S-1 1 d147543ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on May 27, 2016

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Planet Fitness, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   7997   38-3942097

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer Identification Number)

26 Fox Run Road

Newington, NH 03801

(603) 750-0001

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Chris Rondeau

Chief Executive Officer

Planet Fitness, Inc.

26 Fox Run Road

Newington, NH 03801

(603) 750-0001

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

David A. Fine

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

Dorvin Lively

Chief Financial Officer

Planet Fitness, Inc.

26 Fox Run Road

Newington, NH 03801

(603) 750-0001

 

John C. Ericson

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

(212) 455-2000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer ¨   Accelerated filer ¨  

Non-accelerated filer x

(Do not check if a

smaller reporting company)

  Smaller reporting company ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to Be
 Registered(1) 

 

Proposed
Maximum
 Offering Price 

 per Share(2) 

 

Proposed

Maximum

Aggregate
 Offering Price(1)(2) 

  Amount of
Registration Fee

Class A common stock, $0.0001 par value per share

  11,500,000   $17.51   $201,365,000   $20,278

 

 

(1)   Includes 1,500,000 shares of Class A common stock that may be sold if the underwriters’ option to purchase additional shares granted by the Registrant is exercised. See “Underwriting.”
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. In accordance with Rule 457(c) under the Securities Act of 1933, as amended, the price shown is the average of the high and low prices on May 24, 2016, as reported on the New York Stock Exchange.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated May 27, 2016

Preliminary prospectus

10,000,000 shares

 

LOGO

Planet Fitness, Inc.

Class A Common Stock

$        per share

The selling stockholders identified in this prospectus are offering 10,000,000 shares of our Class A common stock. We are not selling any shares of Class A common stock under this prospectus, and we will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Our Class A common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “PLNT.” On May 26, 2016, the last sale price of our Class A common stock as reported on the NYSE was $17.85 per share.

The selling stockholders have granted the underwriters an option to purchase up to 1,500,000 additional shares of our Class A common stock.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

      Per share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to selling stockholders before expenses(1)

   $         $     

 

 

 

(1)  

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting” for additional information regarding underwriting compensation.

Investing in our Class A common stock involves risk. See “Risk factors” beginning on page 16 to read about factors you should consider before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to investors on or about                     , 2016.

 

J.P. Morgan   BofA Merrill Lynch   Jefferies

Prospectus dated                     , 2016


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Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     16   

Cautionary note regarding forward-looking statements

     42   

Use of proceeds

     43   

Dividend policy

     44   

Price range of our Class A common stock

     45   

Capitalization

     46   

Unaudited pro forma consolidated financial information

     47   

Selected consolidated financial and other data

     57   

Management’s discussion and analysis of financial condition and results of operations

     62   

Business

     95   

Management

     114   

Executive compensation

     122   

Certain relationships and related party transactions

     127   

Principal and selling stockholders

     134   

Description of certain indebtedness

     138   

Description of capital stock

     141   

Shares eligible for future sale

     145   

Material U.S. federal income tax considerations for Non-U.S. Holders

     147   

Underwriting

     152   

Legal matters

     160   

Experts

     160   

Where you can find more information

     160   

Index to consolidated financial statements

     F-1   

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we nor the selling stockholders nor the underwriters have authorized anyone to provide you with different information, and neither we nor the selling stockholders nor the underwriters take responsibility for any other information others may give you. Neither we nor the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

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Industry and market data

This prospectus includes market data with respect to the health club industry. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market data and certain industry forecasts that were obtained from third-party surveys, market research, consultant surveys, publicly available information and industry publications and surveys, including the International Health, Racquet & Sportsclub Association, which we believe to be reliable. In some cases, the information has been developed by us for purposes of this offering based on our existing data and is believed by us to have been prepared in a reasonable manner. Other industry and market data included in this prospectus are from internal analyses based upon data available from known sources or other proprietary research and analysis. We believe this data to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because it cannot always be verified with complete certainty due to the limitations on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable.

Trademarks, trade names and service marks

We own or have rights to trademarks, trade names and service marks that we use in connection with the operation of our business, including “Planet Fitness,” “Judgement Free Zone,” “We’re Not a Gym. We’re Planet Fitness.,” “PE@PF,” “No Lunks,” “PF Black Card,” “No Gymtimidation,” “You Belong,” “Judgement Free Generation” and various other marks. Solely for convenience, the trademarks, trade names and service marks referred to in this prospectus are listed without the ®, SM and TM symbols, but we will assert our rights to our trademarks, trade names and service marks to the fullest extent under applicable law.

 

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Prospectus summary

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our Class A common stock, and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk factors” and our financial statements and the related notes, before deciding to purchase shares of our Class A common stock. Unless the context requires otherwise, references in this prospectus to the “Company,” “we,” “us” and “our” refer to Planet Fitness, Inc. and its consolidated subsidiaries after giving effect to the recapitalization transactions described in this prospectus that were completed in connection with our initial public offering.

Our Company

Fitness for everyone

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.

Our judgement-free approach to fitness and exceptional value proposition have enabled us to grow our revenues to $330.5 million in 2015 and to become an industry leader with $1.5 billion in system-wide sales during 2015 (which we define as monthly dues and annual fees billed by us and our franchisees), and more than 8.3 million members and 1,171 stores in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of March 31, 2016. System-wide sales for 2015 include $1.4 billion attributable to franchisee-owned stores, from which we generate royalty revenue, and $95.6 million attributable to our corporate-owned stores. Of our 1,171 stores, 1,113 are franchised and 58 are corporate-owned. Our stores are successful in a wide range of geographies and demographics. According to internal and third-party analysis, we believe we have the opportunity to more than triple our store count to over 4,000 stores in the U.S. alone. As of March 31, 2016, we had commitments from franchisees to open more than 1,000 new stores under existing area development agreements (“ADAs”).

In 2015, our corporate-owned stores had segment EBITDA margin of 36.7% and had average unit volumes (“AUVs”) of approximately $1.7 million with four-wall EBITDA margins (an assessment of store-level profitability which includes local and national advertising expense) of approximately 42%, or approximately 37% after applying the 5% royalty rate under our current franchise agreement. Based on a survey of franchisees, we believe that our franchise stores achieve four-wall EBITDA margins in line with these corporate-owned store EBITDA margins. Our strong member value proposition has also driven growth throughout a variety of

 

 

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economic cycles and conditions. For a reconciliation of segment EBITDA margin to four-wall EBITDA margin for corporate-owned stores, see “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP financial measures.”

Our significant growth is reflected in:

 

 

1,124 stores as of December 31, 2015, compared to 488 as of December 31, 2011, reflecting a compound annual growth rate (“CAGR”) of 23.2%;

 

 

7.3 million members as of December 31, 2015, compared to 2.9 million as of December 31, 2011, reflecting a CAGR of 25.8%;

 

 

2015 system-wide sales of $1.5 billion, reflecting a CAGR of 30.5%, or an increase of $1.0 billion, since 2011;

 

 

2015 total revenue of $330.5 million, reflecting a CAGR of 24.8%, or an increase of $194.1 million, since 2011, of which 4.3% is attributable to revenues from corporate-owned stores acquired from or sold to franchisees since 2011;

 

 

37 consecutive quarters of system-wide same store sales growth (which we define as year-over-year growth solely of monthly dues from stores that have been open and for which membership dues have been billed for longer than 12 months);

 

 

2015 net income of $38.1 million, reflecting a CAGR of 6.8%, or an increase of $8.8 million, since 2011. Our historical results, prior to our initial public offering, benefit from insignificant income taxes due to our status as a pass-through entity for U.S. federal income tax purposes, and we anticipate future results will not be comparable to periods prior to our initial public offering as our income attributable to Planet Fitness, Inc. will be subject to U.S. federal and state taxes;

 

 

2015 Adjusted EBITDA of $123.5 million, reflecting a CAGR of 34.1%, or an increase of $85.3 million, since 2011; and

 

 

2015 pro forma adjusted net income of $53.2 million compared to $42.2 million in 2014, an increase of 26.2%.

 

LOGO

 

LOGO

 

LOGO

 

 

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For a discussion of Adjusted EBITDA and pro forma adjusted net income and a reconciliation of Adjusted EBITDA and pro forma adjusted net income to net income, see “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP financial measures.” For a discussion of same store sales and the effect of our point-of-sale and billing system, see “Management’s discussion and analysis of financial condition and results of operations—How we assess the performance of our business.”

We’re not a gym. We’re Planet Fitness.

We believe our approach to fitness is revolutionizing the industry by bringing fitness to a large, previously underserved segment of the population. Our differentiated member experience is driven by three key elements:

 

 

Judgement Free Zone:    We believe every member should feel accepted and respected when they walk into a Planet Fitness. Our stores provide a Judgement Free Zone where members of all fitness levels can enjoy a non-intimidating environment. Our “come as you are” approach has fostered a strong sense of community among our members, allowing them not only to feel comfortable as they work toward their fitness goals but also to encourage others to do the same. The removal of heavy free weights reinforces our Judgement Free Zone by discouraging what we call “Lunkhead” behavior, such as dropping weights and grunting, that can be intimidating to new and occasional gym users. In addition, to help maintain our welcoming, judgement-free environment, each store has a purple and yellow branded “Lunk” alarm on the wall that staff occasionally rings as a light-hearted reminder of our policies.

 

 

Distinct store experience:    Our bright, clean, large-format stores offer our members a selection of high-quality, purple and yellow Planet Fitness-branded cardio, circuit- and weight-training equipment that is commonly used by first-time and occasional gym users. Because our stores are typically 20,000 square feet and we do not offer non-essential amenities such as group exercise classes, pools, day care centers and juice bars, we have more space for the equipment our members do use, and we have not needed to impose time limits on our cardio machines.

 

 

Exceptional value for members:    Both our standard and PF Black Card memberships are priced significantly below the industry average of $52 per month and still provide our members with a high-quality fitness experience. For only $10 per month, our standard membership includes unlimited access to one Planet Fitness location and unlimited free fitness instruction to all members in small groups through our PE@PF program. For $19.99 per month, our PF Black Card members have access to all of our stores system-wide and can bring a guest on each visit, which provides an additional opportunity to attract new members. Our PF Black Card members also have access to exclusive areas in our stores that provide amenities such as water massage beds, massage chairs, tanning equipment and more.

Our differentiated approach to fitness has allowed us to create an attractive franchise model that is both profitable and scalable. We recognize that our success depends on a shared passion with our franchisees for providing a distinctive store experience based on a judgement-free environment and an exceptional value for our members. We enhance the attractiveness of our streamlined, easy-to-operate franchise model by providing franchisees with extensive operational support relating to site selection and development, marketing and training. We also take a highly collaborative, teamwork approach to our relationship with franchisees, as captured by our motto “One Team, One Planet.” The strength of our brand and the attractiveness of our franchise model are evidenced by the fact that over 90% of our new stores in 2015 were opened by our existing franchisee base.

 

 

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Our competitive strengths

We attribute our success to the following strengths:

 

 

Market leader with differentiated member experience, nationally recognized brand and scale advantage.    We believe we are the largest operator of fitness centers in the United States by number of members, with more than 8.3 million members as of March 31, 2016. Our franchisee-owned and corporate-owned stores generated $1.5 billion in system-wide sales during 2015. Through our differentiated member experience, nationally recognized brand and scale advantage, we will continue to deliver a compelling value proposition to our members and our franchisees and, we believe, grow our store and total membership base.

 

   

Differentiated member experience.    We seek to provide our members with a high-quality fitness experience in a non-intimidating, judgement-free environment at an exceptional value. We have a dedicated Brand Excellence team that seeks to ensure that all our franchise stores uphold our brand standards and deliver a consistent Planet Fitness member experience in every store.

 

   

Nationally recognized brand.    We have developed a highly relatable and recognized brand that emphasizes our focus on providing our members with a judgement-free environment. We do so through fun and memorable marketing campaigns and in-store signage that often poke fun at “Lunk” behavior. As a result, we have the highest aided and unaided brand awareness and likelihood to join scores in the U.S. fitness industry, according to a third-party consumer study that we commissioned in January 2016. Our brand strength also helps our franchisees attract members, with new stores in 2015 signing up an average of approximately 1,300 members even before opening their doors.

 

   

Scale advantage.    Our scale provides several competitive advantages, including enhanced purchasing power with our fitness equipment and other suppliers and the ability to attract high-quality franchisee partners. In addition, we estimate that our large U.S. national advertising fund, funded by franchisees and us, together with our requirement that franchisees generally spend 5 to 7% of their monthly membership dues on local advertising, have enabled us and our franchisees to spend over $225 million since 2011 on marketing to drive consumer brand awareness.

 

 

Exceptional value proposition that appeals to a broad member demographic.    We offer a high-quality and consistent fitness experience throughout our entire store base at low monthly membership dues. Combined with our non-intimidating and welcoming environment, we are able to attract a broad member demographic based on age, household income, gender and ethnicity. Our member base is over 50% female and our members come from both high- and low-income households. Our broad appeal and ability to attract occasional and first-time gym users enable us to continue to target a large segment of the population in a variety of markets and geographies across the United States and Canada.

 

 

Strong store-level economics.    Our store model is designed to generate attractive four-wall EBITDA margins, strong free cash flow and high returns on invested capital for both our corporate-owned and franchise stores. Average four-wall EBITDA margins for our corporate-owned stores have increased significantly since 2011, driven by higher average members per store as well as a higher percentage of PF Black Card members, which leverage our relatively fixed costs. In 2015, our corporate-owned stores had segment EBITDA margin of 36.7% and had AUVs of approximately $1.7 million with four-wall EBITDA margins of approximately 42%, or approximately 37% after applying the 5% royalty rate under our current franchise agreement. Based on a survey of franchisees, we believe that our franchise stores achieve four-wall EBITDA margins in line with these corporate-owned store EBITDA margins. We believe that our strong store-level economics are important to our ability to attract and retain successful franchisees and grow our store base.

 

 

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Highly attractive franchise system built for growth.    Our easy-to-operate model, strong store-level economics and brand strength have enabled us to attract a team of professional, successful franchisees from a variety of industries. We believe that our franchise model enables us to scale more rapidly than a company-owned model. Our streamlined model features relatively fixed labor costs, minimal inventory, automatic billing and limited cash transactions. Our franchisees enjoy recurring monthly member dues, regardless of member use, weather or other factors. Based on survey data and management estimates, we believe our franchisees can earn, in their second year of operations, on average, a cash-on-cash return on initial investment greater than 25% after royalties and advertising, which is in line with our corporate-owned stores. The attractiveness of our franchise model is further evidenced by the fact that our franchisees re-invest their capital with us, with over 90% of our new stores in 2015 opened by our existing franchisee base. We view our franchisees as strategic partners in expanding the Planet Fitness store base and brand.

 

 

Predictable and recurring revenue streams with high cash flow conversion.    Our business model provides us with predictable and recurring revenue streams. In 2015, over 90% of both our corporate-owned store and franchise revenues consisted of recurring revenue streams, which include royalties, vendor commissions, monthly dues and annual fees. In addition, our franchisees are obligated to purchase fitness equipment from us or our vendors for their new stores and to replace this equipment every four to seven years. As a result, these “equip” and “re-equip” requirements create a predictable and growing revenue stream as our franchisees open new stores under their ADAs. By re-investing in stores, we and our franchisees maintain and enhance our member experience. Our predictable and recurring revenue streams, combined with our attractive margins and minimal capital requirements, result in high cash flow conversion and increased capacity to invest in future growth initiatives.

 

 

Proven, experienced management team driving a strong culture.    Our strategic vision and unique culture have been developed and fostered by our senior management team under the stewardship of Chief Executive Officer, Chris Rondeau. Mr. Rondeau has been with Planet Fitness for over 20 years and helped develop the Planet Fitness business model and brand elements that give us our distinct personality and spirited culture. Dorvin Lively, our Chief Financial Officer, brings valuable expertise from his 30 years of corporate finance experience with companies such as RadioShack and Ace Hardware, and from the initial public offering of Maidenform Brands. We have assembled a management team that shares our passion for “fitness for everyone” and has extensive experience across a broad range of disciplines, including retail, franchising, finance, consumer marketing, brand development and information technology. We believe our senior management team is a key driver of our success and has positioned us well to execute our long-term growth strategy.

Our growth strategies

We believe there are significant opportunities to grow our brand awareness, increase our revenues and profitability and deliver shareholder value by executing on the following strategies:

 

 

Continue to grow our store base across a broad range of markets.    We have grown our store count over the last five years, expanding from 389 stores as of December 31, 2010 to 1,171 stores as of March 31, 2016. As of March 31, 2016, our franchisees have signed ADAs to open more than 1,000 additional stores over the next five years, including approximately 500 over the next three years. Because our stores are successful across a wide range of geographies and demographics with varying population densities, we believe that our high level of brand awareness and low per capita penetration outside of our original Northeast market create a significant opportunity to open new Planet Fitness stores. Based on our internal and third-party analysis, we believe we have the potential to grow our store base to over 4,000 stores in the United States alone.

 

 

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Drive revenue growth and system-wide same store sales.    Because we provide a high-quality, affordable, non-intimidating fitness experience that is designed for first-time and occasional gym users, we have achieved positive system-wide same store sales growth in each of the past 37 quarters. We expect to continue to grow system-wide same store sales primarily by:

 

   

Attracting new members to existing Planet Fitness stores.    As the U.S. and Canadian populations continue to focus on health and wellness, we believe we are well-positioned to capture a disproportionate share of the population given our appeal to first-time and occasional gym users. In addition, because our stores offer a large, focused selection of equipment geared toward first-time and occasional gym users, we are able to service higher member volumes without sacrificing the member experience. We also have continued to evolve our offerings to appeal to our target member base, such as the introduction of 12-minute abdominal circuits and 30-minute express workout areas.

