

%

The following table sets forth a comparison of our condensed consolidated statements of operations for the three months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

(in thousands)

Revenue:

Franchise revenue

$

31,413

$

23,046

$

94,485

$

70,042

Commission income

4,149

4,179

15,668

14,338

Franchise segment

35,562

27,225

110,153

84,380

Corporate-owned stores

28,560

26,675

83,886

78,756

Equipment

33,374

33,107

101,875

98,686

Total revenue

97,496

87,007

295,914

261,822

Operating costs and expenses:

Cost of revenue

25,819

25,925

78,395

77,365

Store operations

15,551

15,181

45,339

45,673

Selling, general and administrative

14,071

12,244

42,659

36,470

Depreciation and amortization

8,137

7,745

23,982

23,127

Other loss (gain)

(36

)

(241

)

280

(406

)

Total operating costs and expenses

63,542

60,854

190,655

182,229

Income from operations

33,954

26,153

105,259

79,593

Other income (expense), net:

Interest expense, net

(8,920

)

(6,291

)

(26,711

)

(18,819

)

Other (expense) income

408

(204

)

157

30

Total other expense, net

(8,512

)

(6,495

)

(26,554

)

(18,789

)

Income before income taxes

25,442

19,658

78,705

60,804

Provision for income taxes

6,540

4,795

23,933

11,504

Net income

18,902

14,863

54,772

49,300

Less net income attributable to non-controlling interests

3,557

11,438

18,173

38,374

Net income attributable to Planet Fitness, Inc.

$

15,345

$

3,425

$

36,599

$

10,926

Comparison of the three months ended September 30, 2017 and three months ended September 30, 2016

Revenue

Total revenues were $97.5 million in the three months ended September 30, 2017, compared to $87.0 million in the three months ended September 30, 2016, an increase of $10.5 million, or 12.1%.

Franchise segment revenue was $35.6 million in the three months ended September 30, 2017, compared to $27.2 million in the three months ended September 30, 2016, an increase of $8.3 million, or 30.6%.

Franchise revenue was $31.4 million in the three months ended September 30, 2017 compared to $23.0 million in the three months ended September 30, 2016, an increase of $8.4 million or 36.3%. Included in franchise revenue is royalty revenue of $22.0 million, franchise and other fees of $7.0 million, and placement revenue of $2.4 million for the three months ended September 30, 2017, compared to royalty revenue of $15.1 million, franchise and other fees of $5.8 million, and placement revenue of $2.2 million for the three months ended September 30, 2016. The $7.0 million increase in royalty revenue was primarily driven by $3.1 million attributable to a same store sales increase of 9.6% in franchisee-owned stores, $2.2 million attributable to royalties from new stores in 2017 as well as stores that opened in 2016 that were not included in the same store sales base, and $1.6 million attributable to higher royalties on annual fees, including stores not included in the same store sales base. The $1.2 million increase in franchise and other fees was primarily driven by higher fees associated with increased store and member count, and higher franchise and transfer fees in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.

Commission income, which is included in our franchise segment, was $4.1 million in the three months ended September 30, 2017 compared to $4.2 million in the three months ended September 30, 2016.

Revenue from our corporate-owned stores segment was $28.6 million in the three months ended September 30, 2017, compared to $26.7 million in the three months ended September 30, 2016, an increase of $1.9 million, or 7.1%. The increase was due to higher revenue

from annual fees of $1.0 million and same store sales from corporate-owned stores which increased 5.1% in the three months ended September 30, 2017 and contributed incremental revenues of $0.9 million.

Equipment segment revenue was $33.4 million in the three months ended September 30, 2017, compared to $33.1 million in the three months ended September 30, 2016, an increase of $0.3 million, or 0.8%. The increase was driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores related to nine fewer new equipment sales in the three months ended September 30, 2017 compared to the three months ended September 30, 2016.