 

   

Increasing mix of PF Black Card memberships by enhancing value and member experience.    We expect to drive sales by converting our existing members with standard membership dues at $10 per month to our premium PF Black Card membership with dues at $19.99 per month as well as attracting new members to join at the PF Black Card level. We encourage this upgrade by continuing to enhance the value of our PF Black Card benefits through additional in-store amenities and affinity partnerships with well-known retail brands for discounts and promotions. Since 2011, our PF Black Card members as a percentage of total membership has increased from 42% in 2011 to 57% in 2015, and our average monthly dues per member have increased from $14.24 to $15.64 over the same period.

We may also explore other future revenue opportunities, such as optimizing member pricing and fees, offering new merchandise and services inside and outside our stores, and securing affinity and other corporate partnerships.

 

 

Increase brand awareness to drive growth.    We plan to continue to increase our strong brand awareness by leveraging significant marketing expenditures by our franchisees and us, which we believe will result in increasing membership in new and existing stores and continue to attract high-quality franchisee partners. Under our current U.S. and Canadian franchise agreements, franchisees are required to contribute 2% of their monthly membership dues to our National Advertising Fund (“NAF”), from which we spent over $26 million in 2015 alone to support our national marketing campaigns, our social media platforms and the development of local advertising materials. Under our current U.S. and Canadian franchise agreements, franchisees are also required to spend 7% of their monthly membership dues on local advertising. We expect both our NAF and local advertising spending to grow as our membership grows.

 

 

Continue to expand royalties from increases in average royalty rate and new franchisees.    While our current franchise agreement stipulates monthly royalty rates of 5% of monthly dues and annual membership fees, only 37% of our stores are paying royalties at the current franchise agreement rate, primarily due to lower rates in historical agreements. As new franchisees enter our system and, generally, as current franchisees open new stores or renew their existing franchise agreements at the current royalty rate, our average system-wide royalty rate will increase. Also, when existing stores with royalty rates below our current rate are transferred, whether to new or existing franchisees, our average system-wide royalty rate will increase. In 2015, our average monthly royalty rate was 3.27% compared to 1.67% in 2011. In addition to rising average royalty rates, total royalty revenue will continue to grow as we expand our franchise store base and increase franchise same store sales.

 

 

Grow sales from fitness equipment and related services.    Our franchisees are contractually obligated to purchase fitness equipment from us and, in international markets, from our required vendors. Due to our

 

 

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scale and negotiating power, we believe we offer competitive pricing for high-quality, purple and yellow Planet Fitness-branded fitness equipment. We expect our equipment sales to grow as our U.S. franchisees open new stores. In international markets, we earn a commission on the sale of equipment by our required vendors to franchisee-owned stores. Additionally, all franchisees are required to replace their existing equipment with new equipment every four to seven years. As the number of franchise stores continues to increase and existing franchise stores continue to mature, we anticipate incremental growth in revenue related to the sale of equipment to U.S. franchisees and commissions on the sale of equipment to international franchisees. In addition, we believe that regularly refreshing equipment helps our franchise stores maintain a consistent, high-quality fitness experience and drives new member growth.

Summary risk factors

An investment in our Class A common stock involves a high degree of risk. Any of the factors set forth under “Risk factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus, and, in particular, you should evaluate the specific factors set forth under “Risk factors” in deciding whether to invest in our Class A common stock. Among these important risks are the following:

 

 

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

 

 

risks relating to damage to our brand and reputation;

 

 

our ability to successfully implement our growth strategy;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

the substantial indebtedness of our subsidiary, Planet Fitness Holdings, LLC, which totaled $491.0 million as of March 31, 2016.

Implications of being an emerging growth company

As a company with less than $1.0 billion in revenues during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include:

 

 

reduced disclosure about our executive compensation arrangements;

 

 

no non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; and

 

 

exemption from the auditor attestation requirement of our internal control over financial reporting.

 

 

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We may take advantage of these exemptions for up to five years after our initial public offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of our fiscal year, we have more than $700.0 million in market value of our stock held by non-affiliates as of the end of our second fiscal quarter or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some or all of these reduced disclosure obligations.

Our initial public offering and organizational structure

On August 11, 2015, we closed an initial public offering (“IPO”) of 15,525,000 shares of our Class A common stock at a public offering price of $16.00 per share, including 2,025,000 shares issued pursuant to the underwriters’ option to purchase additional shares. We received $156.9 million in proceeds, after deducting underwriting discounts and commissions, which we used to purchase issued and outstanding membership interests (the “Holdings Units”) from existing equity owners of Pla-Fit Holdings, LLC (the “Continuing LLC Owners”) at a purchase price per unit equal to the initial public offering price per share of our Class A common stock. Our Continuing LLC Owners consist of investment funds affiliated with TSG Consumer Partners, LLC, which we refer to, together with its affiliates, as “TSG” or our “Sponsor,” and certain employees and current and former directors.

Planet Fitness, Inc. is a holding company, and its principal material asset is an equity interest in Pla-Fit Holdings, LLC. As the sole managing member of Pla-Fit Holdings, LLC, Planet Fitness, Inc. operates and controls all of the business and affairs of Pla-Fit Holdings, LLC and, through Pla-Fit Holdings, LLC and its subsidiaries, conducts our business. Although we have a minority economic interest in Pla-Fit Holdings, LLC, we have the sole voting interest in, and control the management of, Pla-Fit Holdings, LLC. As a result, Planet Fitness, Inc. consolidates Pla-Fit Holdings, LLC in its consolidated financial statements and reports a non-controlling interest related to the Holdings Units held by the Continuing LLC Owners in our consolidated financial statements.

In connection with the IPO, we completed a series of recapitalization transactions including the following:

 

 

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

 

 

We issued 72,602,810 shares of Class B common stock to the Continuing LLC Owners on a one-to-one basis for each Holdings Unit owned. The shares of Class B common stock have no economic rights to dividends or distributions, whether in cash or stock, but entitle the holder to one vote per share on matters presented to stockholders of Planet Fitness, Inc.

 

 

We merged with Planet Fitness Holdings L.P., our predecessor entity that held indirect interests in Pla-Fit Holdings, LLC, for which we issued 26,106,930 shares of Class A common stock to the holders of interests in Planet Fitness Holdings L.P., which consisted of additional investment funds affiliated with TSG (the “Direct TSG Investors”).

 

 

We and the Continuing LLC Owners entered into an exchange agreement under which they have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, together with the corresponding 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.

 

 

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The diagram below depicts our organizational structure immediately following this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

LOGO

Our sponsor

TSG Consumer Partners is a leading private equity firm focused exclusively on the branded consumer sector. TSG manages $5 billion of institutional equity capital and has invested in over 70 consumer brands since its founding in 1987. TSG utilizes its extensive industry expertise across verticals, such as food, beverage, beauty, apparel, accessories, restaurants, retail and franchisors, and works closely with its partner companies to implement fundamental improvements in sales, marketing, operations and financial controls.

 

 

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Following the completion of this offering, investment funds affiliated with TSG will own approximately     % of our Class A common stock, or     % if the underwriters exercise in full their option to purchase additional shares of our Class A common stock, and     % of our outstanding Class B common stock, or     % if the underwriters exercise in full their option to purchase additional shares of our Class A common stock, which, combined with their holdings of our Class A common stock, aggregates to     % of our voting power, or     % of our voting power if the underwriters exercise in full their option to purchase additional shares of our Class A common stock, and     % of the outstanding Holdings Units, or     % of the outstanding Holdings Units if the underwriters exercise in full their option to purchase additional shares of our Class A common stock. As a result, we will continue to be a “controlled company” within the meaning of the corporate governance standards of the NYSE, and TSG will continue to have significant influence over us and decisions made by stockholders and may have interests that differ from yours. See “Risk factors—Risks related to our Class A common stock and this offering—TSG has significant influence over us, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.”

In connection with the IPO, we entered into a stockholders agreement with investment funds affiliated with TSG. Pursuant to the stockholders agreement, we are required to take all necessary action to cause the board of directors and its committees to include individuals designated by TSG and to include such individuals in the slate of nominees recommended by the board of directors for election by our stockholders. These nomination rights are described in this prospectus in the sections titled “Management—Board composition and director independence” and “Management—Board committees.” In addition, our certificate of incorporation provides that we renounce any interest or expectancy in the business opportunities of TSG and of its officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries, and each such party will have no obligation to offer us those opportunities unless presented to one of our directors or officers in his or her capacity as a director or officer. Our TSG-affiliated directors have fiduciary duties to us and, in addition, have duties to TSG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and TSG, whose interests may be adverse to ours in some circumstances.

Corporate information

Planet Fitness, Inc. was incorporated in Delaware in March 2015. Our principal executive offices are located at 26 Fox Run Road, Newington, New Hampshire 03801, and our telephone number is (603) 750-0001. Our Internet website is www.planetfitness.com. The information on, or that can be accessed through, this website and the other Internet websites that we present in this prospectus is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase shares of our Class A common stock.

 

 

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The offering

 

Issuer in this offering

Planet Fitness, Inc.

 

Class A common stock offered by the selling stockholders



10,000,000 shares, including              shares offered by certain Continuing LLC Owners following the exchange of certain of their Holdings Units (together with              corresponding shares of Class B common stock) for shares of Class A common stock

 

Underwriters’ option to purchase additional shares of Class A common stock from the selling stockholders




1,500,000 shares

 

Class A common stock to be outstanding after this offering



             shares (or              shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock)

 

Class B common stock to be outstanding after this offering



             shares (or              shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock), all of which will be owned by the Continuing LLC Owners.

 

Voting rights

Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or as otherwise provided by our certificate of incorporation. Each share of Class A common stock and Class B common stock will entitle its holder to one vote per share on all such matters. See “Description of capital stock.”

 

Ratio of shares of Class A common stock to Holdings Units



The amended and restated limited liability company agreement of Pla-Fit Holdings, LLC (the “New LLC Agreement”) requires that we at all times maintain (x) a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of Holdings Units owned by us and (y) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC Owners and the number of Holdings Units owned by the Continuing LLC Owners. This construct is intended to result in the Continuing LLC Owners having a voting interest in Planet Fitness, Inc. that is identical to the Continuing LLC Owners’ percentage economic interest in Pla-Fit Holdings, LLC. The Continuing LLC Owners own all of our outstanding Class B common stock.

 

Use of proceeds

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of shares of Class A

 

 

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common stock offered by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. See “Use of proceeds.”

 

Controlled company

Following this offering, we will continue to be a “controlled company” within the meaning of the corporate governance rules of the NYSE. See “Management—Board composition and director independence.”

 

Dividend policy

We do not currently intend to pay dividends on our Class A common stock. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. Any future determination to pay dividends to holders of Class A common stock will be at the sole discretion of our board of directors and will depend upon many factors, including general economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us and any other factors that our board of directors may deem relevant. See “Dividend policy.”

 

Risk factors

You should read the “Risk factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Class A common stock.

 

NYSE symbol

“PLNT”

The number of shares of Class A common stock to be outstanding immediately after this offering is based on 36,597,985 shares of Class A common stock outstanding as of May 24, 2016 and excludes:

 

 

61,970,964 shares of Class A common stock issuable upon exchange or redemption of Holdings Units, together with corresponding shares of Class B common stock; and

 

 

7,586,530 shares of Class A common stock reserved for future issuance under our equity incentive plans.

Unless otherwise indicated, this prospectus reflects and assumes no exercise by the underwriters of their option to purchase up to 1,500,000 additional shares of our Class A common stock in this offering.

 

 

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Summary consolidated financial and other data

The following tables set forth the summary consolidated financial and other data of Planet Fitness, Inc. and its subsidiaries for the periods presented and at the dates indicated below. The following information should be read in conjunction with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. Pla-Fit Holdings, LLC is considered our predecessor for accounting purposes, and its consolidated financial statements are our historical financial statements.

The summary consolidated financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of March 31, 2016 and for the quarters ended March 31, 2016 and 2015 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for those periods have been reflected. The summary consolidated financial data as of March 31, 2015 and December 31, 2013 are derived from our unaudited and audited balance sheets, respectively not included in this prospectus.

 

     Year ended December 31,     Quarter ended
March 31,
 
(in thousands, except per share data)   2015     2014     2013     2016     2015  
                      (unaudited)  

Consolidated statement of operations data:

         

Revenue:

         

Franchise revenue

  $ 71,762      $ 58,001      $ 33,684      $ 21,491      $ 16,967   

Commission income

    16,323        13,805        10,473        6,186        4,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Franchise segment

    88,085        71,806        44,157        27,677        21,757   

Corporate-owned stores segment

    98,390        85,041        67,364        25,697        23,546   

Equipment segment

    144,062        122,930        99,488        29,969        31,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    330,537        279,777        211,009        83,343        76,922   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

         

Cost of revenue

    113,492        100,306        81,353        23,639        25,946   

Store operations

    57,485        49,476        41,692        14,732        14,341   

Selling, general and administrative

    55,573        35,121        23,118        11,845        14,138   

Depreciation and amortization

    32,158        32,341        28,808        7,703        8,201   

Other (gain) loss

    (273     994               (186     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    258,435        218,238        174,971        57,733        62,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    72,102        61,539        36,038        25,610        14,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

         

Interest expense, net(1)

    (24,549     (21,800     (8,912     (6,367     (4,756

Other income (expense)

    (275     (1,261     (694     393        (736
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (24,824     (23,061     (9,606     (5,974     (5,492
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    47,278        38,478        26,432        19,636        8,810   

Provision for income taxes

    9,148        1,183        633        3,291        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    38,130        37,295        25,799        16,345        8,538   

Less net income attributable to non-controlling interests

    19,612        487        361        12,977        113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Planet Fitness, Inc.

  $ 18,518      $ 36,808      $ 25,438      $ 3,368      $ 8,425   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Year ended December 31,     Quarter ended
March 31,
 
(in thousands, except per share data)   2015     2014     2013     2016     2015  
                      (unaudited)  

Net income per share of Class A common stock:

         

Basic and diluted

  $ 0.11          $ 0.09     

Pro forma net income per share data (unaudited)(2)

         

Pro forma net income per share:

         

Basic and diluted

         

Pro forma weighted average shares of Class A common stock outstanding:

         

Basic and diluted

  $            $       

Consolidated statement of cash flows data:

         

Net cash provided by operating activities

  $ 81,663      $ 79,405      $ 66,943      $ 15,262      $ 12,039   

Net cash used in investing activities

    (19,161     (54,362     (7,137     (845     (5,320

Net cash used in financing activities

    (74,240     (12,952     (37,994     (7,698     (22,501

Consolidated balance sheet data:

         

Cash and cash equivalents

  $ 31,430      $ 43,291      $ 31,267      $ 38,268      $ 27,532   

Property and equipment, net

    56,139        49,579        33,766        54,302        51,587   

Total assets

    699,177        601,982        556,573        685,666        570,880   

Total debt and capital lease obligations, excluding deferred financing costs

    492,320        387,496        184,460        491,034        506,349   

Total equity (deficit)

    (1,080     151,749        321,915        7,261        12,425   

 

 

 

(1)   Interest expense in 2014 includes $4.7 million for the loss on extinguishment of debt.
(2)   Pro forma net income per share is computed by dividing the net income available to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. For more information regarding the pro forma presentation of these measures, see “Unaudited pro forma consolidated financial information.”

 

     Year ended December 31,     Quarter ended
March 31,
 
     2015     2014     2013     2016     2015  

Other operating data: (unaudited)

         

Number of stores at end of period:(1)

         

Franchisee-owned

    1,066        863        704        1,113        919   

Corporate-owned

    58        55        45        58        57   

System-wide

    1,124        918        749        1,171        976   

Same store sales growth:(2)

         

Franchisee-owned

    8.3%        11.5%        9.1%        7.0%        11.7%   

Corporate-owned

    1.9%        5.4%        6.1%        4.9%        4.6%   

System-wide

    7.7%        10.8%        8.4%        6.8%        10.9%   

Number of members at end of period (in millions)(3)

    7.3        6.1        4.8        8.3        7.1   

System-wide sales (in millions)(4)

  $ 1,507      $ 1,190      $ 891      $ 415      $ 328   

(in thousands, except per share data)

         

EBITDA(5)

  $ 103,985      $ 92,619      $ 64,152      $ 33,706      $ 21,767   

Adjusted EBITDA(5)

  $ 123,486      $ 100,549      $ 71,198      $ 34,268      $ 28,471   

Pro forma adjusted net income(6)

  $ 53,235      $ 42,183      $ 34,006      $ 15,175      $ 12,595   

Pro forma adjusted net income per share, diluted(6)

  $ 0.54      $ 0.43      $ 0.34      $ 0.15      $ 0.13   

Pro forma shares outstanding(7)

    98,710        98,710        98,710        98,707        98,710   

 

 

 

 

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(1)   We classify a store as open on the date the store receives its occupancy certificate, which is typically the date the store is first available for use by its members.

 

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

 

(3)   We define members as all active members, which includes monthly billing members, prepay members and all pre-sale members. Pre-sale members include those that have joined a store prior to the store opening. This data is system-wide, which includes members of both corporate-owned and franchisee-owned stores.

 

(4)   We define system-wide sales as the monthly dues and annual fees from members of both corporate-owned and franchisee-owned stores.

 

(5)   EBITDA is defined as net income before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include certain purchase accounting adjustments, management fees, certain IT system upgrade costs, acquisition transaction fees, IPO-related costs, pre-opening costs and certain other charges and gains that we do not believe reflect our underlying business performance. EBITDA and Adjusted EBITDA as presented in this prospectus are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for GAAP metrics such as net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back 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. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP financial measures.”

 

(6)   Our presentation of pro forma adjusted net income and pro forma adjusted net income per diluted share gives effect to the consolidation of Pla-Fit Holdings, LLC with Planet Fitness, Inc. resulting from the recapitalization transactions and the amended and restated Pla-Fit Holdings LLC Agreement as of January 1, 2013. In addition, Pro forma adjusted net income assumes net income is all 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. Pro forma adjusted net income per diluted share is calculated by dividing Pro forma adjusted net income by the total shares of Class A common stock outstanding as though the IPO had occurred and those shares were outstanding for each period presented and assuming the full exchange of all outstanding Holdings Units and corresponding Class B common shares as of the beginning of each period presented. Pro forma adjusted net income and pro forma adjusted net income per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined in accordance with GAAP.

 

(7)   Assumes the full exchange of all outstanding Holdings Units and corresponding Class B common shares for shares of Class A common stock of Planet Fitness, Inc. for all periods presented.

 

 

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Risk factors

This offering and investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our Class A common stock. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks related to our business and industry

Our financial results are affected by the operating and financial results of and our relationships with our franchisees.

A substantial portion of our revenues come from royalties, which are generally based on a percentage of monthly membership dues and annual fees at our franchise stores, other fees and commissions generated from activities associated with our franchisees and equipment sales to our franchisees. As a result, our financial results are largely dependent upon the operational and financial results of our franchisees. As of March 31, 2016, we had approximately 200 franchisee groups operating 1,113 stores. Negative economic conditions, including inflation, increased unemployment levels and the effect of decreased consumer confidence or changes in consumer behavior, could materially harm our franchisees’ financial condition, which would cause our royalty and other revenues to decline and materially and adversely affect our results of operations and financial condition as a result. In addition, if our franchisees fail to renew their franchise agreements, these revenues may decrease, which in turn could materially and adversely affect our results of operations and financial condition.

Our franchisees could take actions that harm our business.

Our franchisees are contractually obligated to operate their stores in accordance, with the operational, safety and health standards set forth in our agreements with them. However, franchisees are independent third parties and their actions are outside of our control. In addition, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises in their approved locations, and certain state franchise laws may limit our ability to terminate or modify these franchise agreements. The franchisees own, operate and oversee the daily operations of their stores. As a result, the ultimate success and quality of any franchise store rests with the franchisee. If franchisees do not successfully operate stores in a manner consistent with required standards and comply with local laws and regulations, franchise fees and royalties paid to us may be adversely affected, and our brand image and reputation could be harmed, which in turn could adversely affect our results of operations and financial condition.

Moreover, although we believe we generally maintain positive working relationships with our franchisees, disputes with franchisees could damage our brand image and reputation and our relationships with our franchisees, generally.

Our success depends substantially on the value of our brand.

Our success is dependent in large part upon our ability to maintain and enhance the value of our brand, our store members’ connection to our brand and a positive relationship with our franchisees. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to our policies, the way we manage our

 

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relationships with our franchisees, our growth strategies, our development efforts or the ordinary course of our, or our franchisees’, businesses. Other incidents that could be damaging to our brand may arise from events that are or may be beyond our ability to control, such as:

 

 

actions taken (or not taken) by one or more franchisees or their employees relating to health, safety, welfare or otherwise;

 

 

data security breaches or fraudulent activities associated with our and our franchisees’ electronic payment systems and other information systems;

 

 

litigation and legal claims;

 

 

third-party misappropriation, dilution or infringement of our intellectual property;

 

 

regulatory, investigative or other actions relating to our and our franchisees’ provision of indoor tanning services; and

 

 

illegal activity targeted at us or others.

Consumer demand for our stores and our brand’s value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our stores, which would likely result in fewer memberships sold or renewed and, ultimately, lower royalty revenue, which in turn could materially and adversely affect our results of operations and financial condition.

If we fail to successfully implement our growth strategy, which includes new store development by existing and new franchisees, our ability to increase our revenues and operating profits could be adversely affected.

Our growth strategy relies in large part upon new store development by existing and new franchisees. Our franchisees face many challenges in opening new stores, including:

 

 

availability and cost of financing;

 

 

selection and availability of suitable store locations;

 

 

competition for store sites;

 

 

negotiation of acceptable lease and financing terms;

 

 

securing required domestic or foreign governmental permits and approvals;

 

 

health and fitness trends in new geographic regions and acceptance of our offerings;

 

 

employment, training and retention of qualified personnel;

 

 

ability to open new stores during the timeframes we and our franchisees expect; and

 

 

general economic and business conditions.

In particular, because the majority of our new store development is funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. If our franchisees (or prospective franchisees) are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new stores, and our future growth could be adversely affected.

Our growth strategy also relies on our ability to identify, recruit and enter into agreements with a sufficient number of franchisees. In addition, our ability and the ability of our franchisees to successfully open and

 

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operate new stores in new markets may be adversely affected by a lack of awareness or acceptance of our brand as well as a lack of existing marketing efforts and operational execution in these new markets. To the extent that we are unable to implement effective marketing and promotional programs and foster recognition and affinity for our brand in new markets, our and our franchisees’ new stores may not perform as expected and our growth may be significantly delayed or impaired. In addition, franchisees of new stores may have difficulty securing adequate financing, particularly in new markets, where there may be a lack of adequate history and brand familiarity. New stores may not be successful or our average store membership sales may not increase at historical rates, which could materially and adversely affect our business, results of operations and financial condition.

To the extent our franchisees are unable to open new stores as we anticipate, we will not realize the revenue growth that we hope or expect. Our failure to add a significant number of new stores would adversely affect our ability to increase our revenues and operating income and could materially and adversely affect our business, results of operations and financial condition.

Our planned growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.

Over the past several years, we have experienced growth in our business activities and operations, including a significant increase in the number of system-wide stores. Our past expansion has placed, and our planned future expansion may place, significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, legal, human resources, risk management, marketing, technology, sales and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention, and we may not realize a return on our investment in these processes. In addition, we believe the culture we foster at our and our franchisees’ stores is an important contributor to our success. However, as we expand we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. These risks may be heightened as our growth accelerates. In 2015, our franchisees opened 206 stores, compared to 169 stores in 2014, 148 stores in 2013 and 118 stores in 2012. Our failure to successfully execute on our planned expansion of stores could materially and adversely affect our results of operations and financial condition.

Changes in the industry could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.

Changes in the industry affecting gym memberships and payment for gym memberships may place significant demands on our administrative, operational, financial and other resources or require us to obtain different or additional resources. Any failure to manage such changes effectively could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls in order to adapt quickly to such changes. These changes may be time-consuming and expensive, increase management responsibilities and divert management attention, and we may not realize a return on our investment in these changes.

We and our franchisees rely heavily on information systems, and any material failure, interruption or weakness may prevent us from effectively operating our business and damage our reputation.

We and our franchisees increasingly rely on information systems, including point-of-sale processing systems in our stores and other information systems managed by third parties, to interact with our franchisees and

 

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members and collect, maintain and store member information, billing information and other personally identifiable information, including for the operation of stores, collection of cash, legal and regulatory compliance, management of our supply chain, accounting, staffing, payment of obligations, Automated Clearing House (“ACH”) transactions, credit and debit card transactions and other processes and procedures. Furthermore, in 2015, we migrated our point-of-sale system from a proprietary, third-party hosted system to a commercially available, third-party hosted system. Although the migration is complete, in the future there may be unforeseen issues, bugs, data inconsistencies, outages, changes in business processes, and other interruptions that could impact our business. If we would need to move to a different third-party system, our operations, including EFT drafting, could be interrupted. Our ability to efficiently and effectively manage our franchisee and corporate-owned stores depends significantly on the reliability and capacity of these systems, and any potential failure of these third parties to provide quality uninterrupted service is beyond our control.

Our and our franchisees’ operations depend upon our ability, and the ability of our franchisees and third-party service providers (as well as their third-party service providers), to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, denial-of-service attacks and other disruptions. The failure of these systems to operate effectively, stemming from maintenance problems, upgrading or transitioning to new platforms, expanding our systems as we grow, a breach in security or other unanticipated problems, could result in interruptions to or delays in our business and member service and reduce efficiency in our operations. If our information systems, or those of our franchisees and third-party service providers (as well as their third-party service providers), fail and our or our partners’ third-party back-up or disaster recovery plans are not adequate to address such failures, our revenues and profits could be reduced and the reputation of our brand and our business could be materially adversely affected.

If we fail to properly maintain the confidentiality and integrity of our data, including member credit, debit card and bank account information, our reputation and business could be materially and adversely affected.

In the ordinary course of business, we and our franchisees collect, transmit and store member and employee data, including credit and debit card numbers, bank account information, driver’s license numbers, dates of birth and other highly sensitive personally identifiable information, in information systems that we maintain and in those maintained by franchisees and third parties with whom we contract to provide services. Some of this data is sensitive and could be an attractive target of a criminal attack by malicious third parties with a wide range of motives and expertise, including lone wolves, organized criminal groups, “hacktivists,” disgruntled current or former employees, and others. The integrity and protection of member and employee data is critical to us.

Despite the security measures we have in place to comply with applicable laws and rules, our facilities and systems, and those of our franchisees and third-party service providers (as well as their third-party service providers), may be vulnerable to security breaches, acts of cyber terrorism or sabotage, vandalism or theft, computer viruses, loss or corruption of data or programming or human errors or other similar events. Furthermore, the size and complexity of our information systems, and those of our franchisees and our third-party vendors (as well as their third-party service providers), make such systems potentially vulnerable to security breaches from inadvertent or intentional actions by our employees, franchisees or vendors, or from attacks by malicious third parties. Because such attacks are increasing in sophistication and change frequently in nature, we, our franchisees and our third-party service providers may be unable to anticipate these attacks or implement adequate preventative measures, and any compromise of our systems, or those of our franchisees and third-party vendors (as well as their third-party service providers), may not be discovered and remediated promptly. Changes in consumer behavior following a security breach, act of cyber terrorism or sabotage, vandalism or theft, computer viruses, loss or corruption of data or programming or human error or other similar event affecting a competitor, large retailer or financial institution may materially and adversely affect our business.

 

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Additionally, the collection, maintenance, use, disclosure and disposal of personally identifiable information by our, or our franchisees’, businesses is regulated at the federal, state and provincial levels as well as by certain industry groups, such as the Payment Card Industry Security Standards Council, National Automated Clearing House Association (“NACHA”), Canadian Payments Association and individual credit card issuers. Federal, state, provincial and industry groups may also consider and implement from time to time new privacy and security requirements that apply to our businesses. Compliance with evolving privacy and security laws, requirements and regulations may result in cost increases due to necessary systems changes, new limitations or constraints on our business models and the development of new administrative processes. They also may impose further restrictions on our collection, disclosure and use of personally identifiable information that are housed in one or more of our franchisees’ databases or those of our third-party service providers. Noncompliance with privacy laws, industry group requirements or a security breach involving the misappropriation, loss or other unauthorized disclosure of personal, sensitive or confidential information, whether by us or by one of our franchisees or vendors, could have material adverse effects on our and our franchisees’ business, operations, brand, reputation and financial condition, including decreased revenue, material fines and penalties, litigation, increased financial processing fees, compensatory, statutory, punitive or other damages, adverse actions against our licenses to do business and injunctive relief by court or consent order. We maintain and we require our franchisees to maintain cyber risk insurance, but in the event of a significant data security breach, this insurance may not cover all of the losses that we would be likely to suffer.

Changes in legislation or requirements related to electronic fund transfer, or our failure to comply with existing or future regulations, may adversely impact our business.

We primarily accept payments for our memberships through electronic fund transfers from members’ bank accounts and, therefore, we are subject to federal, state and provincial legislation and certification requirements governing EFT, including the Electronic Funds Transfer Act. Some states, such as New York, Massachusetts and Tennessee, have passed or have considered legislation requiring gyms and health clubs to offer a prepaid membership option at all times and/or limit the duration for which gym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements, and compliance with these laws and regulations and similar requirements may be onerous and expensive. In addition, variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health club statutes provide harsh penalties for violations, including membership contracts being void or voidable. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages and civil liability and may result in the loss of our ability to accept EFT payments, which would have a material adverse effect on our business, results of operations and financial condition. In addition, any such costs, which may arise in the future as a result of changes to the legislation and regulations or in their interpretation, could individually or in the aggregate cause us to change or limit our business practice, which may make our business model less attractive to our franchisees and our and their members.

We are subject to a number of risks related to ACH, credit card and debit card payments we accept.

We accept payments through ACH, credit card and debit card transactions. For ACH, credit card and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our memberships, which could cause us to lose members or suffer an increase in our operating expenses, either of which could harm our operating results.

If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the

 

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major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards, debit cards or bank accounts on a timely basis or at all, we could lose membership revenue, which would harm our operating results.

If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card would significantly impair our ability to operate our business.

Our and our franchisees’ stores may be unable to attract and retain members, which would materially and adversely affect our business, results of operations and financial condition.

Our target market is average people seeking regular exercise and people who are new to fitness. The success of our business depends on our and our franchisees’ ability to attract and retain members. Our and our franchisees’ marketing efforts may not be successful in attracting members to stores, and membership levels may materially decline over time, especially at stores in operation for an extended period of time. Members may cancel their memberships at any time after giving proper advance written notice, subject to an initial minimum term applicable to certain memberships. We may also cancel or suspend memberships if a member fails to provide payment for an extended period of time. In addition, we experience attrition and must continually engage existing members and attract new members in order to maintain membership levels. A portion of our member base does not regularly use our stores and may be more likely to cancel their membership. Some of the factors that could lead to a decline in membership levels include changing desires and behaviors of consumers or their perception of our brand, changes in discretionary spending trends and general economic conditions, market maturity or saturation, a decline in our ability to deliver quality service at a competitive price, an increase in monthly membership dues due to inflation, direct and indirect competition in our industry, and a decline in the public’s interest in health and fitness, among other factors. In order to increase membership levels, we may from time to time offer promotions or lower monthly dues or annual fees. If we and our franchisees are not successful in optimizing price or in adding new memberships in new and existing stores, growth in monthly membership dues or annual fees may suffer. Any decrease in our average dues or fees or higher membership costs may adversely impact our results of operation and financial condition.

If we and our franchisees are unable to identify and secure suitable sites for new franchise stores, our revenue growth rate and profits may be negatively impacted.

To successfully expand our business, we and our franchisees must identify and secure sites for new franchise stores and, to a lesser extent, new corporate-owned stores that meet our established criteria. In addition to finding sites with the right demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in the market. We face significant competition for sites that meet our criteria, and as a result we may lose those sites, our competitors could copy our format or we could be forced to pay significantly higher prices for those sites. If we and our franchisees are unable to identify and secure sites for new stores, our revenue growth rate and profits may be negatively impacted. Additionally, if our or our franchisees’ analysis of the suitability of a store site is incorrect, we or our franchisees may not be able to recover the capital investment in developing and building the new store.

As we increase our number of stores, we and our franchisees may also open stores in higher-cost geographies, which could entail greater lease payments and construction costs, among others. The higher level of invested capital at these stores may require higher operating margins and higher net income per store to produce the

 

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level of return we or our franchisees and potential franchisees expect. Failure to provide this level of return could adversely affect our results of operations and financial condition.

Opening new stores in close proximity may negatively impact our existing stores’ revenues and profitability.

We and our franchisees currently operate stores in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic, and we and our franchisees plan to open many new stores in the future, some of which will be in existing markets. We intend to continue opening new franchise stores in our existing markets as part of our growth strategy, some of which may be located in close proximity to stores already in those markets. Opening new stores in close proximity to existing stores may attract some memberships away from those existing stores, which may lead to diminished revenues and profitability for us and our franchisees rather than increased market share. In addition, as a result of new stores opening in existing markets and because older stores will represent an increasing proportion of our store base over time, our same store sales increases may be lower in future periods than they have been historically.

We are subject to a variety of additional risks associated with our franchisees.

Our franchise business model subjects us to a number of risks, any one of which may impact our royalty revenues collected from our franchisees, may harm the goodwill associated with our brand, and may materially and adversely impact our business and results of operations.

Bankruptcy of franchisees.    A franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise agreement(s). In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise agreement(s), ADA(s) and/or franchisee lease/sublease pursuant to Section 365 under the U.S. bankruptcy code, in which case there would be no further royalty payments from such franchisee, and we may not ultimately recover those payments in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.

Franchisee changes in control.    Our franchises are operated by independent business owners. Although we have the right to approve franchise owners, and any transferee owners, it can be difficult to predict in advance whether a particular franchise owner will be successful. If an individual franchise owner is unable to successfully establish, manage and operate the store, the performance and quality of service of the store could be adversely affected, which could reduce memberships and negatively affect our royalty revenues and brand image. Although our agreements prohibit “changes in control” of a franchisee without our prior consent as the franchisor, a franchise owner may desire to transfer a store to a transferee franchisee. In addition, in the event of the death or disability of a franchisee (if a natural person) or a principal of a franchisee entity, the executors and representatives of the franchisee are required to transfer the relevant franchise agreements to a successor franchisee approved by the franchisor. In any transfer situation, the transferee may not be able to perform the former franchisee’s obligations under such franchise agreements and successfully operate the store. In such a case the performance and quality of service of the store could be adversely affected, which could also reduce memberships and negatively affect our royalty revenues and brand image.

Franchisee insurance.    Our franchise agreements require each franchisee to maintain certain insurance types and levels. Losses arising from certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material adverse effect on a franchisee’s ability to satisfy its obligations under its franchise agreement or other contractual obligations, which could cause a franchisee to terminate its franchise agreement and, in turn, negatively affect our operating and financial results.

 

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Some of our franchisees are operating entities.    Franchisees may be natural persons or legal entities. Our franchisees that are operating companies (as opposed to limited purpose entities) are subject to business, credit, financial and other risks, which may be unrelated to the operation of their stores. These unrelated risks could materially and adversely affect a franchisee that is an operating company and its ability to service its members and maintain store operations while making royalty payments, which in turn may materially and adversely affect our business and operating results.

Franchise agreement termination; nonrenewal.    Each franchise agreement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise agreement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise agreements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten the licensed intellectual property. Moreover, a franchisee may have a right to terminate its franchise agreement in certain circumstances.