Cost of revenue

Cost of revenue was $25.8 million in the three months ended September 30, 2017 compared to $25.9 million in the three months ended September 30, 2016, a decrease of $0.1 million, or 0.4%. Cost of revenue, which relates to our equipment segment, decreased due to nine fewer equipment sales to new franchisee-owned stores, partially offset by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.

Store operations

Store operation expenses, which relate to our corporate-owned stores segment, were $15.6 million in the three months ended September 30, 2017 compared to $15.2 million in the three months ended September 30, 2016, an increase of $0.4 million, or 2.4%.

Selling, general and administrative

Selling, general and administrative expenses were $14.1 million in the three months ended September 30, 2017 compared to $12.2 million in the three months ended September 30, 2016, an increase of $1.8 million, or 14.9%. The $1.8 million increase was primarily due to additional expenses incurred during the three months ended September 30, 2017 to support our growing operations, including additional headcount, infrastructure, and public company expenses. Partially offsetting this increase was $1.0 million of lower costs incurred in connection with secondary offerings in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count grows.

Depreciation and amortization

Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements.

Depreciation and amortization expense was $8.1 million in the three months ended September 30, 2017 compared to $7.7 million in the three months ended September 30, 2016, an increase of $0.4 million, or 5.1%.

Other (gain)

Other gain was $0 in the three months ended September 30, 2017 compared to $0.2 million in the three months ended September 30, 2016.

Interest expense, net

Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.

Interest expense, net was $8.9 million in the three months ended September 30, 2017 compared to $6.3 million in the three months ended September 30, 2016, an increase of $2.6 million, or 41.8%. The increase in interest expense is a result of the additional $230.0 million in borrowings which occurred in November 2016 as a result of the amendment of our senior secured credit facility.

Other income (expense)

Other income was $0.4 million in the three months ended September 30, 2017 compared to expense of $0.2 million in the three months ended September 30, 2016, an increase of $0.6 million. In the three months ended September 30, 2017, other income includes foreign currency gains of $0.3 million.

Provision for income taxes

Income tax expense was $6.5 million in the three months ended September 30, 2017, compared to $4.8 million in the three months ended September 30, 2016, an increase of $1.7 million. The increase in the provision for income taxes is primarily attributable to the increased economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. in the three months ended September 30, 2017 compared to the three months ended September 30, 2016 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.

The Company is subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Pla-Fit Holdings. Our effective tax rate of 39.5% for the three months ended September 30, 2017 and 2016, was calculated using the U.S. federal income tax rate and the statutory rates applied to income apportioned to each state and local jurisdiction. This tax rate has been applied to the portion of income before taxes that represents the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. The provision for income taxes also reflects an effective state tax rate of 2.1% for the three months ended September 30, 2017 and 2016, applied to non-controlling interests, excluding income from variable interest entities, related to Pla-Fit Holdings.

Segment results

Franchise

Segment EBITDA for the franchise segment was $29.9 million in the three months ended September 30, 2017 compared to $22.8 million in the three months ended September 30, 2016, an increase of $7.1 million, or 31.2%. This increase was primarily the result of growth in our franchise segment revenue of $3.1 million attributable to a same store sales increase of 9.6% in franchisee-owned stores, $2.2 million due to higher royalties received from additional franchisee-owned stores not included in the same store sales base, $1.6 million attributable to higher royalties on annual fees, including stores not included in the same store sales base, and $1.2 million of higher franchise and other fees. The increase in revenue was partially offset by $1.2 million of higher franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $2.1 million for both periods.

Corporate-owned stores

Segment EBITDA for the corporate-owned stores segment was $12.0 million in the three months ended September 30, 2017 compared to $10.6 million in the three months ended September 30, 2016, an increase of $1.5 million, or 14.2%. Of this increase, $1.0 million was attributable to higher annual fee revenue, and $0.9 million was the result of an increase in revenue related to our same store sales increase of 5.1% in the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Depreciation and amortization was $4.0 million and $3.9 million for the three months ended September 30, 2017 and 2016, respectively.