In addition, each franchise agreement has an expiration date. Upon the expiration of a franchise agreement, we or the franchisee may, or may not, elect to renew the franchise agreement. If the franchise agreement is renewed, the franchisee will receive a “successor” franchise agreement for an additional term. Such option, however, is contingent on the franchisee’s execution of the then-current form of franchise agreement (which may include increased royalty revenues, advertising fees and other fees and costs), the satisfaction of certain conditions (including re-equipment and remodeling of the store and other requirements) and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring franchise agreement will terminate upon expiration of its term.

Franchisee litigation; effects of regulatory efforts.    We and our franchisees are subject to a variety of litigation risks, including, but not limited to, member claims, personal injury claims, vicarious liability claims, litigation with or involving our relationship with franchisees, litigation alleging that the franchisees are our employees or that we are the co-employer of our franchisees’ employees, employee allegations against the franchisee or us of improper termination and discrimination, landlord/tenant disputes and intellectual property claims, among others. Each of these claims may increase costs, reduce the execution of new franchise agreements and affect the scope and terms of insurance or indemnifications we and our franchisees may have. In addition, we and our franchisees are subject to various regulatory efforts to enforce employment laws, such as efforts to categorize franchisors as the co-employers of their franchisees’ employees; legislation to categorize individual franchised businesses as large employers for the purposes of various employment benefits; and other legislation or regulations that may have a disproportionate impact on franchisors and/or franchised businesses. These changes may impose greater costs and regulatory burdens on franchising and negatively affect our ability to sell new franchises.

Franchise agreements and franchisee relationships.    Our franchisees develop and operate their stores under terms set forth in our ADAs and franchise agreements, respectively. These agreements give rise to long-term relationships that involve a complex set of mutual obligations and mutual cooperation. We have a standard set of agreements that we typically use with our franchisees, but various franchisees have negotiated specific terms in these agreements. Furthermore, we may from time to time negotiate terms of our franchise agreements with individual franchisees or groups of franchisees (e.g., a franchisee association). We seek to have positive relationships with our franchisees, based in part on our common understanding of our mutual rights and obligations under our agreements, to enable both the franchisees’ business and our business to be successful. However, we and our franchisees may not always maintain a positive relationship or always interpret our agreements in the same way. Our failure to have positive relationships with our franchisees could individually or in the aggregate cause us to change or limit our business practices, which may make our business model less attractive to our franchisees or our members.

 

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While our franchisee revenues are not concentrated among one or a small number of parties, the success of our business does depend in large part on our ability to maintain contractual relationships with franchisees in profitable stores. A typical franchise agreement has a ten-year term. While our largest franchisee group accounts for less than 5% of our total stores, certain of our franchisee groups account for 4%, or close to 4%, of our total stores. If we fail to maintain or renew our contractual relationships on acceptable terms, or if one or more of these significant franchisees were to become insolvent or otherwise were unwilling to pay amounts due to us, our business, reputation, financial condition and results of operations could be materially adversely affected.

The high level of competition in the health and fitness industry could materially and adversely affect our business.

We compete with the following industry participants: other health and fitness clubs; physical fitness and recreational facilities established by non-profit organizations and businesses for their employees; private studios and other boutique fitness offerings; racquet, tennis and other athletic clubs; amenity and condominium/apartment clubs; country clubs; online personal training and fitness coaching; the home-use fitness equipment industry; local tanning salons; businesses offering similar services; and other businesses that rely on consumer discretionary spending. We may not be able to compete effectively in the markets in which we operate in the future. Competitors may attempt to copy our business model, or portions thereof, which could erode our market share and brand recognition and impair our growth rate and profitability. Competitors, including companies that are larger and have greater resources than us, may compete with us to attract members in our markets. Non-profit organizations in our markets may be able to obtain land and construct stores at a lower cost and collect membership dues and fees without paying taxes, thereby allowing them to charge lower prices. Luxury fitness companies may attempt to enter our market by lowering prices or creating lower price brand alternatives. Furthermore, due to the increased number of low-cost health and fitness club alternatives, we may face increased competition if we increase our price or if discretionary spending declines. This competition may limit our ability to attract and retain existing members and our ability to attract new members, which in each case could materially and adversely affect our results of operation and financial condition.

Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and could adversely affect our revenues and gross profit.

Equipment and certain products and services used in our stores, including our exercise equipment and point-of-sale software and hardware, are sourced from third-party suppliers. In addition, we rely on third-party suppliers to manage and maintain our websites and online join processes, and in 2015 over 20% of our new members joined online through our websites. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate our business efficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability and port delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing stores and open new stores on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand for our equipment or other products or services, we may not be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity of equipment we or our franchisees require to open new and refurbish existing stores, our suppliers encounter difficulties meeting our

 

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and our franchisees’ demands for products or services, our websites experience delays or become impaired due to errors in the third-party technology or there is a deficiency, lack or poor quality of products or services provided, our ability to serve our members and grow our brand would be interrupted. If any of these events occur, it could have a material adverse effect on our business and operating results.

Our franchisees may incur rising costs related to construction of new stores and maintenance of existing stores, which could adversely affect the attractiveness of our franchise model, and in turn our business, results of operations and financial condition.

Our stores require significant upfront and ongoing investment, including periodic remodeling and equipment replacement. If our franchisees’ costs are greater than expected, franchisees may need to outperform their operational plan to achieve their targeted return. In addition, increased costs may result in lower profits to the franchisees, which may cause them to terminate their franchise agreement or make it harder for us to attract new franchisees, which in turn could materially and adversely affect our business, results of operations and financial condition.

In addition, if a franchisee is unwilling or unable to acquire the necessary financing to invest in the maintenance and upkeep of its stores, including periodic remodeling and replacement of equipment, the quality of its stores could deteriorate, which may have a negative impact on our brand image and our ability to attract and maintain members, which in turn may have a negative impact on our revenues.

We and our franchisees could be subject to claims related to health and safety risks to members that arise while at both our corporate-owned and franchise stores.

Use of our and our franchisees’ stores poses some potential health and safety risks to members or guests through physical exertion and use of our services and facilities, including exercise and tanning equipment. Claims might be asserted against us and our franchisees for injuries suffered by or death of members or guests while exercising and using the facilities at a store. We may not be able to successfully defend such claims. We also may not be able to maintain our general liability insurance on acceptable terms in the future or maintain a level of insurance that would provide adequate coverage against potential claims. Depending upon the outcome, these matters may have a material adverse effect on our results of operations, financial condition and cash flows.

If we cannot retain our key employees and hire additional highly qualified employees, we may not be able to successfully manage our businesses and pursue our strategic objectives.

We are highly dependent on the services of our senior management team and other key employees at our corporate headquarters and our corporate-owned stores, and on our and our franchisees’ ability to recruit, retain and motivate key employees. Competition for such employees can be intense, and the inability to attract and retain the additional qualified employees required to expand our activities, or the loss of current key employees, could adversely affect our and our franchisees’ operating efficiency and financial condition.

Our intellectual property rights, including trademarks and trade names, may be infringed, misappropriated or challenged by others.

We believe our brand and related intellectual property are important to our continued success. We seek to protect our trademarks, trade names, copyrights and other intellectual property by exercising our rights under applicable state, provincial, federal and international laws. Policing unauthorized use and other violations of our intellectual property rights is difficult and the steps we take may not prevent misappropriation,

 

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infringement or other violations of our intellectual property. If we were to fail to successfully protect our intellectual property rights for any reason, or if any third party misappropriates, dilutes or infringes our intellectual property, the value of our brands may be harmed, which could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could cause membership levels to decline or make it more difficult to attract new members.

We may also from time to time be required to initiate litigation to enforce our trademarks, service marks and other intellectual property. Third parties may also assert that we have infringed, misappropriated or otherwise violated their intellectual property rights, which could lead to litigation against us. Litigation is inherently uncertain and could divert the attention of management, result in substantial costs and diversion of resources and could negatively affect our membership sales and profitability regardless of whether we are able to successfully enforce or defend our rights.

Use of email marketing and social media may adversely impact our reputation or subject us to fines or other penalties.

There has been a substantial increase in the use of email and social media platforms, including blogs, social media websites and other forms of internet-based communication, which allow access to a broad audience of consumers and other interested persons. Negative commentary about us may be posted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available information about health clubs and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our stores, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our stores.

We also use email and social medial platforms as marketing tools. For example, we maintain Facebook and Twitter accounts and may occasionally email members to inform them of certain offers or promotions. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our franchisees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our and our franchisees’ business, financial condition and results of operations or subject us to fines or other penalties.

If we fail to obtain and retain high-profile strategic partnership arrangements, or if the reputation of any of our partners is impaired, our business may suffer.

A principal component of our marketing program has been to partner with high-profile marketing partners, such as NBC’s “The Biggest Loser” and the opportunity to be featured on ABC’s “Dick Clark’s New Year’s Rockin’ Eve with Ryan Seacrest,” as the presenting sponsor in Times Square, to help us extend the reach of our brand. Although we have partnered with several well-known partners in this manner, we may not be able to attract and partner with new marketing partners in the future. In addition, if the actions of our partners were to damage their reputation, our partnerships may be less attractive to our current or prospective members. Any of these failures by us or our partners could adversely affect our business and revenues.

We are subject to risks associated with leasing property subject to long-term non-cancelable leases.

We do not own any real property, and all of our corporate-owned stores are located on leased premises. The leases for our stores generally have initial terms of 10 years and typically provide for two renewal options in five-year increments as well as for rent escalations.

 

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Generally, our leases are net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot terminate these leases before the end of the initial lease term. Additional sites that we lease are likely to be subject to similar long-term, non-terminable leases. If we close a store, we nonetheless may be obligated to perform our monetary obligations under the applicable lease, including, among other things, payment of the base rent for the balance of the lease term. In addition, if we fail to negotiate renewals, either on commercially acceptable terms or at all, as each of our leases expire we could be forced to close stores in desirable locations. We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our senior secured credit facility or other sources, we may not be able to service our lease expenses or fund our other liquidity and capital needs, which would materially affect our business.

Our business is subject to various laws and regulations and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect our business.

We are subject to the FTC Franchise Rule, which is a trade regulation imposed on franchising promulgated by the Federal Trade Commission (the “FTC”) that regulates the offer and sale of franchises in the United States and that requires us to provide to all prospective franchisees certain mandatory disclosure in FDD. In addition, we are subject to state franchise sales laws in approximately 14 states that regulate the offer and sale of franchises by requiring us to make a franchise filing or obtain franchise registration prior to our making any offer or sale of a franchise in those states and to provide a FDD to prospective franchisees in accordance with such laws. We are subject to franchise sales laws in five provinces in Canada that regulate the offer and sale of franchises by requiring us to provide a FDD in a prescribed format to prospective franchisees in accordance with such laws, and that regulate certain aspects of the franchise relationship. Failure to comply with such laws may result in a franchisee’s right to rescind its franchise agreement and damages, and may result in investigations or actions from federal or state franchise authorities, civil fines or penalties, and stop orders, among other remedies. We are also subject to franchise relationship laws in over 20 states that regulate many aspects of the franchisor-franchisee relationship, including renewals and terminations of franchise agreements, franchise transfers, the applicable law and venue in which franchise disputes must be resolved, discrimination and franchisees’ right to associate, among others. Our failure to comply with such franchise relationship laws could result in fines, damages and our inability to enforce franchise agreements where we have violated such laws. Although we believe that our FDDs, franchise sales practices and franchise activities comply with such franchise sales laws and franchise relationship laws, our non-compliance could result in liability to franchisees and regulatory authorities (as described above), inability to enforce our franchise agreements and a reduction in our anticipated royalty revenue, which in turn may materially and adversely affect our business and results of operating.

We and our franchisees are also subject to the Fair Labor Standards Act of 1938, as amended, and various other laws in the United States, Canada and the Dominican Republic governing such matters as minimum-wage requirements, overtime and other working conditions. A significant number of our and our franchisees’ employees are paid at rates related to the U.S. federal or state minimum wage, and past increases in the U.S. federal and/or state minimum wage have increased labor costs, as would future increases. Any increases in labor costs might result in our and our franchisees inadequately staffing stores. Such increases in labor costs and other changes in labor laws could affect store performance and quality of service, decrease royalty revenues and adversely affect our brand.

Our and our franchisees’ operations and properties are subject to extensive U.S., Canadian and Dominican federal, state, provincial and local laws and regulations, including those relating to environmental, building and zoning requirements. Our and our franchisees’ development of properties depends to a significant extent on the

 

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selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. Failure to comply with these legal requirements could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability, which could adversely affect our business.

We and our franchisees are responsible at stores we each operate for compliance with state and provincial laws that regulate the relationship between stores and their members. Many states and provinces have consumer protection regulations that may limit the collection of membership dues or fees prior to opening, require certain disclosures of pricing information, mandate the maximum length of contracts and “cooling off” periods for members (after the purchase of a membership), set escrow and bond requirements for stores, govern member rights in the event of a member relocation or disability, provide for specific member rights when a store closes or relocates, or preclude automatic membership renewals. Our or our franchisees’ failure to comply fully with these rules or requirements may subject us or our franchisees to fines, penalties, damages, and civil liability, or result in membership contracts being void or voidable. In addition, states may update these laws and regulations. Any additional costs which may arise in the future as a result of changes to the legislation and regulations or in their interpretation could individually or in the aggregate cause us to change or limit our business practices, which may make our business model less attractive to our franchisees or our members.

Regulatory restrictions placed on indoor tanning services and negative opinions about the health effects of indoor tanning services could harm our reputation and our business.

Although our business model does not place an emphasis on indoor tanning, the vast majority of our corporate-owned and franchise stores offer indoor tanning services. We offer tanning services as one of many amenities available to our PF Black Card members. Many states and provinces where we and our franchisees operate have health and safety regulations that apply to health clubs and other facilities that offer indoor tanning services. In addition to regulations imposed on the indoor tanning industry, medical opinions and opinions of commentators in the general public regarding negative health effects of indoor tanning services could adversely impact the value of our PF Black Card memberships and our future revenues and profitability. Although the tanning industry is regulated by U.S., Canadian and Dominican federal, state and provincial government agencies, negative publicity regarding the potentially harmful health effects of the tanning services we offer at our stores could lead to additional legislation or further regulation of the industry. The potential increase in cost of complying with these regulations could have a negative impact on our profit margins.

The continuation of our tanning services is dependent upon the public’s sustained belief that the benefits of utilizing tanning services outweigh the risks of exposure to ultraviolet light. Any significant change in public perception of tanning equipment or any investigative or regulatory action by a government agency or other regulatory authority could impact the appeal of indoor tanning services to our PF Black Card members, and could in turn have an adverse effect on our and our franchisees’ reputation, business, results of operations and financial condition as well as our ability to profit from sales of tanning equipment to our franchisees.

In addition, from time to time, government agencies and other regulatory authorities have shown an interest in taking investigative or regulatory action with respect to tanning services. For example, we reached a settlement with the New York Office of the Attorney General (“OAG”) last year in connection with allegations that in the spring of 2013, seven of the approximately 80 independently owned and operated Planet Fitness franchise locations in New York at the time had violated certain state laws related to tanning advertising, signage, paperwork, and eyewear. Upon being alerted to these alleged violations, we re-emphasized to all franchisees that they are contractually required to operate their businesses in compliance with all applicable laws and regulations. Although we understand that the OAG’s investigation was part of a larger initiative with respect to tanning salons and other providers of tanning services and do not believe that the settlement will have a

 

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material adverse effect on us, publicity regarding the OAG’s initiative could influence public perception of the tanning services we offer and of the benefits of our PF Black Card membership.

Risks related to our indebtedness

As of March 31, 2016, we had total indebtedness of $491.0 million, and our substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

We have a substantial amount of debt, which requires significant interest payments. As of March 31, 2016, we had total indebtedness of $491.0 million, gross of deferred financing costs. Subject to the restrictions contained in our senior secured credit facility applicable to our subsidiary Planet Fitness Holdings, LLC, as borrower, and its restricted subsidiaries and its parent Planet Intermediate, LLC, as guarantors, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. These restrictions will not prevent us from incurring obligations that do not constitute indebtedness, may be waived by certain votes of debt holders and, if we refinance our existing indebtedness, such refinancing indebtedness may contain fewer restrictions on our activities. To the extent new indebtedness or other financial obligations are added to our and our subsidiaries’ currently anticipated indebtedness levels, the related risks that we and our subsidiaries face could intensify.

Our substantial level of indebtedness could adversely affect our financial condition and increase the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other existing and any future financial obligations and contractual commitments, could have important consequences. For example, it could:

 

 

make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under our senior secured credit facility, including restrictive covenants, could result in an event of default under such facility;

 

 

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other purposes;

 

 

increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have proportionately less indebtedness;

 

 

increase our cost of borrowing and cause us to incur substantial fees from time to time in connection with debt amendments or refinancings;

 

 

increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates;

 

 

limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and

 

 

limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other corporate purposes.

By the nature of their relationship to our enterprise, debt holders may have different points of view on the use of company resources as compared to our management. The financial and contractual obligations related to our debt also represent a natural constraint on any intended use of company resources.

 

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Restrictions imposed by our outstanding indebtedness and any future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

The terms of our outstanding indebtedness restrict us from engaging in specified types of transactions. These covenants restrict our ability, among other things, to:

 

 

incur indebtedness or guarantees or engage in sale-leaseback transactions;

 

 

incur liens;

 

 

engage in mergers, acquisitions and asset sales;

 

 

alter the business conducted by Planet Intermediate, LLC, Planet Fitness Holdings, LLC and its restricted subsidiaries;

 

 

make investments and loans;

 

 

declare dividends or other distributions;

 

 

enter into agreements limiting restricted subsidiary distributions; and

 

 

engage in certain transactions with affiliates.