Equipment

Segment EBITDA for the equipment segment was $7.7 million in the three months ended September 30, 2017 compared to $7.2 million in the three months ended September 30, 2016, an increase of $0.5 million, or 7.4%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017 compared to the three months ended September 30, 2016, partially offset by nine fewer equipment sales to new franchisee-owned stores in the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Depreciation and amortization was $1.6 million for both periods.

Comparison of the nine months ended September 30, 2017 and nine months ended September 30, 2016

Revenue

Total revenues were $295.9 million in the nine months ended September 30, 2017, compared to $261.8 million in the nine months ended September 30, 2016, an increase of $34.1 million, or 13.0%.

Franchise segment revenue was $110.2 million in the nine months ended September 30, 2017, compared to $84.4 million in the nine months ended September 30, 2016, an increase of $25.8 million, or 30.5%.

Franchise revenue was $94.5 million in the nine months ended September 30, 2017 compared to $70.0 million in the nine months ended September 30, 2016, an increase of $24.4 million or 34.9%. Included in franchise revenue is royalty revenue of $66.5 million, franchise and other fees of $20.6 million, and placement revenue of $7.4 million for the nine months ended September 30, 2017, compared to royalty revenue of $47.0 million, franchise and other fees of $16.1 million, and placement revenue of $7.0 million for the nine months ended September 30, 2016. The $ 19.5 million increase in royalty revenue was primarily driven by $8.3 million attributable to a same store sales increase of 10.1% in franchisee-owned stores, $6.3 million attributable to royalties from new stores opened in 2017 as well as stores that opened in 2016 that were not included in the same store sales base, and $4.9 million attributable to higher royalties on annual fees, including stores not included in the same store sales base. The $4.5 million increase in franchise and other fees was primarily driven by higher fees associated with increased store and member count in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

Commission income, which is included in our franchise segment, was $15.7 million in the nine months ended September 30, 2017 compared to $14.3 million in the nine months ended September 30, 2016, an increase of $1.3 million or 9.3%. The increase was primarily due to a higher volume of franchisee purchases from vendors due to more franchise stores open during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

Revenue from our corporate-owned stores segment was $83.9 million in the nine months ended September 30, 2017, compared to $78.8 million in the nine months ended September 30, 2016, an increase of $5.1 million, or 6.5%. Same store sales from corporate-owned stores increased 4.6% in the nine months ended September 30, 2017, which contributed incremental revenues of $2.8 million, and annual fee revenue contributed incremental revenues of $2.6 million in the nine months ended September 30, 2017.

Equipment segment revenue was $101.9 million in the nine months ended September 30, 2017, compared to $98.7 million in the nine months ended September 30, 2016, an increase of $3.2 million, or 3.2%. This increase was primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores related to 18 fewer new equipment sales in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Cost of revenue

Cost of revenue was $78.4 million in the nine months ended September 30, 2017 compared to $77.4 million in the nine months ended September 30, 2016, an increase of $1.0 million, or 1.3%. Cost of revenue, which relates to our equipment segment, increased due to an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores.

Store operations

Store operation expenses, which relates to our corporate-owned stores segment, were $45.3 million in the nine months ended September 30, 2017 compared to $45.7 million in the nine months ended September 30, 2016, a decrease of $0.3 million, or 0.7%.

Selling, general and administrative

Selling, general and administrative expenses were $42.7 million in the nine months ended September 30, 2017 compared to $36.5 million in the nine months ended September 30, 2016, an increase of $6.2 million, or 17.0%. The $6.2 million increase was primarily due to additional expenses incurred during the nine months ended September 30, 2017 to support our growing operations, including additional headcount, infrastructure, and public company expenses. Partially offsetting this increase was $1.1 million of lower costs incurred in connection with secondary offerings in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count grows.

Depreciation and amortization

Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements.

Depreciation and amortization expense was $24.0 million in the nine months ended September 30, 2017 compared to $23.1 million in the nine months ended September 30, 2016, an increase of $0.9 million, or 3.7%.

Other (gain) loss

Other loss was $0.3 in the nine months ended September 30, 2017 compared to a gain of $0.4 in the nine months ended September 30, 2016.

Interest expense, net

Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.

Interest expense, net was $26.7 million in the nine months ended September 30, 2017 compared to $18.8 million in the nine months ended September 30, 2016, an increase of $7.9 million, or 41.9%. The increase in interest expense is a result of the additional $230.0 million in borrowings which occurred in November 2016 as a result of the amendment of our senior secured credit facility.

Other income (expense)

Other income (expense) was an expense of $0.2 million in the nine months ended September 30, 2017 compared to $0.0 in the nine months ended September 30, 2016. In the nine months ended September 30, 2017, other expense includes $1.0 million of third party fees recorded in connection with the May 2017 amendment of our credit facility, partially offset by a gain of $0.5 million related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate, and $0.5 million of foreign currency gains.

Provision for income taxes

Income tax expense was $23.9 million in the nine months ended September 30, 2017, compared to $11.5 million in the nine months ended September 30, 2016, an increase of $12.4 million. The increase in the provision for income taxes is primarily attributable to the increased economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.

The Company is subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Pla-Fit Holdings. Our effective tax rate of 39.5% for the nine months ended September 30, 2017 and 2016, was calculated using the U.S. federal income tax rate and the statutory rates applied to income apportioned to each state and local jurisdiction. This tax rate has been applied to the portion of income before taxes that represents the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. The provision for income taxes also reflects an effective state tax rate of 2.1% for the nine months ended September 30, 2017 and 2016, applied to non-controlling interests, excluding income from variable interest entities, related to Pla-Fit Holdings.

Segment results

Franchise

Segment EBITDA for the franchise segment was $94.4 million in the nine months ended September 30, 2017 compared to $71.3 million in the nine months ended September 30, 2016, an increase of $23.1 million, or 32.4%. This increase was primarily the result of growth in our franchise segment revenue of $8.3 million attributable to a same store sales increase of 10.1% in franchisee-owned stores, $6.3 million due to higher royalties received from additional franchisee-owned stores not included in the same store sales base, $4.9 million attributable to higher royalties on annual fees, including stores not included in the same store sales base, $4.5 million of higher franchise and other fees, and $1.3 million of higher commission income, partially offset by a $2.6 million increase in franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $6.4 million for both periods.

Corporate-owned stores

Segment EBITDA for the corporate-owned stores segment was $35.6 million in the nine months ended September 30, 2017 compared to $30.3 million in the nine months ended September 30, 2016, an increase of $5.3 million, or 17.6%. This increase was primarily the result of a $2.8 million increase in revenue related to our same store sales increase of 4.6% and an increase of $2.6 million in annual fee revenue in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Depreciation and amortization was $11.7 million for both periods.

Equipment

Segment EBITDA for the equipment segment was $23.6 million in the nine months ended September 30, 2017 compared to $21.3 million in the nine months ended September 30, 2016, an increase of $2.3 million, or 10.6%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to 18 fewer new franchisee-owned stores the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Depreciation and amortization was $4.7 million for both periods.

Liquidity and capital resources

As of September 30, 2017, we had $93.3 million of cash and cash equivalents. In addition, as of September 30, 2017, we had borrowing capacity of $75.0 million under our revolving credit facility.