In addition, the credit agreement governing our senior secured credit facility requires us to comply with a financial maintenance covenant, which covenant is solely for the benefit of the revolving credit facility. Our ability to comply with this financial covenant can be affected by events beyond our control, and we may not be able to satisfy it. See “Description of certain indebtedness.”

A breach of any of the restrictive covenants in the credit agreement governing our senior secured credit facility could result in an event of default, which could trigger acceleration of our indebtedness and may result in the acceleration of or default under any other debt we may incur in the future to which a cross-acceleration or cross-default provision applies, which could have a material adverse effect on our business, results of operations and financial condition. In the event of any default under our credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together with accrued and unpaid interest and any fees and other obligations, to be due and payable. In addition, or in the alternative, the applicable lenders could exercise their rights under the security documents entered into in connection with our credit facilities. We have pledged a significant portion of our assets as collateral under our senior secured credit facility.

If we were unable to repay or otherwise refinance these borrowings and loans when due, the applicable lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the agreements governing our credit facilities or the exercise by the applicable lenders of their rights under the security documents would likely have a material adverse effect on our business. As a result of these restrictions, we may be:

 

 

limited in how we conduct our business;

 

 

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

 

unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy.

 

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We will require a significant amount of cash to service our indebtedness. The ability to generate cash or refinance our indebtedness as it becomes due depends on many factors, some of which are beyond our control.

We are a holding company, and as such have no independent operations or material assets other than our ownership of equity interests in our subsidiaries and our subsidiaries’ contractual arrangements with customers, and we will depend on our subsidiaries to distribute funds to us so that we may pay our obligations and expenses. Our ability to make scheduled payments on, or to refinance our respective obligations under, our indebtedness and to fund planned capital expenditures and other corporate expenses will depend on the ability of our subsidiaries to make distributions, dividends or advances to us, which in turn will depend on our subsidiaries’ future operating performance and on economic, financial, competitive, legislative, regulatory and other factors and any legal and regulatory restrictions on the payment of distributions and dividends to which they may be subject. Many of these factors are beyond our control. We can provide no assurance that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized or that future borrowings will be available to us in an amount sufficient to enable us to satisfy our respective obligations under our indebtedness or to fund our other needs. In order for us to satisfy our obligations under our indebtedness and fund planned capital expenditures, we must continue to execute our business strategy. If we are unable to do so, we may need to reduce or delay our planned capital expenditures or refinance all or a portion of our indebtedness on or before maturity. Significant delays in our planned capital expenditures may materially and adversely affect our future revenue prospects. In addition, we can provide no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Borrowings under our senior secured credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

Our senior secured credit facility includes a London Inter-Bank Offered Rates (“LIBOR”) floor of 1.00%, which at March 31, 2016 was in excess of LIBOR. If the three-month LIBOR spot rate were to increase or decrease by 0.125% from current rates, interest expense would not change due to application of the 1.00% floor previously mentioned. If the specified LIBOR rate were to increase above 1.00%, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. An increase of 0.125% over the 1.00% floor previously mentioned would result in an approximate increase of $0.6 million in our annual interest expense associated with our senior secured credit facilities.

We have entered into and may continue to enter into interest rate swaps, caps or other derivative financial instruments that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain derivative financial instruments with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Risks related to our organizational structure

We will be required to pay certain of our existing owners for certain tax benefits we may claim, and we expect that the payments we will be required to make will be substantial.

Future and certain past exchanges of Holdings Units for shares of our Class A common stock (or cash) are expected to produce and have produced favorable tax attributes for us. We are a party to two tax receivable

 

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agreements. Under the first of those agreements, we are generally required to pay to the Continuing LLC Owners 85% of the applicable cash savings, if any, in U.S. federal and state income tax that we are deemed to realize as a result of certain tax attributes of their Holdings Units sold to us (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of our 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, we are generally required to pay to the Direct TSG Investors 85% of the amount of cash savings, if any, that we are deemed to realize as a result of the tax attributes of the Holdings Units that we hold in respect of the Direct TSG Investors’ interest in us, which resulted from the Direct TSG Investors’ purchase of interests in the 2012 acquisition (the “2012 Acquisition”), by investment funds affiliated with TSG and certain other tax benefits. Under both agreements, we generally retain the benefit of the remaining 15% of the applicable tax savings.

The payment obligations under the tax receivable agreements are obligations of Planet Fitness, Inc., and we expect that the payments we will be required to make under the tax receivable agreements will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreements, we expect that the reduction in tax payments for us associated with sales of the corresponding Holdings Units as described above would aggregate to approximately $         million over the applicable period under the tax receivable agreements based on a price of $         per share of our Class A common stock (the last closing price of our Class A common stock on                     , 2016), and assuming all future sales had occurred on March 31, 2016. Under such scenario, we would be required to pay the other parties to the tax receivable agreements 85% of such amount, or $         million, over the applicable period under the tax receivable agreements. The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us, and tax receivable agreement payments by us, will be calculated using the market value of our Class A common stock at the time of the sale and the prevailing tax rates applicable to us over the life of the tax receivable agreements and will be dependent on us generating sufficient future taxable income to realize the benefit. See “Certain relationships and related party transactions—Tax receivable agreements.” Payments under the tax receivable agreements are not conditioned on the Continuing LLC Owners’ ownership of our shares.

The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales by the Continuing LLC Owners, the price of our Class A common stock at the time of the sales, whether such sales are taxable, the amount and timing of the taxable income we generate in the future, the tax rate then applicable and the portion of our payments under the tax receivable agreements constituting imputed interest. Payments under the tax receivable agreements are expected to give rise to certain additional tax benefits attributable to either further increases in basis or in the form of deductions for imputed interest (generally calculated using one-year LIBOR), depending on the tax receivable agreements and the circumstances. Any such benefits are covered by the tax receivable agreements and will increase the amounts due thereunder. The tax receivable agreements provide for interest, at a rate equal to one-year LIBOR, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the tax receivable agreements. In addition, under certain circumstances where we are unable to make timely payments under the tax receivable agreements, the tax receivable agreements provide for interest to accrue on unpaid payments, at a rate equal to one-year LIBOR plus 500 basis points.

Payments under the tax receivable agreements will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase or other tax attributes subject to the tax receivable agreements, we will not be reimbursed for any payments previously made under the tax receivable agreements if such basis increases or other benefits are subsequently disallowed. As a result, in certain circumstances, payments could be made under the tax receivable agreements in excess of the benefits that we are deemed to realize in respect of the attributes to which the tax receivable agreements relate.

 

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Our ability to pay taxes and expenses, including payments under the tax receivable agreements, may be limited by our structure.

We have no material assets other than our ownership of Holdings Units in Pla-Fit Holdings, LLC. As such, we have no independent means of generating revenue. Pla-Fit Holdings, LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to holders of its Holdings Units, including us. Accordingly, we incur income taxes on our allocable share of any taxable income of Pla-Fit Holdings, LLC, and also incur expenses related to our operations. Pursuant to the New LLC Agreement, Pla-Fit Holdings makes cash distributions to the owners of Holdings Units for purposes of funding their tax obligations in respect of the income of Pla-Fit Holdings, LLC that is allocated to them, to the extent other distributions from Pla-Fit Holdings, LLC have been insufficient. In addition to tax expenses, we also incur expenses related to our operations, including payment obligations under the tax receivable agreements, which are significant. We have caused Pla-Fit Holdings, LLC to make distributions in an amount sufficient to allow us to pay our taxes and operating expenses, including ordinary course payments due under the tax receivable agreements. However, its ability to make such distributions in the future will be subject to various limitations and restrictions, including contractual restrictions under our senior secured credit facility. If, as a consequence of these various limitations and restrictions, we do not have sufficient funds to pay tax or other liabilities or to fund our operations (including as a result of an acceleration of our obligations under the tax receivable agreements), we may have to borrow funds and thus our liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the tax receivable agreements for any reason, such payments will be deferred and will accrue interest at a rate equal to one-year LIBOR plus 500 basis points until paid.

In certain cases, payments under the tax receivable agreements to our existing owners may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreements.

The tax receivable agreements provide that (i) in the event that we materially breach such tax receivable agreements, (ii) if, at any time, we elect an early termination of the tax receivable agreements, or (iii) upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successor’s) obligations under the tax receivable agreements (with respect to all Holdings Units, whether or not they have been sold before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the tax deductions, tax basis and other tax attributes subject to the tax receivable agreements.

As a result of the foregoing, (i) we could be required to make payments under the tax receivable agreements that are greater than or less than the specified percentage of the actual tax savings we realize in respect of the tax attributes subject to the agreements and (ii) we may be required to make an immediate lump sum payment equal to the present value of the anticipated tax savings, which payment may be made years in advance of the actual realization of such future benefits, if any such benefits are ever realized. In these situations, our obligations under the tax receivable agreements could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to finance our obligations under the tax receivable agreements in a manner that does not adversely affect our working capital and growth requirements. For example, if we had elected to terminate the tax receivable agreements as of March 31, 2016, based on a share price of $         per share of our Class A common stock (the last sale price of our Class A common stock on                     , 2016) and a discount rate equal to     %, we estimate that we would have been required to pay $         million in the aggregate under the tax receivable agreements. See “Certain relationships and related party transactions—Tax receivable agreements.”

 

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In certain circumstances, Pla-Fit Holdings, LLC will be required to make distributions to us and the Continuing LLC Owners, and the distributions that Pla-Fit Holdings, LLC will be required to make may be substantial.

Funds used by Pla-Fit Holdings, LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that Pla-Fit Holdings, LLC will be required to make may be substantial and will likely exceed (as a percentage of Pla-Fit Holdings, LLC’s net income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.

As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing LLC Owners, as well as the use of an assumed tax rate in calculating Pla-Fit Holdings, LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the tax receivable agreements. To the extent, as currently expected, we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to Pla-Fit Holdings, LLC, the Continuing LLC Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their Holdings Units.

We will not be reimbursed for any payments made to the Continuing LLC Owners or the Direct TSG Investors under the tax receivable agreements in the event that any tax benefits are disallowed.

If the IRS or a state or local taxing authority challenges the tax basis adjustments and/or deductions that give rise to payments under the tax receivable agreements and the tax basis adjustments and/or deductions are subsequently disallowed, the recipients of payments under the agreements will not reimburse us for any payments we previously made to them. Any such disallowance would be taken into account in determining future payments under the tax receivable agreements and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments and/or deductions are disallowed, our payments under the tax receivable agreements could exceed our actual tax savings, and we may not be able to recoup payments under the tax receivable agreements that were calculated on the assumption that the disallowed tax savings were available.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.

We are subject to income taxes in the United States and Canada, and our domestic and foreign tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

 

changes in the valuation of our deferred tax assets and liabilities;

 

 

expected timing and amount of the release of any tax valuation allowances;

 

 

tax effects of stock-based compensation;

 

 

costs related to intercompany restructurings;

 

 

changes in tax laws, regulations or interpretations thereof; or

 

 

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state and foreign authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

 

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Risks related to our Class A common stock and this offering

We are eligible to be treated as an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our ordinary shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to another four years, although circumstances could cause us to lose that status earlier, including if the market value of our Class A common stock held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter in any fiscal year before that time or if we have total annual gross revenues of $1.0 billion or more during any fiscal year before that time, in which case we would no longer be an emerging growth company as of the following fiscal year end, or if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time we would cease to be an emerging growth company immediately. If some investors find our Class A common stock less attractive as a result of our being an emerging growth company, there may be a less active trading market for our Class A common stock, and our share price may be more volatile.

TSG has significant influence over us, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by investment funds affiliated with TSG. Upon completion of this offering, investment funds affiliated with TSG will control     % of the voting power of our common stock (or     % if the underwriters exercise in full their option to purchase additional shares). As long as TSG owns or controls at least a majority of our outstanding voting power, it will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if its ownership falls below 50%, TSG will continue to be able to strongly influence or effectively control our decisions.

Additionally, TSG’s interests may not align with the interests of our other stockholders. TSG is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. TSG may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Certain of our directors have relationships with TSG, which may cause conflicts of interest with respect to our business.

Four of our eight directors are affiliated with TSG. Our TSG-affiliated directors have fiduciary duties to us and, in addition, have duties to TSG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and TSG, whose interests may be adverse to ours in some circumstances.

 

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We are a “controlled company” under NYSE rules and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements; you do not have the same protections afforded to stockholders of companies that are subject to such requirements.

Because TSG controls a majority of the voting power of our outstanding Class A common stock, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our Class A common stock:

 

 

we have a board of directors that is composed of a majority of “independent directors,” as defined under NYSE rules;

 

 

we have a compensation committee that is composed entirely of independent directors; and

 

 

we have a nominating and corporate governance committee that is composed entirely of independent directors.

We are currently utilizing all of these exemptions. Accordingly, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Provisions of our corporate governance documents could make an acquisition of our Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to TSG’s beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include:

 

 

the division of our board of directors into three classes and the election of each class for three-year terms;

 

 

advance notice requirements for stockholder proposals and director nominations;

 

 

the ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

 

the ability of our board of directors to issue new series of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors;

 

 

limitations on the ability of stockholders to call special meetings and to take action by written consent following the date that investment funds affiliated with TSG no longer beneficially own a majority of our common stock; and

 

 

the required approval of holders of at least 75% of the voting power of the outstanding shares of our capital stock to adopt, amend or repeal certain provisions of our certificate of incorporation and bylaws or remove directors for cause, in each case following the date that investment funds affiliated with TSG no longer beneficially own a majority of our common stock.

 

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In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” While we have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, our certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they provide that investment funds affiliated with TSG will not be deemed to be an “interested stockholder,” and accordingly will not be subject to such restrictions.

Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of capital stock.”

Our organizational structure, including the tax receivable agreements, confers certain benefits upon the Continuing LLC Owners that do not benefit Class A common stockholders to the same extent as it will benefit the Continuing LLC Owners.

Our organizational structure, including the tax receivable agreements, confers certain benefits upon the Continuing LLC Owners that do not benefit the holders of our Class A common stock to the same extent as it benefits the Continuing LLC Owners. The tax receivable agreement with the Direct TSG Investors also confers benefits upon the Direct TSG Investors that are not shared with other holders of Class A common stock. Although we retain 15% of the amount of tax benefits conferred under the tax receivable agreements, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

We previously identified a material weakness in our internal control over financial reporting. While management has concluded that we have remediated this material weakness and no new material weaknesses have been identified to date, we cannot provide assurance that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. In addition, because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

We are not currently required to comply with the rules of the Securities and Exchange Commission (“SEC”) implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. We are required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports. However, although we are required to disclose significant changes made in our internal controls and procedures on a quarterly basis, we are not required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following the filing of our first annual report with the SEC. Further, as an emerging growth company, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an emerging growth company. At such time, if our independent registered public accounting firm

 

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concluded that our internal control over financial reporting was not effective due to the existence of one or more material weaknesses in internal control, it would issue an adverse opinion on the effectiveness of our internal control over financial reporting.

As we approach the dates for compliance with the requirements of Section 404, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring internal audit or additional accounting staff. Testing and maintaining internal controls can divert our management’s attention from other matters related to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404.

In the first half of 2015, management identified a material weakness in our internal control over financial reporting relating to our controls over the authorization of IT hardware purchases and the processing of related invoices. The internal controls in place during this time were not adequate to detect fraudulent purchases being made. Since identifying this material weakness, we have implemented processes and controls designed to remediate this material weakness by revising existing, and implementing new, procedures and systems regarding (i) authorizing purchases, (ii) receiving invoices, (iii) receiving IT hardware products and (iv) processing invoices. As a result of the successful implementation of the remediation actions noted, as well as subsequent successful testing of the design and operation of the enhanced control procedures, management has concluded that this material weakness has been remediated as of March 31, 2016.

If we identify additional material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting in future periods, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the NYSE, on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of Class A common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.

Since our IPO, the price of our Class A common stock, as reported by the NYSE, has ranged from a low of $13.23 on February 11, 2016 to a high of $20.68 on August 10, 2015. In addition, in recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our Class A common stock is likely to be similarly volatile, and investors in our Class A common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or

 

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prospects, and could lose part or all of their investment. The price of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:

 

 

variations in our operating performance and the performance of our competitors;

 

 

actual or anticipated fluctuations in our quarterly or annual operating results;

 

 

publication of research reports by securities analysts about us or our competitors or our industry;

 

 

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

 

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

 

additions and departures of key personnel;

 

 

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

 

the passage of legislation or other regulatory developments affecting us or our industry;

 

 

speculation in the press or investment community;

 

 

changes in accounting principles;

 

 

terrorist acts, acts of war or periods of widespread civil unrest;

 

 

natural disasters and other calamities; and

 

 

changes in general market and economic conditions.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Our future ability to repurchase shares is subject to the discretion of management and our board of directors and may be limited by our ability to generate sufficient earnings and cash flows.

In May 2016, the board of directors authorized the Company to purchase, from time to time, as market conditions warrant, $20 million of our Class A common stock. The share repurchase program does not obligate us to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. The timing and amount of repurchases will be determined by management at its discretion based on a variety of factors such as the market price of its common stock, corporate and legal requirements, and general market and economic conditions. Actual repurchases of shares will also depend on our ability to generate sufficient earnings and cash flows. In addition, our ability to repurchase shares is subject to limitations under our senior secured credit facility. See “Description of certain indebtedness—Senior secured credit facility—Covenants and other matters.”

Because we do not currently anticipate that we will pay any cash dividends on our Class A common stock in the foreseeable future, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and do not currently anticipate that we will pay any cash dividends on our Class A common stock in the foreseeable future.

 

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Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior credit facility. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our Class A common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock. In connection with this offering, our officers, directors and the selling stockholders will enter into 90-day lock-up agreements with the underwriters. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares eligible for future sale” section of this prospectus. We have also filed a Form S-8 under the Securities Act to register all shares of Class A common stock that we may issue under our equity compensation plans. In addition, TSG has certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by TSG. See “Certain relationships and related party transactions—Registration rights agreement.” Such sales by TSG could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. In the event one or more securities analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

A credit ratings downgrade or other negative action by a credit ratings organization could adversely affect the trading price of the shares of our Class A common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our Class A common stock.

 

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Our certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

 

any derivative action or proceeding brought on our behalf;

 

 

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

 

any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws;

 

 

any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; or

 

 

any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

In addition, our certificate of incorporation provides that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Financial forecasting may differ materially from actual results.

Due to the inherent difficulty of predicting future events and results, our forecasted financial and operational results may differ materially from actual results. Discrepancies between forecasted and actual results could cause a decline in the price of our stock.

 

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Cautionary note regarding forward-looking statements

This prospectus contains forward-looking statements. 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,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words.

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

 

 

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

 

 

our ability to protect our brand and reputation;

 

 

our ability to execute our growth strategy, including through development of new stores by new and existing franchisees;

 

 

our ability to manage our growth and associated strain on our resources;

 

 

our ability to successfully identify and secure appropriate franchisees and sites, and timely develop and expand our operations;

 

 

data security and the vulnerability of our information systems;

 

 

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

 

 

the high level of competition in the health and fitness industry;

 

 

our dependence on a small number of equipment suppliers;

 

 

our ability to maintain sufficient levels of cash flow, or access to capital, to meet growth expectations;

 

 

our dependence on key executive management;

 

 

our ability to identify qualified individuals for our workforce;

 

 

our ability to adequately protect our intellectual property;

 

 

risks related to franchisees generally;

 

 

share repurchases and dividends;

 

 

our business model being susceptible to litigation;

 

 

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

 

 

TSG’s significant influence over us and our status as a “controlled company” under the rules of the NYSE;

 

 

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

 

 

the other factors identified under the heading “Risk factors” elsewhere in this prospectus.

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

 

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Use of proceeds

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of shares of Class A common stock offered by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. For more information, see “Certain relationships and related party transactions—Registration rights agreement,” “Principal and selling stockholders” and “Underwriting.”

 

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Dividend policy

Our board of directors does not currently intend to pay dividends on our Class A common stock. However, we expect to re-evaluate our dividend policy on a regular basis and may, subject to compliance with the covenants contained in our senior secured credit facility and other considerations, determine to pay dividends in the future. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. The declaration, amount and payment of any future dividends on shares of our Class A common stock will be at the sole discretion of our board of directors, which may take into account general economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our board of directors may deem relevant. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” and “Description of certain indebtedness” included elsewhere in this prospectus regarding restrictions on our ability to pay dividends.

 

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Price range of our Class A common stock

Shares of our Class A common stock have been listed and traded on the NYSE under the symbol “PLNT” since August 6, 2015. Prior to that date, there was no public market for our stock. The following table sets forth, for the periods indicated, the high and low intra-day sale prices in dollars on the NYSE for our Class A common stock.

 

      High      Low  

Third quarter of fiscal year 2015

   $ 20.68       $ 13.65   

Fourth quarter of fiscal year 2015

   $ 17.34       $ 14.50   

First quarter of fiscal year 2016

   $ 16.38       $ 13.23   

Second quarter of fiscal year 2016 (through May 24, 2016)

   $ 17.79       $ 14.86   

 

 

There is no trading market for shares of our Class B common stock.

On May 24, 2016, the last reported sale price of our Class A common stock on the NYSE was $17.55 per share. As of May 24, 2016, there were four stockholders of record of our Class A common stock and 16 stockholders of record of our Class B common stock. These figures do not reflect the beneficial ownership or shares held in nominee name.

 

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Capitalization

The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2016 on a historical basis and on a pro forma basis giving effect to this offering and the other transactions described under “Unaudited pro forma condensed consolidated financial information.”

You should read this information together with our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Unaudited pro forma condensed consolidated financial information,” “Selected consolidated financial and other data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

             As of March 31,  2016  
(in thousands)   Historical     Pro forma  

Cash and cash equivalents

  $ 38,268      $                
 

 

 

   

 

 

 

Long-term debt, including current portion:

   

Senior secured credit facility

    491,000     

Deferred financing costs, net of accumulated amortization

    (7,025  
 

 

 

   

 

 

 

Total debt(1)

  $ 483,975     
 

 

 

   

 

 

 

Stockholders’ equity (deficit):

   

Class A common stock, par value $0.0001 per share; 300,000 shares authorized and 36,598 shares issued and outstanding on a historical basis; 300,000 shares authorized and                  shares issued and outstanding on a pro forma basis

    4     

Class B common stock, par value $0.0001 per share; 100,000 shares authorized and 62,067 shares issued and outstanding on a historical basis; 100,000 shares authorized and             shares issued and outstanding on a pro forma basis

    6     

Additional paid-in capital

    577     

Accumulated deficit

    (11,805  

Accumulated other comprehensive loss

    (2,387  
 

 

 

   

 

 

 

Stockholders’ deficit attributable to Planet Fitness, Inc.

    (13,605  

Noncontrolling interests

    20,866     
 

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    7,261     
 

 

 

   

 

 

 

Total capitalization

  $ 491,236      $     
 

 

 

   

 

 

 

 

 

 

(1)   Total debt consists of borrowings under our senior secured credit facility as described in “Description of certain indebtedness,” less deferred financing costs, net of accumulated amortization.

 

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Unaudited pro forma consolidated financial information

The following unaudited pro forma information reflects the impact of this offering, after giving effect to the recapitalization transactions and the IPO discussed under “Prospectus summary—Our initial public offering and organizational structure.” The unaudited pro forma consolidated statements of operations for the year ended December 31, 2015 and the quarter ended March 31, 2016 give effect to the recapitalization transactions, the IPO and this offering as if they had occurred on January 1, 2015. The unaudited pro forma consolidated balance sheet as of March 31, 2016 gives effect to this offering as if it had occurred on March 31, 2016.

We derived the unaudited pro forma consolidated financial information set forth below by applying the pro forma adjustments to the audited and unaudited historical consolidated financial statements of Planet Fitness, Inc. and subsidiaries included elsewhere in this prospectus. The unaudited pro forma consolidated financial information reflects pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable but are subject to change.

The pro forma adjustments related to the recapitalization and IPO transactions reflect the impacts of those transactions on our historical statements of operations and include the following:

 

 

the reversal of cash-based and equity-based compensation expense related to our 2013 Performance Incentive Plan and the Class M units of Pla-Fit Holdings, LLC, respectively, recorded in connection with the IPO, the reversal of costs and expenses incurred and recorded in connection with the recapitalization transactions and the IPO, and the reversal of management fee expense resulting from the termination of the management services agreement with TSG in connection with the IPO;

 

 

a provision for income taxes reflecting Planet Fitness, Inc. as a taxable corporation; and

 

 

the allocation of net income between non-controlling interests and Planet Fitness Inc. based on Planet Fitness, Inc.’s 37.1% ownership of Pla-Fit Holdings, LLC following the recapitalization and IPO transactions.

The pro forma adjustments related to this offering reflect the impact of this offering on our historical balance sheet and statements of operations and include the following:

 

 

the exchange by Continuing LLC Owners, prior to this offering, of             Holdings Units (together with a corresponding number of shares of Class B common stock) for a corresponding number of shares of Class A common stock. The shares of Class A common stock received in the exchange will be sold by the former Continuing LLC Owners in this offering, together with              shares of Class A common stock held by Direct TSG Investors;

 

 

the effects of (1) the tax receivable agreement entered into with the Continuing LLC Owners, which provides for the payment by us to the Continuing LLC Owners of 85% of the amount of the cash savings, if any, in U.S. federal and state income tax that we are deemed to realize as a result of (i) certain tax attributes that are created as a result of their exchange of Holdings Units for shares of our Class A common stock, (ii) certain other tax attributes we acquire from the acquisitions of their Holdings Units and (iii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest), and (2) the exchange agreement, under which to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the Continuing LLC Owners have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such tax liability (up to 3.5% of the value received upon exchange). If and when we subsequently realize a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant Continuing LLC Owner in respect of its contribution;

 

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adjustments to the provision for income taxes and deferred income taxes reflecting the increased ownership of Pla-Fit Holdings, LLC by Planet Fitness, Inc.; and

 

 

the allocation of net income between non-controlling interests and Planet Fitness Inc. based on Planet Fitness, Inc.’s     % ownership of Pla-Fit Holdings, LLC following this offering.

The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock from the selling stockholders. We will not receive any of the proceeds from the sale of shares of Class A common stock by the selling stockholders in connection with this offering.

The unaudited pro forma consolidated financial information is presented for informational purposes only and should not be considered indicative of the actual financial position or results of operations that would have been achieved had the recapitalization and IPO transactions or this offering been consummated on the dates indicated, and does not purport to be indicative of the financial condition or results of operations as of any future date or for any future period. You should read our unaudited pro forma consolidated financial information and the accompanying notes in conjunction with the historical consolidated financial statements and related notes included elsewhere in this prospectus and the financial and other information appearing elsewhere in this prospectus, including information contained in the sections entitled “Risk factors,” “Selected consolidated financial and operating data,” “Use of proceeds,” “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations.”

 

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Planet Fitness, Inc.

Unaudited pro forma consolidated balance sheet

as of March 31, 2016

 

(in thousands)   Historical     Offering
adjustments
    Pro forma

Assets

     

Cash and cash equivalents

  $ 38,268                         (1)   

Accounts receivable, net

    10,446       

Due from related parties

    1,005       

Inventory

    1,476       

Restricted assets—NAF

    5,300       

Other current assets

    12,318       
 

 

 

   

 

 

   

 

Total current assets

    68,813       

Property and equipment, net

    54,302       

Intangible assets, net

    268,679       

Goodwill

    176,981       

Deferred income taxes

    115,523        (2 )   

Other assets, net

    1,368       
 

 

 

   

 

 

   

 

Total assets

  $ 685,666       
 

 

 

   

 

 

   

 

Liabilities and Stockholders’ Equity (Deficit)

     

Current maturities of long-term debt

  $ 5,100       

Accounts payable

    10,090       

Accrued expenses

    9,853       

Equipment deposits

    5,253       

Deferred revenue, current

    15,477       

Payable to related parties pursuant to tax benefit arrangements, current

    5,870        (2 )   

Other current liabilities

    253       
 

 

 

   

 

 

   

 

Total current liabilities

    51,896       
 

 

 

   

 

 

   

 

Long-term debt, net of current maturities

    478,875       

Deferred rent, net of current portion

    4,665       

Deferred revenue, net of current portion

    10,277       

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

    132,208        (2 )   

Deferred tax liabilities—non current

      (2 )   

Other liabilities

    484       
 

 

 

   

 

 

   

 

Total noncurrent liabilities

    626,509       
 

 

 

   

 

 

   

 

Stockholders’ equity (deficit):

     

Class A common stock

    4       

Class B common stock

    6       

Additional paid in capital

    577        (2 )   

Accumulated other comprehensive loss

    (2,387    

Accumulated deficit

    (11,805     (1 )(2)(3)   
 

 

 

   

 

 

   

 

Stockholders’ equity (deficit) attributable to Planet Fitness, Inc.

    (13,605    

Non-controlling interests

    20,866        (3 )   
 

 

 

   

 

 

   

 

Total stockholders’ equity (deficit)

    7,261       
 

 

 

   

 

 

   

 

Total liabilities and stockholders’ equity (deficit)

  $ 685,666       
 

 

 

   

 

 

   

 

 

 

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Notes to unaudited pro forma consolidated balance sheet as of March 31, 2016

 

(1)   Represents expenses of $             million related to this offering that will be paid by us subsequent to March 31, 2016. This adjustment is reflected as a decrease in cash and an increase in accumulated deficit. Since we will not retain any proceeds from the offering, these amounts are expensed as incurred prior to and at the time of the offering.

 

(2)   Planet Fitness, Inc. is subject to U.S. federal and state income taxes and files consolidated income tax returns for U.S. federal and certain state jurisdictions. These adjustments reflect the recognition of additional deferred taxes in connection with this offering related to temporary differences in the book basis as compared to the tax basis of our investment in Pla-Fit Holdings, LLC, resulting in unaudited pro forma deferred tax liability adjustments of $             million related to this offering as of March 31, 2016.

In addition, we are a party to two tax receivable agreements. Under the first of those agreements, we generally are required to pay to our Continuing LLC Owners 85% of the applicable cash savings, if any, in U.S. federal and state income tax that we are deemed to realize in certain circumstances as a result of certain tax attributes of their Holdings Units sold to us (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of our Class A common stock, and (ii) tax benefits attributable to payments made under this tax receivable agreement. See “Certain relationships and related party transactions—Tax receivable agreements.”

Also, pursuant to the exchange agreement, to the extent an exchange results in Pla-Fit Holdings, LLC incurring a current tax liability relating to the New Hampshire business profits tax, the Continuing LLC Owners have agreed that they will contribute to Pla-Fit Holdings, LLC an amount sufficient to pay such tax liability (up to 3.5% of the value received upon exchange). If and when we subsequently realize a related tax benefit, Pla-Fit Holdings, LLC will distribute the amount of any such tax benefit to the relevant Continuing LLC Owner in respect of its contribution. See “Certain relationships and related party transactions—Exchange agreement.”

The deferred tax asset adjustment of $         million, resulting from this offering, and the $         million adjustment related to the tax receivable agreements and the exchange agreement liability are assuming: (1) only exchanges associated with this offering, (2) a share price equal to $         per share (the last closing sale price of our Class A common stock on             , 2016), (3) a constant federal income tax rate of 35.0% and a state tax rate net of federal benefit for the deductibility of state taxes of 4.4%, (4) no material changes in tax law, (5) the ability to utilize tax attributes and (6) future tax receivable agreement and exchange agreement payments.

The net impact of the adjustments to deferred tax assets and liabilities and the liability for the tax receivable of $         million have been recorded as a reduction in additional paid in capital of $        , reducing additional paid in capital to $0, and then as a reduction to accumulated deficit of $         million as these adjustments arise from equity transactions of the Company.

We anticipate that we will account for the income tax effects resulting from future taxable exchanges of Holdings Units by Continuing LLC Owners for shares of our Class A common stock or cash by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of each exchange. Further, we will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset, and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance.

The amounts to be recorded for both the deferred tax assets and liabilities and the liability for our obligations under the tax receivable agreements and the exchange agreement have been estimated. All of

 

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the effects of changes in any of our estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

 

(3)   Planet Fitness, Inc. is the sole managing member of Pla-Fit Holdings, LLC. As sole managing member, Planet Fitness, Inc. exclusively operates and controls the business and affairs of Pla-Fit Holdings, LLC. As the Continuing LLC Owners control both Planet Fitness, Inc. and Pla-Fit Holdings, LLC, we consolidate Pla-Fit Holdings, LLC. The Holdings Units owned by the Continuing LLC Owners are considered noncontrolling interests in the consolidated financial statements of Planet Fitness, Inc.

Immediately prior to this offering,              Holdings Units, together with the related shares of Class B common stock, will be acquired by Planet Fitness, Inc. from certain Continuing LLC Owners in exchange for an equal number of shares of Class A common stock. These Continuing LLC Owners, along with the Direct TSG investors, will sell a total of              shares of Class A common stock in this offering.

Following this offering, Planet Fitness, Inc. will hold              Holdings Units, and the Continuing LLC Owners will hold              Holdings Units, representing     % and     %, respectively, of the outstanding Holdings Units of Pla-Fit Holdings, LLC. The adjustment to noncontrolling interests of $             million reflects the proportional interest in the pro forma consolidated total equity of Pla-Fit Holdings, LLC owned by the Continuing LLC Owners.

The Continuing LLC Owners, from time to time, may require us to exchange all or a portion of their Holdings Units for newly issued shares of our Class A common stock on a one-for-one basis or, at our discretion, for cash. Shares of our Class B common stock will be cancelled on a one-for-one basis if we, at the election of a Continuing LLC Owner, redeem or exchange Holdings Units of such Continuing LLC Owner pursuant to the terms of the exchange agreement. The decision whether to tender Holdings Units to us will be made solely at the discretion of the Continuing LLC Owners. We will exercise discretion regarding the form of consideration in any such exchange. Pursuant to the exchange agreement, any such decisions will be made on our behalf by a majority of the disinterested members of our board of directors.

 

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Planet Fitness, Inc.

Unaudited pro forma consolidated statement of operations

for the quarter ended March 31, 2016

 

(in thousands, except per share data)    Historical     Offering
adjustments
    Pro
forma
 

Revenue:

      

Franchise

   $ 21,491      $              

Commission income

     6,186       

Corporate—owned stores

     25,697       

Equipment

     29,969       
  

 

 

   

 

 

   

 

 

 

Total revenues

     83,343       
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

      

Cost of revenue

     23,639       

Store operations

     14,732       

Selling, general and administrative

     11,845       

Depreciation and amortization

     7,703       

Other (gain) loss

     (186    
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     57,733       
  

 

 

   

 

 

   

 

 

 

Income from operations

     25,610       
  

 

 

   

 

 

   

 

 

 

Other income (expense), net:

      

Interest expense, net

     (6,367    

Other income (expense)

     393       
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (5,974    
  

 

 

   

 

 

   

 

 

 

Income before taxes

     19,636       

Provision for income taxes

     3,291        (1 )   
  

 

 

   

 

 

   

 

 

 

Net income

     16,345       

Less net income attributable to noncontrolling interests

     12,977        (2 )   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Planet Fitness, Inc.