We require cash principally to fund day-to-day operations, to finance capital investments, to service our outstanding debt and tax benefit arrangements and to address our working capital needs. Based on our current level of operations and anticipated growth, we believe that with the available cash balance, the cash generated from our operations, and amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements and obligations under the tax benefit arrangements, capital expenditures and working capital needs for at least the next 12 months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk factors” in the Annual Report. There can be no assurance, however, that our business will generate sufficient

cash flows from operations or that future borrowings will be available under our revolving credit facility or otherwise to enable us to service our indebtedness, including our senior secured credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

The following table presents summary cash flow information for the nine months ended September 30, 2017 and 2016:

Nine months ended September 30,

(in thousands)

2017

2016

Net cash (used in) provided by:

Operating activities

$

93,028

$

75,738

Investing activities

(23,063

)

(8,864

)

Financing activities

(17,490

)

(32,437

)

Effect of foreign exchange rates on cash

399

87

Net increase in cash

$

52,874

$

34,524

Operating activities

For the nine months ended September 30, 2017, net cash provided by operating activities was $93.0 million compared to $75.7 million in the nine months ended September 30, 2016, an increase of $17.3 million. Of the increase, $18.4 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, partially offset by $1.1 million of higher cash used for working capital in the nine months ended September 30, 2017.

Investing activities

Cash flow used in investing activities related to the following capital expenditures for the nine months ended September 30, 2017 and 2016:

Nine months ended September 30,

(in thousands)

2017

2016

New corporate-owned stores and corporate-owned stores not

yet opened

$

1,313

$

-

Existing corporate-owned stores

14,651

8,308

Information systems

1,070

533

Corporate and all other

6,195

425

Total capital expenditures

$

23,229

$

9,266

For the nine months ended September 30, 2017, net cash used in investing activities was $23.1 million compared to $8.9 million in the nine months ended September 30, 2016, an increase of $14.2 million, and was primarily related to higher capital expenditures on existing corporate-owned stores and costs incurred with our headquarters relocation.

Financing activities

For the nine months ended September 30, 2017, net cash used in financing activities was $17.5 million compared to $32.4 million in the nine months ended September 30, 2016, a decrease of $14.9 million. Continuing LLC Owner distributions were $9.3 million in the nine months ended September 30, 2017 compared to $27.1 million in the nine months ended September 30, 2016.

Credit facility

Our senior secured credit facility consists of term loans and a revolving credit facility. Borrowings under the term loans bear interest, payable at least semi-annually. The term loans require principal payments equal to approximately $7.2 million per calendar year, payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due on March 31, 2021.

The senior secured credit facility also provides for borrowings of up to $75.0 million under the revolving credit facility, of which up to $9.4 million is available for letter of credit advances. Borrowings under the revolving credit facility (excluding letters of credit) bear interest, payable at least semi-annually. We also pay a 0.40% commitment fee per annum on the unused portion of the revolver. The revolving credit facility expires on March 31, 2019.

The credit agreement governing our senior secured credit facility requires us to comply on a quarterly basis with one financial covenant which is a maximum ratio of debt to Credit Facility Adjusted EBITDA (the “leverage ratio”) that becomes more restrictive over time. This covenant

is only for the benefit of the revolving credit facility. At September 30, 2017, the terms of the senior secured credit facility require that we maintain a leverage ratio of no more than 5.75 to 1.0. The leverage ratio financial covenant will become more restrictive over time and will require us to maintain a leverage ratio of no more than 4.25 to 1.0 by June 30, 2020.

Failure to comply with this covenant would result in an event of default under our senior secured credit facility unless waived by our senior secured credit facility lenders. An event of default under our senior secured credit facility can result in the acceleration of our indebtedness under the facility, which in turn can result in an event of default and possible acceleration of our other indebtedness, if any.

As of September 30, 2017, we were in compliance with our senior secured credit facility financial covenant with a leverage ratio of 3.6 to 1.0 which was calculated for the 12 months ended September 30, 2017 based upon certain adjustments to EBITDA, as provided for under the terms of our senior secured credit facility.

On November 10, 2016, we amended our credit agreement governing our senior secured credit facility primarily to provide for an increase of $230.0 million in term loan borrowings for a total of $718.5 million, decrease the interest rate spread on our term loan by 25 basis points, and increase our revolving credit facility to $75.0 million. The full incremental borrowing of $230.0 million and approximately $41.0 million of cash on hand was used to pay a dividend of $169.3 million to shareholders of our Class A common stock and make cash dividend equivalent payments of $101.7 million to Continuing LLC Owners. The incremental term loan borrowings bear a variable rate of interest of the greater of LIBOR or 0.75% in respect of the term loans plus the applicable margin of 3.50%. In connection with the increased borrowings under the term loans, the contractually required leverage ratios under the covenants were adjusted. All other terms and conditions remained unchanged under the senior secured credit facility.

On May 26, 2017, we further amended our credit agreement governing our senior secured credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment also reduced the interest rate margin for revolving loan borrowings by 25 basis points.

Off-balance sheet arrangements

As of September 30, 2017, our off-balance sheet arrangements consisted of operating leases and certain guarantees. In a limited number of cases, we have guaranteed certain leases and debt agreements of entities related through common ownership. These guarantees relate to leases for operating space, equipment and other operating costs of franchises operated by the related entities. Our maximum total commitment under these agreements is approximately $1.0 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at September 30, 2017 was not material, and no accrual has been recorded for our potential obligation under these arrangements.

Critical accounting policies and use of estimates

There have been no material changes to our critical accounting policies and use of estimates from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

JOBS Act

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups (“JOBS”) Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Class A common stock under our registration statement. As of June 30, 2017, the market value of our Class A common stock held by non-affiliates exceeded $700 million. As a result, we anticipate that we will no longer be an emerging growth company beginning January 1, 2018.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Interest rate risk

We are exposed to market risk from changes in interest rates on our senior secured credit facility, which bears interest at variable rates and has a U.S. dollar LIBOR floor of 0.75% in respect of the term loans. As of September 30, 2017, we had outstanding borrowings of $713.1 million. An increase in the effective interest rate applied to these borrowings of 100 basis points would result in a $7.1 million increase in pre-tax interest expense on an annualized basis. We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments. To mitigate exposure to fluctuations in interest rates, we entered into a series of interest rate caps as discussed in Note 6 to our unaudited condensed consolidated interim financial statements elsewhere in this Quarterly Report on Form 10-Q.

Foreign exchange risk

We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian entities. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of September 30, 2017, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would increase or decrease net income by a negligible amount.

Inflation risk

Although we do not believe that inflation has had a material effect on our income from continuing operations, we have a substantial number of hourly employees in our corporate-owned stores that are paid wage rates at or based on the applicable federal or state minimum wage. Any increases in these minimum wages will subsequently increase our labor costs. We may or may not be able to offset cost increases in the future.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38

PART II-OTHER INFORMATION

ITEM 1. Legal Proceedings

We are currently involved in various claims and legal actions that arise in the ordinary course of business, most of which are covered by insurance. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, financial condition, results of operations, liquidity or capital resources nor do we believe that there is a reasonable possibility that we will incur material loss as a result of such actions. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1A. Risk Factors.

For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in the Annual Report.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities by the Company during the three months ended September 30, 2017.

In connection with our IPO, we and the existing holders of Holdings Units entered into an exchange agreement under which they (or certain permitted transferees) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, together with a corresponding number of shares of Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions. As an existing holder of Holdings Units exchanges Holdings Units for shares of Class A common stock, the number of Holdings Units held by Planet Fitness, Inc. is correspondingly increased, and a corresponding number of shares of Class B common stock are cancelled.

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Mine Safety Disclosures.

None.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits

Description of Exhibit Incorporated

Herein by Reference

Exhibit

Exhibit

Filed

Number

Exhibit Description

Form

File No.

Filing Date

Number

Herewith

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

101

Interactive Data Files pursuant to Rule 405 of regulation S-T (XBRL)

X

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Planet Fitness, Inc.

(Registrant)

Date: November 8, 2017

/s/ Dorvin Lively

Dorvin Lively

President and Chief Financial Officer

(On behalf of the Registrant and as Principal Financial Officer)


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