   $ 3,368      $       
  

 

 

   

 

 

   

 

 

 

Net income per share data(3):

      

Net income per share:

      

Basic and diluted

   $ 0.09        $            

Weighted average shares of Class A common stock outstanding:

      

Basic and diluted

     36,598       

 

 

 

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Notes to unaudited pro forma condensed consolidated statement of operations for the quarter ended March 31, 2016

 

(1)   Planet Fitness, Inc. 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, LLC. The adjustment of $         million to the provision for income taxes resulting from this offering reflects our effective tax rate of 39.4% applied to the additional     % of income before taxes that represents our additional economic interest in Pla-Fit Holdings, LLC that will be held by Planet Fitness, Inc. upon completion of the exchange of Holdings Units for shares of Class A common stock by certain Continuing LLC Owners in connection with this offering. The unaudited pro forma provision for income taxes upon completion of this offering also reflects an effective state tax rate of 2.5% applied to noncontrolling interests, representing the remaining     % of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings, LLC.

 

(2)   The Holdings Units of Pla-Fit Holdings, LLC owned by the Continuing LLC Owners are considered noncontrolling interests in the consolidated financial statements of Planet Fitness, Inc. The pro forma adjustment reflects the reduction in the allocation of Pla-Fit Holdings, LLC net income to the noncontrolling interests. Immediately following the completion of this offering, the noncontrolling interests held by the Continuing LLC Owners will have     % economic ownership of Pla-Fit Holdings, LLC, and as such,     % of Pla-Fit Holdings, LLC’s net income will be attributable to the noncontrolling interests. The remaining economic ownership of Pla-Fit Holdings, LLC will be held by Planet Fitness, Inc. following the completion of this offering.

 

(3)   The pro forma net income per share is calculated based on pro forma net income reflecting the adjustments discussed above divided by the             shares of Class A common stock that will be issued and outstanding following this offering. The shares of Class B common stock have no rights to dividends or distributions, whether in cash or stock, and therefore are excluded from this calculation. We have determined that the assumed conversion of Holdings Units into Class A common stock under the if-converted method of calculating earnings per share does not result in a dilutive impact and therefore that basic and dilutive pro forma net income per share are the same.

 

(in thousands except share and per share amounts)   

Quarter ended

March 31,

2016

 

Basic and diluted net income per share:

  

Numerator

  

Net income

   $     

Less: Net income attributable to non-controlling interests

  
  

 

 

 

Net income attributable to Class A common stockholders—basic and diluted

   $     
  

 

 

 

Denominator

  

Shares of Class A common stock outstanding prior to the offering

     36,597,985   

Incremental shares of Class A common stock issued in connection with this offering

  
  

 

 

 

Weighted-average shares of Class A common stock outstanding—basic and diluted

  
  

 

 

 

Basic and diluted net income per share

   $     
  

 

 

 

 

 

 

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Planet Fitness, Inc.

Unaudited pro forma consolidated statement of operations

for the year ended December 31, 2015

 

(in thousands, except per share data)   Historical    

Recapitalization
transaction

and IPO
adjustments

    As adjusted
before
offering
    Offering
adjustments
    Pro forma  

Revenue:

         

Franchise

  $ 71,762      $      $ 71,762      $               $     

Commission income

    16,323               16,323       

Corporate-owned stores

    98,390               98,390       

Equipment

    144,062               144,062       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    330,537          330,537       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

         

Cost of revenue

    113,492               113,492       

Store operations

    57,485               57,485       

Selling, general and administrative

    55,573        (13,365 )(2)(3)(4)      42,208       

Depreciation and amortization

    32,158               32,158       

Other (gain) loss

    (273            (273    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    258,435        (13,365     245,070       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    72,102        13,365        85,467       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net:

         

Interest expense, net

    (24,549       (24,549    

Other income (expense)

    (275     1,899 (1)      1,624       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (24,824     1,899        (22,925    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    47,278        15,264        62,542       

Provision for income taxes

    9,148        3,363 (5)      12,511        (5 )   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    38,130        11,901        50,031       

Less net income attributable to noncontrolling interests

    19,612        20,586 (6)      40,198        (7 )   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Planet Fitness, Inc.

  $ 18,518      $ (8,685   $ 9,833       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share
data
(8):

         

Net income per share:

         

Basic and diluted

  $ 0.11            $                

Weighted average shares of Class A common stock outstanding:

         

Basic and diluted

    36,244           

 

 

 

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Notes to unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2015

 

(1)   For the year ended December 31, 2015, we recognized expenses totaling $1.9 million related to management fees paid to TSG. In connection with the IPO, this management services agreement was terminated. This pro forma adjustment removes this expense from the Planet Fitness, Inc. historical financial statements as such amounts are no longer incurred following the IPO.

 

(2)   For the year ended December 31, 2015, we recognized expenses totaling $7.7 million related to various costs incurred in conjunction with the recapitalization transactions and the IPO. As we did not retain any proceeds from the IPO, we were required to record these costs in the consolidated statement of operations for the year ended December 31, 2015. This pro forma adjustment removes these expenses from the Planet Fitness, Inc. historical financial statements as they were directly related to the recapitalization transactions and the IPO.

 

(3)   For the year ended December 31, 2015, we recognized cash-based compensation expense totaling $1.7 million in conjunction with the IPO. This pro forma adjustment removes this expense from the Planet Fitness, Inc. historical financial statements as such amounts were incurred as a direct result of the IPO.

 

(4)   For the year ended December 31, 2015, we recognized equity-based compensation expense totaling $4.5 million in conjunction with the IPO. This pro forma adjustment removes this expense from the Planet Fitness, Inc. historical financial statements as such amounts were incurred as a direct result of the IPO.

This pro forma adjustment also adds $0.5 million of equity-based compensation expense related to equity awards previously granted which met vesting requirements upon completion of the IPO. The expense represents the amount that would have vested on such awards during the period assuming the IPO had been effective January 1, 2015.

 

(5)   Planet Fitness, Inc. 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, LLC. The adjustment of $3.4 million to the provision for income taxes resulting from the recapitalization and IPO is the result of additional income tax expense from the pro forma offering adjustments as well as the increased ownership of Pla-Fit Holdings, LLC by Planet Fitness, Inc. The unaudited pro forma provision for income taxes reflects our effective tax rate of 39.4% applied to income apportioned to each state and local jurisdiction. This tax rate has been applied to the 37.1% portion of income before taxes that represents the economic interest in Pla-Fit Holdings, LLC held by Planet Fitness, Inc. following the recapitalization transactions and the IPO. The unaudited pro forma provision for income taxes also reflects an effective state tax rate of 2.5% applied to noncontrolling interests representing the remaining 62.9% portion of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings, LLC following the recapitalization transactions and the IPO.

The adjustment of $         million to the provision for income taxes resulting from this offering reflects our effective tax rate of 39.4% applied to the additional     % of income before taxes that represents our additional economic interest in Pla-Fit Holdings, LLC that will be held by Planet Fitness, Inc. upon completion of the exchange of Holdings Units for shares of Class A common stock by certain Continuing LLC Owners in connection with this offering. The unaudited pro forma provision for income taxes upon completion of this offering also reflects an effective state tax rate of 2.5% applied to noncontrolling interests, representing the remaining     % of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings, LLC.

 

(6)  

The Holdings Units of Pla-Fit Holdings, LLC owned by the Continuing LLC Owners are considered noncontrolling interests in the consolidated financial statements of Planet Fitness, Inc. As a result of the

 

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recapitalization transactions and IPO, the non controlling interests held by the Continuing LLC Owners have a 62.9% economic ownership of Pla-Fit Holdings, LLC, and as such 62.9% of Pla-Fit Holdings, LLC’s net income is attributable to the non controlling interests. The remaining economic ownership of Pla-Fit Holdings, LLC is held by Planet Fitness, Inc. following the completion of the recapitalization transactions and the IPO. The pro forma adjustment reflects the allocation of Pla-Fit Holdings, LLC net income to the noncontrolling interests for the period presented assuming the IPO had been effective as of January 1, 2015.

 

(7)   Upon consummation of this offering, the noncontrolling interests’ ownership of Pla-Fit Holdings, LLC will be diluted from 62.9% to     %, and, therefore, net income will be attributable to the noncontrolling interests based on their     % ownership interest, and to Planet Fitness, Inc., which owns the remaining     % of the Holdings Units of Pla-Fit Holdings, LLC. The adjustment of $         million reflects the adjustment to the allocation of income to the noncontrolling interests.

 

(8)   The pro forma net income per share is calculated based on pro forma net income reflecting the adjustments discussed above divided by the             shares of Class A common stock that will be issued and outstanding following this offering. The shares of Class B common stock have no rights to dividends or distributions, whether in cash or stock, and therefore are excluded from this calculation. We have determined that the assumed conversion of Holdings Units to Class A common stock under the if-converted method of calculating earnings per share does not result in a dilutive impact and therefore that basic and dilutive pro forma net income per share are the same.

 

(in thousands except share and per share amounts)   

Year ended

December 31,

2015

 

Basic and diluted net income per share:

  

Numerator

  

Net income

   $     

Less: Net income attributable to non-controlling interests

  
  

 

 

 

Net income attributable to Class A common stockholders—basic and diluted

   $     
  

 

 

 

Denominator

  

Shares of Class A common stock issued and outstanding prior to the offering

     36,597,985   

Incremental shares of Class A common issued in connection with this offering

  
  

 

 

 

Weighted-average shares of Class A common stock outstanding—basic and diluted

  
  

 

 

 

Basic and diluted net income per share

   $     
  

 

 

 

 

 

 

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Selected consolidated financial and other data

The following selected consolidated financial and other data of Planet Fitness, Inc. and its subsidiaries should be read in conjunction with “Capitalization,” “Management’s discussion and analysis of financial condition and results of operations” and our audited and unaudited consolidated financial statements and the related notes included elsewhere in this prospectus. Pla-Fit Holdings, LLC is considered our predecessor for accounting purposes, and its consolidated financial statements are our historical financial statements. The terms “Predecessor” and “Successor” used below and throughout this prospectus refer to the periods prior and subsequent to the 2012 Acquisition, respectively.

The selected historical consolidated financial data in the following table as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial data as of March 31, 2016 and for the quarters ended March 31, 2016 and 2015 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for those periods have been reflected. The selected consolidated financial data set forth below as of December 31, 2013, 2012 and 2011 and for the year ended December 31, 2011 and for the periods from January 1, 2012 to November 7, 2012 (Predecessor) and November 8, 2012 to December 31, 2012 (Successor) are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated financial data set forth below as of March 31, 2015 is derived from our unaudited balance sheet not included in this prospectus.

The unaudited combined results of operations and cash flows for the year ended December 31, 2012 represent the mathematical addition of our Predecessor’s results of operations from January 1, 2012 to November 7, 2012, and the Successor’s results of operations from November 8, 2012 to December 31, 2012. We have included the unaudited combined financial information in order to facilitate a comparison with our other years.

 

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     Year ended December 31,    

Combined

year ended
December 31,

2012

   

Period from
November 8,
2012 through
December 31,

2012

         

Period from
January 1,
2012 through
November 7,

2012

    Year ended
December 31,
    Quarter ended
March 31,
 
(in thousands, except per share
data)
  2015     2014     2013             2011     2016     2015  
Consolidated statement of
operations data:
                       (Unaudited)(1)     (Successor)          (Predecessor)     (Predecessor)     (Unaudited)  
 

Revenue:

                     

Franchise revenue(2)

  $ 71,762      $ 58,001      $ 33,684      $ 25,709      $ 4,420          $ 21,289      $ 14,903      $ 21,491      $ 16,967   

Commission income

    16,323        13,805        10,473        9,026        1,837            7,189        6,917        6,186        4,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Franchise segment

    88,085        71,806        44,157        34,735        6,257            28,478        21,820        27,677        21,757   

Corporate-owned stores segment

    98,390        85,041        67,364        49,182        8,822            40,360        39,395        25,697        23,546   

Equipment segment(2)

    144,062        122,930        99,488        75,770        26,708            49,062        75,221        29,969        31,619   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    330,537        279,777        211,009        159,687        41,787            117,900        136,436        83,343        76,922   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 
 

Operating costs and expenses:

                     

Cost of revenue

    113,492        100,306        81,353        62,544        21,480            41,064        58,032        23,639        25,946   

Store operations

    57,485        49,476        41,692        34,331        5,950            28,381        27,790        14,732        14,341   

Selling, general and administrative

    55,573        35,121        23,118        22,108        2,633            19,475        15,005        11,845        14,138   

Depreciation and amortization

    32,158        32,341        28,808        12,635        6,959            5,676        4,205        7,703        8,201   

Other (gain) loss

    (273     994               (1,921                (1,921     (234     (186     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    258,435        218,238        174,971        129,697        37,022            92,675        104,798        57,733        62,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    72,102        61,539        36,038        29,990        4,765            25,225        31,638        25,610        14,302   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 
 

Other income (expense), net:

                     

Interest expense, net(3)

    (24,549     (21,800     (8,912     (3,782     (2,430         (1,352     (1,891     (6,367     (4,756

Other income (expense)

    (275     (1,261     (694     (96     (125         29        288        393        (736
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (24,824     (23,061     (9,606     (3,878     (2,555         (1,323     (1,603     (5,974     (5,492
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    47,278        38,478        26,432        26,112        2,210            23,902        30,035        19,636        8,810   

Provision for income taxes

    9,148        1,183        633        712        56            656        747        3,291        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    38,130        37,295        25,799        25,400        2,154            23,246        29,288        16,345        8,538   

Less net income attributable to non-controlling interests

    19,612        487        361        1,047        32            1,015        2,350        12,977        113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Planet Fitness, Inc.

  $ 18,518      $ 36,808      $ 25,438      $ 24,353      $ 2,122          $ 22,231      $ 26,938      $ 3,368      $ 8,425   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share of Class A common stock:

                     

Basic and diluted

  $ 0.11                      $ 0.09     

Pro forma net income per share data (unaudited)(5)

                     
 

Pro forma net income per share:

                     

Basic and diluted

  $                        $       
 

Pro forma weighted average shares of Class A common stock outstanding:

                     

Basic and diluted

                     
 

Consolidated statement of cash flows data:

                     

Net cash provided by operating activities

  $ 81,663      $ 79,405      $ 66,943      $ 43,058      $ 12,481          $ 30,577      $ 37,954      $ 15,262      $ 12,039   

Net cash used in investing activities

    (19,161     (54,362     (7,137     (232,900     (216,156         (16,744     (6,699     (845     (5,320

Net cash provided by (used in) financing activities

    (74,240     (12,952     (37,994     186,643        192,441            (5,798     (33,963     (7,698     (22,501
 

Consolidated balance sheet data:

                     

Cash and cash equivalents

  $ 31,430      $ 43,291      $ 31,267        n/a      $ 9,455            n/a      $ 12,986      $ 38,268      $ 27,532   

Property and equipment, net

    56,139        49,579        33,766        n/a        32,747            n/a        28,150        54,302        51,587   

Total assets(4)

    699,177        601,982        556,573        n/a        552,564            n/a        66,920        685,666        570,880   

Total debt and capital lease obligations, excluding deferred financing costs

    492,320        387,496        184,460        n/a        201,819            n/a        24,254        491,034        506,349   

Total equity (deficit)

    (1,080     151,749        321,915        n/a        316,639            n/a        1,761        7,261        12,425   

 

(1)  

The table above sets forth our results of operations for the period from January 1, 2012 to November 7, 2012 (Predecessor), and the period November 8, 2012 to December 31, 2012 (Successor). The unaudited combined results of operations and cash flows for the year ended December 31, 2012 represent the mathematical addition of our Predecessor’s results of operations from January 1, 2012 to November 7, 2012, and the Successor’s results of operations from November 8, 2012 to December 31, 2012. We have included the unaudited combined financial information in order to facilitate a comparison with our other years. Each of the Predecessor and Successor results for the period from January 1, 2012 to November 7, 2012, and the period from November 8, 2012 to December 31, 2012, respectively, have been audited and are consistent with GAAP. However, the presentation of unaudited combined financial information for the year ended December 31, 2012 is not consistent with GAAP or with the pro forma requirements of Article 11 of Regulation S-X, and may yield results that are not comparable on a period-to-period basis primarily due to (i) the impact of required

 

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purchase accounting adjustments and (ii) the new basis of accounting established in connection with the 2012 Acquisition. Such results are not necessarily indicative of what the results for the respective periods would have been had the 2012 Acquisition not occurred. All references to the year ended December 31, 2012 in this prospectus are based on this unaudited combined information.

 

(2)   Effective January 1, 2012, we began to report placement revenue within franchise revenue. Prior to January 1, 2012, this revenue was reported within equipment revenue. Placement revenue includes amounts we charge our franchisees for assembling and placing cardio and strength equipment at franchisee-owned stores. Placement revenue was $9.8 million, $8.5 million, $6.3 million and $4.9 million in 2015, 2014, 2013 and 2012, respectively. Prior to 2012, we did not separately track these amounts.

 

(3)   Interest expense in 2014 included $4.7 million for the loss on extinguishment of debt.

 

(4)   Reflects the reclassification of deferred financing costs of $7.3 million, $5.5 million, $7.1 million, and $0.6 million in connection with the adoption of ASU No. 2015-03 as of December 31, 2014, 2013, 2012 and 2011, respectively.

 

(5)   Pro forma net income per share is computed by dividing pro forma net income available to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. For more information regarding the pro forma presentation of these measures, see “Unaudited pro forma consolidated financial information.”

 

     Year ended December 31,     Quarter ended March 31,  
     2015     2014     2013     2012     2011             2016             2015  
                      (Combined)     (Predecessor)     (unaudited)  

Other operating data: (unaudited)(1)

             

Number of stores at end of period:(2)

             

Franchisee-owned

    1,066        863        704        562        457        1,113        919   

Corporate-owned

    58        55        45        44        31        58        57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

System-wide

    1,124        918        749        606        488        1,171        976   

Same store sales growth:(3)

             

Franchisee-owned

    8.3%        11.5%        9.1%        8.7%        3.8%        7.0%        11.7%   

Corporate-owned

    1.9%        5.4%        6.1%        4.8%        3.3%        4.9%        4.6%   

System-wide

    7.7%        10.8%        8.4%        8.1%        3.6%        6.8%        10.9%   

Number of members at end of period (in millions)(4)

    7.3        6.1        4.8        3.7        2.9        8.3        7.1   

System-wide sales (in millions)(5)

  $ 1,507      $ 1,190      $ 891      $ 694      $ 520      $ 415      $ 328   

($ in thousands, except per share data)

             

EBITDA(6)

  $ 103,985      $ 92,619      $ 64,152      $ 42,529      $ 36,131      $ 33,706      $ 21,767   

Adjusted EBITDA(6)

  $ 123,486      $ 100,549      $ 71,198      $ 51,320      $ 38,099      $ 34,268      $ 28,471   

Pro forma adjusted net income(7)

  $ 53,235      $ 42,183      $ 34,006          $ 15,175      $ 12,595   

Pro forma adjusted net income per share, diluted(7)

  $ 0.54      $ 0.43      $ 0.34          $ 0.15      $ 0.13   

Pro forma shares outstanding(8)

    98,710        98,710        98,710                        98,707        98,710   

 

(1)   For the other operating data shown in the table above, we have combined the Predecessor and the Successor periods to present 2012 on a combined basis only.

 

(2)   We classify a store as open on the date the store receives its occupancy certificate, which is typically the date the store is first available for use by its members.

 

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

 

(4)   We define members as all active members, which includes both monthly billing members, prepay members and all pre-sale members. Pre-sale members include those that have joined a store prior to the store opening. This data is system-wide, which includes members of corporate-owned and franchisee-owned stores.

 

(5)   We define system-wide sales as the monthly dues and annual fees from members of both corporate-owned and franchisee-owned stores.

 

(6)  

EBITDA is defined as net income before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include certain purchase accounting adjustments, management fees, certain IT system upgrade costs, acquisition transaction fees, IPO-related costs, pre-opening costs and certain other charges and gains that we do not believe reflect our underlying business performance. EBITDA and Adjusted EBITDA as presented in this prospectus are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for GAAP metrics such as net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back to

 

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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. See “Management’s discussion and analysis of financial condition and results of operations—Non-GAAP financial measures.”

 

(7)   Our presentation of pro forma adjusted net income and pro forma adjusted net income per diluted share gives effect to the consolidation of Pla-Fit Holdings, LLC with Planet Fitness, Inc. resulting from the recapitalization transactions described in “Prospectus summary—Our initial public offering and organizational structure” and the amended and restated Pla-Fit Holdings LLC Agreement as if they had occurred as of January 1, 2013. In addition, Pro forma 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 items that we do not believe directly reflect our core operations. Pro forma adjusted net income per diluted share is calculated by dividing Pro forma adjusted net income by the total shares of Class A common stock outstanding as though the IPO had occurred and those shares were outstanding for each period presented and assuming the full exchange of all outstanding Holdings Units and corresponding Class B common shares as of the beginning of each period presented. Pro forma adjusted net income and pro forma adjusted net income per diluted share 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 GAAP.

 

(8)   Assumes the full exchange of all outstanding Holdings Units and corresponding Class B common shares for shares of Class A common stock of Planet Fitness, Inc. for all periods presented.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively, and for the quarters ended March 31, 2016 and 2015, respectively.

 

     Year ended December 31,     Quarter ended March 31,  
(in thousands)   2015     2014     2013     2012     2011     2016     2015  

(unaudited)

                    (Combined)     (Predecessor)     (unaudited)  

Net income

  $ 38,130      $ 37,295      $ 25,799      $ 25,400      $ 29,288      $ 16,345      $ 8,538   

Interest expense, net(1)

    24,549        21,800        8,912        3,782        1,891        6,367        4,756   

Provision for income taxes

    9,148        1,183        633        712        747        3,291        272   

Depreciation and amortization

    32,158        32,341        28,808        12,635        4,205        7,703        8,201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    103,985        92,619        64,152        42,529        36,131        33,706        21,767   

Purchase accounting adjustments(2)

    1,606        2,814        2,819        782               182        426   

Management fees(3)

    1,899        1,211        1,136        147                      284   

IT system upgrade costs(4)

    3,901        1,228        2,516        451        762               3,633   

Transaction fees(5)

           552        280        1,989        202                 

IPO-related costs(6)

    7,697        687                                    1,757   

IPO related compensation expense(7)

    6,155                                             

Pre-opening costs(8)

    793        1,676        295        144        604               604   

Severance costs(9)

                                       380          

Legacy bonus(10)

                         4,542                        

Other(11)

    (2,550     (238            736        400                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 123,486      $ 100,549      $ 71,198      $ 51,320      $ 38,099      $ 34,268      $ 28,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

(1)   Includes $4.7 million of loss on extinguishment of debt in 2014.

 

(2)   Represents the impact of certain purchase accounting adjustments associated with the 2012 Acquisition of Pla-Fit Holdings, LLC on November 8, 2012 and our acquisition of eight franchisee-owned stores during 2014. These are primarily related to fair value adjustments to deferred revenue and deferred rent.

 

(3)   Represents management fees and expenses paid to a management company affiliated with TSG pursuant to a management services agreement that terminated in connection with the IPO. See “Certain relationships and related party transactions—Management services agreement.”

 

(4)   Represents costs associated with certain IT system upgrades, primarily related to our point-of-sale systems.

 

(5)   Represents transaction fees and expenses primarily related to business acquisitions and dispositions.

 

(6)   Represents legal, accounting and other costs incurred in connection with the IPO.

 

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(7)   Represents cash-based and equity-based compensation expense recorded in connection with the IPO.

 

(8)   Represents costs associated with new corporate-owned stores incurred prior to the store opening, including payroll-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.

 

(9)   Represents severance expense recorded in connection with an equity award modification.

 

(10)   Relates primarily to bonuses for certain employees at the time of the 2012 Acquisition that were paid by the members of the Predecessor, which according to accounting rules applicable to us must be reported in our GAAP results.

 

(11)   Represents certain other charges and gains that we do not believe reflect our underlying business performance. These charges consisted primarily of severance in 2011, severance offset by the gain from the sale of two stores to a franchisee in 2012 and the net gain recorded from the receipt of insurance proceeds related to restoration and business interruption costs from the flood that occurred in our Bayshore, New York store in October 2014.

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with the “Selected consolidated financial and other data” section of this prospectus and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in the “Risk factors” section and elsewhere in this prospectus.

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 March 31, 2016, we had more than 8.3 million members and 1,171 stores in 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. Of our 1,171 stores, 1,113 are franchised and 58 are corporate-owned. As of March 31, 2016, we had commitments from franchisees to open more than 1,000 new stores under existing ADAs.

Composition of revenues, expenses and cash flows

Revenues

We generate revenue from three primary sources:

 

 

Franchise segment revenue:    Franchise segment revenue relates to services we provide to support our franchisees and includes royalty revenue, franchise fees, placement revenue, other fees and commission income associated with our franchisee-owned stores. Franchise segment revenue does not include the sale of tangible products by us to our franchisees. Our franchise segment revenue comprised 27%, 26% and 21% of our total revenue for the years ended December 31, 2015, 2014 and 2013, respectively, and 33% and 28% of our total revenue for the quarters ended March 31, 2016 and 2015, respectively. Royalty revenue, which represents royalties paid by franchisees based on the franchisee-owned stores’ monthly and annual membership billings, is recognized on a monthly basis over the term of the franchise agreement. Franchise fees, which include fees under ADAs, are recognized when we have substantially completed all of our performance obligations, which is generally at or near the store opening date. Placement revenue includes amounts we charge our franchisees for assembling and placing cardio and strength equipment at franchisee-

 

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owned stores. Placement revenue is recognized upon completion and acceptance of the services at the franchisee stores. Other fees includes online member join fees we receive from franchisees related to processing transactions for new members joining franchisee-owned stores through the Company’s website and billing transaction fees we receive from franchisees related to franchisee membership billing processing through our third-party hosted point-of-sale system. Through our point-of-sale system, we oversee the processing of membership billings for franchisee-owned stores through EFT transactions and the billing transaction fees we receive are based upon the number of transactions processed. Our royalties and other fees are deducted from these membership billings and remitted to us by the processor prior to the net billings being remitted to the franchisees. Commission income is generated from activities related to our franchisees, including purchases of merchandise, promotional materials and store fixtures by our franchisees from third-party vendors. Beginning in 2015, commission income also included commissions earned on equipment sales by third-party vendors to franchisees in international locations. These commissions are recognized when amounts have been earned and collectability from the vendor is reasonably assured.

 

 

Corporate-owned store segment revenue:    Includes monthly membership dues, enrollment fees, annual fees and prepaid fees paid by our members as well as retail sales. This source of revenue comprised 30%, 30% and 32% of our total revenue for the years ended December 31, 2015, 2014 and 2013, respectively, and 31% and 31% of our total revenue for the quarters ended March 31, 2016 and 2015, respectively. As of March 31, 2016, 95% of our members paid their monthly dues by EFT, while the remainder prepaid annually in advance. Membership dues and fees are earned and recognized over the membership term. Enrollment fees are recognized ratably over the estimated duration of the membership. Annual fees are recognized ratably over the 12-month membership period. Retail sales are recognized at the point of sale.

 

 

Equipment segment revenue:    Includes equipment revenue for new U.S. franchisee-owned stores as well as replacement equipment for U.S. existing franchisee-owned stores. Franchisee-owned stores are required to replace their equipment every four to seven years based on the life of the specific equipment. This source of revenue comprised 43%, 44% and 47% of our total revenue for the years ended December 31, 2015, 2014 and 2013, respectively, and 36% and 41% of our total revenue for the quarters ended March 31, 2016 and 2015, respectively. Equipment revenue is recognized when the equipment is delivered, assembled, placed and accepted by the franchisee.

Expenses

We primarily incur the following expenses:

 

 

Cost of revenue:    Primarily includes the direct costs associated with equipment sales to new and existing franchisee-owned stores in the U.S. as well as direct costs related to our point-of-sale system. Cost of revenue also includes the cost of retail sales at our corporate-owned stores, which is immaterial. Our cost of revenue changes primarily based on equipment sales volume.

 

 

Store operations:    Includes the direct costs associated with our corporate-owned stores, primarily rent, utilities, payroll, marketing, maintenance and supplies. The components of store operations remain relatively stable for each store and change primarily based on the number of corporate-owned stores. Our statements of operations do not include, and we are not responsible for, any costs associated with operating franchisee-owned stores.

 

 

Selling, general and administrative expenses:    Consists of costs associated with administrative and franchisee support functions related to our existing business as well as growth and development activities, including costs to support equipment placement services. These costs primarily consist of payroll, IT-related, marketing, legal and accounting expenses.

 

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Cash flows

We generate a significant portion of our cash flows from monthly membership dues, royalties and various fees and commissions related to transactions involving our franchisee-owned stores. We oversee the membership billing process, as well as the collection of our royalties and certain other fees, through our third-party hosted system-wide point-of-sale system. We collect monthly dues from our corporate-owned store members on or around the 17th of each month, while annual fees are collected in February, June or October, depending on when the membership agreement was signed. Through our point-of-sale system, we oversee the processing of membership billings for franchisee-owned stores. Our royalties and certain other fees are deducted on or around the 17th of each month from these membership billings by the processor prior to the net billings being remitted to the franchisees. Our franchisees are responsible for maintaining the membership billing records and collection of member dues for their respective stores through the point-of-sale system. Our royalties are based on monthly and annual membership billings for the franchisee-owned stores without regard to the collections of those billings by our franchisees. The amount and timing of the collection of royalties and membership dues and fees at corporate-owned stores is, therefore, generally fairly predictable.

As new corporate-owned stores open, or existing stores generate positive same store sales, future corporate-owned store revenues are expected to grow. Our corporate-owned stores also generate strong operating margins and cash flows, as a significant portion of our costs are fixed or semi-fixed such as rent and labor.

Equipment sales to new and existing franchisee-owned stores also generate significant cash flows. Franchisees either pay in advance or provide evidence of a committed financing arrangement.

Recent transactions

In May 2016, the board of directors authorized the Company to purchase, from time to time, as market conditions warrant, $20 million of the Company’s Class A common stock. The share repurchase program does not obligate us to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. The timing and amount of repurchases will be determined by management, at its discretion, based on a variety of factors such as the market price of our common stock, corporate and legal requirements, general market and economic conditions, and compliance with the terms of agreements governing our outstanding indebtedness. Purchases of our common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, in privately negotiated transactions or by other means in accordance with federal securities laws. The share repurchase program does not have a specified expiration date.

Seasonality

Our results are subject to seasonality fluctuations in that member joins are typically higher in January as compared to other months of the year. In addition, our quarterly results may fluctuate significantly because of several factors, including the timing of store openings, timing of price increases for enrollment fees and monthly membership dues and general economic conditions. See Note 21 to our consolidated financial statements included in this prospectus for our total revenues, income from operations and net income for each of the quarters during the years ended December 31, 2015 and 2014.

 

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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, the District of Columbia, 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 franchisee-owned stores in the U.S. 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 years ended December 31, 2015, 2014 and 2013, and for the quarters ended March 31, 2016 and 2015. “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.

 

     Year ended
December 31,
    Quarter ended
March 31,
 
(in thousands)    2015     2014     2013     2016     2015  
                       (unaudited)  

Revenue

          

Franchise segment

   $ 88,085      $ 71,806      $ 44,157      $ 27,677      $ 21,757   

Corporate-owned stores segment

     98,390        85,041        67,364        25,697        23,546   

Equipment segment

     144,062        122,930        99,488        29,969        31,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 330,537      $ 279,777      $ 211,009      $ 83,343      $ 76,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment EBITDA

          

Franchise

   $ 66,030      $ 53,109      $ 30,123      $ 23,813      $ 13,578   

Corporate-owned stores

     36,070        31,705        21,742        10,162        7,798   

Equipment

     31,936        26,447        19,791        6,318        6,763   

Corporate and other

     (30,051     (18,642     (7,504     (6,587     (6,372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment EBITDA

   $ 103,985      $ 92,619      $ 64,152      $ 33,706      $ 21,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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

 

(in thousands)    Franchise     

Corporate-
owned

stores

    Equipment      Corporate
and other
    Total  

Quarter ended March 31, 2016:

            

Income from operations

   $ 21,691       $ 5,877      $ 4,767       $ (6,725   $ 25,610   

Depreciation and amortization

     2,118         3,902        1,551         132        7,703   

Other income (expense)

     4         383                6        393   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment EBITDA

   $ 23,813       $ 10,162      $ 6,318       $ (6,587   $ 33,706   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Quarter ended March 31, 2015:

            

Income from operations

   $ 11,264       $ 3,929      $ 5,210       $ (6,101   $ 14,302   

Depreciation and amortization

     2,314         4,321        1,553         13        8,201   

Other income (expense)

             (452             (284     (736
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment EBITDA

   $ 13,578       $ 7,798      $ 6,763       $ (6,372   $ 21,767   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Year ended December 31, 2015

            

Income from operations

   $ 57,442       $ 19,738      $ 25,725       $ (30,803   $ 72,102   

Depreciation and amortization

     8,544         17,232        6,211         171        32,158   

Other income (expense)

     44         (900             581        (275
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment EBITDA

   $ 66,030       $ 36,070      $ 31,936       $ (30,051   $ 103,985   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Year ended December 31, 2014

            

Income from operations

   $ 44,500       $ 14,154      $ 20,235       $ (17,350   $ 61,539   

Depreciation and amortization

     8,609         17,388        6,212         132        32,341   

Other income (expense)

             163                (1,424     (1,261
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment EBITDA

   $ 53,109       $ 31,705      $ 26,447       $ (18,642   $ 92,619   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Year ended December 31, 2013

            

Income from operations

   $ 22,528       $ 7,894      $ 12,093       $ (6,477   $ 36,038   

Depreciation and amortization

     7,595         13,407        7,698         108        28,808   

Other income (expense)

             441                (1,135     (694
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment EBITDA

   $ 30,123       $ 21,742      $ 19,791       $ (7,504   $ 64,152   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

 

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 total monthly dues and annual fees from members (which we refer to as system-wide sales), the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, net member growth per store, average royalty fee percentages for franchisee-owned stores, monthly PF Black Card membership penetration percentage, EBITDA, Adjusted EBITDA, Segment EBITDA, four-wall EBITDA, pro forma adjusted net income, and pro forma adjusted net income per diluted share. See “—Non-GAAP financial measures” below for our definition of EBITDA, Adjusted EBITDA, four-wall EBITDA, pro forma adjusted net income, and pro forma adjusted net income per diluted share and why we present EBITDA, Adjusted EBITDA, four-wall EBITDA, pro forma adjusted net income, and pro forma adjusted net income per diluted share, and for a reconciliation of our EBITDA, Adjusted EBITDA, and pro forma adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

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Total monthly dues and annual fees from members (system-wide sales)

We review the total amount of dues we collect from our members on a monthly basis, which allows us to assess changes in the performance of our corporate-owned stores from period to period, any competitive pressures, local or regional membership traffic patterns and general market conditions that might impact our store performance. We collect monthly dues on or around the 17th of every month. We collect annual fees once per year from each member in February, June or October, depending upon when the member signed his or her membership agreement.

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 growth in our corporate-owned and franchisee-owned store base for the years ended December 31, 2015, 2014 and 2013 and for the quarters ended March 31, 2016 and 2015:

 

      Year ended
December 31,
    Quarter ended
March 31,
 
      2015     2014     2013     2016     2015  

Franchisee-owned stores:

          

Stores operated at beginning of period

     863        704        562        1,066        863   

New stores opened

     206        169        148        48        59   

Stores debranded, sold or consolidated(1)

     (3     (10     (6     (1     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stores operated at end of period

     1,066        863        704        1,113        919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate-owned stores:

          

Stores operated at beginning of period

     55        45        44        58        55   

New stores opened

     3        2        1               2   

Stores acquired from franchisees

            8                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stores operated at end of period

     58        55        45        58        57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stores: