PLANET FITNESS, INC. Unless the context requires otherwise, references in this report to the "Company," "we," "us" and "our" refer toPlanet Fitness, Inc. and its consolidated subsidiaries. Overview We are one of the largest and fastest-growing franchisors and operators of fitness centers inthe 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 theJudgement 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 yellowPlanet Fitness -branded cardio, circuit- and weight-training equipment and friendly staff trainerswho 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 theU.S. and Canadian populations over age 14who are not gym members, particularly thosewho find the traditional fitness club setting intimidating and expensive. We and our franchisees fiercely protectPlanet 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 ofSeptember 30, 2020 , we had more than 14.1 million members and 2,086 stores in all 50 states, theDistrict of Columbia ,Puerto Rico ,Canada , theDominican Republic ,Panama ,Mexico andAustralia . Of our 2,086 stores, 1,985 are franchised and 101 are corporate-owned. As ofSeptember 30, 2020 , we had commitments to open more than 1,000 new stores under existing ADAs. COVID-19 Impact OnMarch 11, 2020 , theWorld Health Organization declared a global pandemic related to the COVID-19 outbreak. The pandemic has caused unprecedented economic volatility and uncertainty, which has negatively impacted our recent operating results. In response to the COVID-19 pandemic, we proactively closed all of our stores system wide inMarch 2020 . Our stores began reopening in early May as local guidelines allowed, and as ofSeptember 30, 2020 , 1,983 of our stores were open and operating, of which 1,884 were franchisee-owned stores and 99 were corporate-owned stores. As COVID-19 continues to impact areas in which our stores operate, certain of our stores have had to re-close, and additional stores may have to re-close, pursuant to local guidelines. As previously announced, members will not be charged membership dues while our stores are closed and will be credited for any membership dues paid for periods when our stores were closed. We have experienced and continue to expect to experience decreased new store development and remodels, as well as decreased replacement equipment sales for 2020 as a result of the COVID-19 pandemic. We continue to reopen stores as local authorities issue guidelines authorizing the reopening of fitness centers and we determine it is safe to do so. As stores reopened we have recognized franchise revenue and corporate-owned store revenue associated with any March membership dues collected prior to store closures. We continue to defer revenue for stores that have not yet reopened. We may have to defer further revenue in the future for stores that are required to re-close. The duration of the COVID-19 pandemic and the extent of its impact on our business cannot be reasonably estimated at this time. We anticipate that the COVID-19 pandemic will continue to negatively impact our operating results in future periods. As a result of COVID-19 we have experienced to date, and may continue to experience, a decrease in our net membership base. We previously withdrew our 2020 full-year guidance and are not providing updated guidance at this time due to continued uncertainty around the duration and impact of COVID-19. We have taken the following actions to efficiently manage the business, as well as increase liquidity and financial flexibility in order to mitigate the current and anticipated future impact of the COVID-19 pandemic on our business: •Board of Director and Executive Compensation: In March, the Company's Chief Executive Officer, President, Chief Financial andChief Digital and Information Officers significantly reduced their base salaries, and the base salaries of other members of senior management were reduced in graduated amounts. These salaries were reinstated beginning in September. The Board of Directors suspended payment of the annual retainer to non-employee directors during the second and third quarters of 2020, and plans to resume payment in the fourth quarter. •Corporate-owned stores: We temporarily furloughed all employees except the store manager at each corporate-owned store location while the stores were closed. These employees were able to continue receiving benefits from the Company during store closures. As ofSeptember 30, 2020 , 99 of our 101 corporate-owned stores have reopened. •Corporate Office: Our corporate headquarters has reopened, with some employees continuing to work remotely. During the quarter endedSeptember 30, 2020 , we completed a reduction in force of approximately 15% of our corporate headquarters employees. 26 -------------------------------------------------------------------------------- Table of Contents •Credit Facility: We fully drew down our$75.0 million Variable Funding Notes in March to provide additional liquidity and flexibility. •Share Repurchase: We have suspended share repurchases to preserve liquidity and flexibility. •Capital Expenditures: Capital expenditures may be deferred, including new corporate-owned store openings and investments in existing corporate-owned stores. Although we expect the COVID-19 pandemic to continue to negatively impact the Company's operations and cash flows, based on management's current expectations and currently available information, the Company believes current cash and cash from operations will be sufficient to meet its operating cash requirements, planned capital expenditures and interest and principal payments for at least the next twelve months. 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 inthe United States ,Puerto Rico ,Canada , theDominican Republic ,Panama ,Mexico andAustralia , including revenues and expenses from the NAF. Our Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughoutthe United States andCanada . The Equipment segment primarily includes the sale of equipment to ourUnited States franchisee-owned stores. We evaluate the performance of our segments and allocate resources to them based on revenue and earnings before interest, taxes, depreciation and amortization, referred to as Segment EBITDA. Revenue and Segment EBITDA for all operating segments include only transactions with unaffiliated customers and do not include intersegment transactions. The tables below summarize the financial information for our segments for the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 . "Corporate and other," as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment. Three months ended Nine months ended September 30, September 30, (in thousands) 2020 2019 2020 2019 Revenue Franchise segment$ 59,757 $ 66,709 $ 139,288 $ 204,283 Corporate-owned stores segment 28,289 40,742 78,224 118,481 Equipment segment 17,337 59,364 55,335 174,528 Total revenue$ 105,383 $ 166,815 $ 272,847 $ 497,292 Segment EBITDA Franchise$ 31,111 $ 44,328 $ 71,386 $ 141,548 Corporate-owned stores 5,711 16,799 11,376 50,505 Equipment 2,271 13,741 9,948 40,920 Corporate and other (9,439) (10,036) (26,470) (33,968) Total Segment EBITDA(1)$ 29,654 $ 64,832 $ 66,240 $ 199,005 (1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance withU.S. GAAP. Refer to "-Non-GAAP financial measures" for a definition of EBITDA and a reconciliation to net (loss) income, the most directly comparableU.S. GAAP measure. 27 -------------------------------------------------------------------------------- Table of Contents A reconciliation of income (loss) from operations to Segment EBITDA is set forth below: Corporate-owned Corporate and (in thousands) Franchise stores Equipment other Total Three months ended September 30, 2020 Income (loss) from operations$ 29,156 $ (2,088)$ 1,009 $ (12,035) $ 16,042 Depreciation and amortization 1,955 7,650 1,262 2,769 13,636 Other income (expense) - 149 - (173) (24) Segment EBITDA(1)$ 31,111 $ 5,711$ 2,271 $ (9,439) $ 29,654 Three months ended September 30, 2019 Income (loss) from operations$ 42,356 $ 9,987$ 12,479 $ (11,761) $ 53,061 Depreciation and amortization 1,980 6,937 1,262 1,653 11,832 Other (expense) income (8) (125) - 72 (61) Segment EBITDA(1)$ 44,328 $ 16,799$ 13,741 $ (10,036) $ 64,832 Nine months ended September 30, 2020 Income (loss) from operations$ 65,624 $ (10,186) $ 6,161 $ (34,011) $ 27,588 Depreciation and amortization 5,846 22,235 3,787 7,568 39,436 Other expense (84) (673) - (27) (784) Segment EBITDA(1)$ 71,386 $ 11,376$ 9,948 $ (26,470) $ 66,240 Nine months ended September 30, 2019 Income (loss) from operations$ 135,606 $ 31,558$ 37,135 $ (32,786) $ 171,513 Depreciation and amortization 5,952 18,673 3,782 3,909 32,316 Other (expense) income (10) 274 3 (5,091) (4,824) Segment EBITDA(1)$ 141,548 $ 50,505$ 40,920 $ (33,968) $ 199,005 (1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance withU.S. GAAP. Refer to "-Non-GAAP Financial Measures" for a definition of EBITDA and a reconciliation to net (loss) income, the most directly comparableU.S. GAAP measure. How we assess the performance of our business In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing include the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, system-wide sales, EBITDA, Adjusted EBITDA, Segment EBITDA, Adjusted net (loss) income, and Adjusted net (loss) income per share, diluted. See "-Non-GAAP financial measures" below for our definition of EBITDA, Adjusted EBITDA, Adjusted net (loss) income, and Adjusted net (loss) income per share, diluted and why we present EBITDA, Adjusted EBITDA, Adjusted net (loss) income, and Adjusted net (loss) income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net (loss) income to net (loss) income, the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP, and a reconciliation of Adjusted net (loss) income per share, diluted to net (loss) income per share, diluted, the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP. Number of new store openings The number of new store openings reflects stores opened during a particular reporting period for both corporate-owned and franchisee-owned stores. Opening new stores is an important part of our growth strategy and we expect the majority of our future new stores will be franchisee-owned. Before we obtain the certificate of occupancy or report any revenue for new corporate-owned stores, we incur pre-opening costs, such as rent expense, labor expense and other operating expenses. Some of our stores open with an initial start-up period of higher than normal marketing and operating expenses, particularly as a percentage of monthly revenue. New stores may not be profitable and their revenue may not follow historical patterns. 28 -------------------------------------------------------------------------------- Table of Contents The following table shows the change in our corporate-owned and franchisee-owned store base for the three and nine months endedSeptember 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Franchisee-owned stores: Stores operated at beginning of period 1,960 1,779 1,903 1,666 New stores opened 27 39 86 157 Stores debranded, sold or consolidated(1) (2) (1) (4)
(6)
Stores operated at end of period(2) 1,985 1,817 1,985
1,817
Corporate-owned stores: Stores operated at beginning of period 99 80 98 76 New stores opened 2 2 3 2 Stores acquired from franchisees - - -
4
Stores operated at end of period(2) 101 82 101
82
Total stores: Stores operated at beginning of period 2,059 1,859 2,001 1,742 New stores opened 29 41 89 159 Stores acquired, debranded, sold or consolidated(1) (2) (1) (4)
(2)
Stores operated at end of period(2) 2,086 1,899 2,086 1,899 (1)The term "debrand" refers to a franchisee-owned store whose right to use the Planet Fitness brand and marks has been terminated in accordance with the franchise agreement. We retain the right to prevent debranded stores from continuing to operate as fitness centers. The term "consolidated" refers to the combination of a franchisee's store with another store located in close proximity with our prior approval. This often coincides with an enlargement, re-equipment and/or refurbishment of the remaining store. (2)The "stores operated" includes stores that have closed temporarily related to the COVID-19 pandemic. All stores were closed inMarch 2020 in response to COVID-19, and as ofSeptember 30, 2020 , 1,983 were re-opened and operating, of which 1,884 were franchisee-owned stores and 99 were corporate-owned stores. Same store sales Same store sales refers to year-over-year sales comparisons for the same store sales base of both corporate-owned and franchisee-owned stores. We define the same store sales base to include those stores that have been open and for which monthly membership dues have been billed for longer than 12 months. We measure same store sales based solely upon monthly dues billed to members of our corporate-owned and franchisee-owned stores. Several factors affect our same store sales in any given period, including the following: •the number of stores that have been in operation for more than 12 months; •the percentage mix and pricing of PF Black Card and standard memberships in any period; •growth in total net memberships per store; •consumer recognition of our brand and our ability to respond to changing consumer preferences; •overall economic trends, particularly those related to consumer spending; •our and our franchisees' ability to operate stores effectively and efficiently to meet consumer expectations; •marketing and promotional efforts; •local competition; •trade area dynamics; and •opening of new stores in the vicinity of existing locations. Consistent with common industry practice, we present same store sales as compared to the same period in the prior year and which is calculated for a given period by including only sales from stores that had sales in the comparable months of both years. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year's same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance. 29 -------------------------------------------------------------------------------- Table of Contents Stores acquired from or sold to franchisees are removed from the franchisee-owned or corporate-owned same store sales base, as applicable, upon the ownership change and for the 12 months following the date of the ownership change. These stores are included in the corporate-owned or franchisee-owned same store sales base, as applicable, following the 12th month after the acquisition or sale. These stores remain in the system-wide same store sales base in all periods. As a result of the closure of all of our stores due to COVID-19 inMarch 2020 , a majority of stores remained closed for a portion of the nine months endedSeptember 30, 2020 . Because less than 50% of our stores in the same store sales base billed monthly membership dues in all of the months included in the nine months endingSeptember 30, 2020 , we are not providing same store sales comparisons for that period. For the three months endingSeptember 30, 2020 , since more than 50% of our stores in the same store sales base billed monthly membership dues in all three months, we have provided same store sales comparisons for those stores that were open during both the current and prior year periods. The following table shows our same store sales for the three and nine months endedSeptember 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Same store sales data Same store sales growth: Franchisee-owned stores (5.6) % 8.1 % NC(1) 9.1 % Corporate-owned stores (6.6) % 4.9 % NC(1) 6.2 % Total stores (5.6) % 7.9 % NC(1) 8.9 % Number of stores in same store sales base: Franchisee-owned stores 1,366 1,562 NC(1) 1,562 Corporate-owned stores 50 73 NC(1) 73 Total stores 1,416 1,639 NC(1) 1,639 (1) No comparison Total monthly dues and annual fees from members (system-wide sales) We define system-wide sales as total monthly dues and annual fees billed by us and our franchisees. System-wide sales is an operating measure that includes sales by franchisees that are not revenue realized by the Company in accordance with GAAP, as well as sales by our corporate-owned stores. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure aids in understanding how we derive royalty revenue and is important in evaluating our performance. 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 and franchisee-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 based upon when the member signed his or her membership agreement. System-wide sales were$661 million and$781 million , during the three months endedSeptember 30, 2020 and 2019, respectively, and$1,663 million and$2,430 million during the nine months endedSeptember 30, 2020 and 2019, respectively. Non-GAAP financial measures We refer to EBITDA and Adjusted EBITDA as we use these measures to evaluate our operating performance and we believe these measures provide useful information to investors in evaluating our performance. EBITDA and Adjusted EBITDA as presented in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance withU.S. GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes forU.S. GAAP metrics such as net (loss) income or any other performance measures derived in accordance withU.S. GAAP. Also, in the future we may incur expenses or charges such as those used to calculate Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in "Our Segments" within Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA. We define EBITDA as net (loss) income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our board of directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as net (loss) 30 -------------------------------------------------------------------------------- Table of Contents income before interest, taxes, depreciation and amortization, adjusted for the impact of certain additional non-cash and other items that we do not consider in our evaluation of ongoing performance of the Company's core operations. These items include certain purchase accounting adjustments, stock offering-related costs, and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. A reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is set forth below for the three and nine months endedSeptember 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 (in thousands) Net (loss) income$ (3,284) $ 29,692 $ (24,886) $ 101,158 Interest income (349) (1,808) (2,635) (5,585) Interest expense 20,686 14,807 61,394 44,192 (Benefit) provision for income taxes (1,035) 10,309 (7,069) 26,924 Depreciation and amortization 13,636 11,832 39,436 32,316 EBITDA$ 29,654
70 275 216 524
Purchase accounting adjustments-rent(2) 130 108 400 348
Severance costs(3) 830 - 990 -
Pre-opening costs(4) 699 826 1,214 1,021
Tax benefit arrangement remeasurement(5) - (214) (502) 4,638
Other(6) 598 (104) 691 55
Adjusted EBITDA $ 31,981 $ 65,723 $ 69,249 $ 205,591
(1)Represents the impact of revenue-related purchase accounting adjustments
associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the
Company maintained a deferred revenue account, which consisted of deferred ADA
fees, deferred franchise fees, and deferred enrollment fees that the Company
billed and collected up front but recognizes for U.S. GAAP purposes at a later
date. In connection with the 2012 Acquisition, it was determined that the
carrying amount of deferred revenue was greater than the fair value assessed in
accordance with ASC 805-Business Combinations, which resulted in a write-down of
the carrying value of the deferred revenue balance upon application of
acquisition push-down accounting under ASC 805. These amounts represent the
additional revenue that would have been recognized in these periods if the
write-down to deferred revenue had not occurred in connection with the
application of acquisition pushdown accounting.
(2)Represents the impact of rent-related purchase accounting adjustments. In
accordance with guidance in ASC 805 - Business Combinations, in connection with
the 2012 Acquisition, the Company's deferred rent liability was required to be
written off as of the acquisition date and rent was recorded on a straight-line
basis from the acquisition date through the end of the lease term. This resulted
in higher overall recorded rent expense each period than would have otherwise
been recorded had the deferred rent liability not been written off as a result
of the acquisition push down accounting applied in accordance with ASC 805.
Adjustments of $43 , $44 , $124 , and $173 in the three and nine months ended
September 30, 2020 and 2019, respectively, reflect the difference between the
higher rent expense recorded in accordance with U.S. GAAP since the acquisition
and the rent expense that would have been recorded had the 2012 Acquisition not
occurred. Adjustments of $87 , $64 , $276 , and $216 in the three and nine months
ended September 30, 2020 and 2019, respectively, are due to the amortization of
favorable and unfavorable leases. All of the rent related purchase accounting
adjustments are adjustments to rent expense which is included in store
operations on our consolidated statements of operations.
(3)Represents severance expense recorded in connection with a reduction in force
and an equity award modification.
(4)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.
(5)Represents gains and losses related to the adjustment of our tax benefit
arrangements primarily due to changes in our effective tax rate.
(6)Represents certain other charges and gains that we do not believe reflect our
underlying business performance. During the three and nine months ended
September 30, 2020 , this amount primarily includes expense of $1,956 that
represents a reserve against an indemnification receivable, partially offset by
a $1,358 one-time employee retention payroll tax credit received in connection
with the CARES Act.
31
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Our presentation of Adjusted net (loss) income and Adjusted net (loss) income
per share, diluted, assumes that all net (loss) income is attributable to Planet
Fitness, Inc. , which assumes the full exchange of all outstanding Holdings Units
for shares of Class A common stock of Planet Fitness, Inc. , adjusted for certain
non-recurring items that we do not believe directly reflect our core operations.
Adjusted net (loss) income per share, diluted, is calculated by dividing
Adjusted net (loss) income by the total shares of Class A common stock
outstanding plus any dilutive options and restricted stock units as calculated
in accordance with U.S. GAAP and assuming the full exchange of all outstanding
Holdings Units and corresponding Class B common stock as of the beginning of
each period presented. Adjusted net (loss) income and Adjusted net (loss) income
per share, diluted, are supplemental measures of operating performance that do
not represent, and should not be considered, alternatives to net (loss) income
and earnings per share, as calculated in accordance with U.S. GAAP. We believe
Adjusted net (loss) income and Adjusted net (loss) income per share, diluted,
supplement U.S. GAAP measures and enable us to more effectively evaluate our
performance period-over-period. A reconciliation of Adjusted net (loss) income
to net (loss) income, the most directly comparable U.S. GAAP measure, and the
computation of Adjusted net (loss) income per share, diluted, are set forth
below.
Three months
ended
2020 2019 2020 2019
Net (loss) income $ (3,284)
(1,035) 10,309 (7,069) 26,924
Purchase accounting adjustments-revenue(1) 70 275 216 524
Purchase accounting adjustments-rent(2) 130 108 400 348
Severance costs(3) 830 - 990 -
Pre-opening costs(4) 699 826 1,214 1,021
Tax benefit arrangement remeasurement(5) - (214) (502) 4,638
Other(6) 598 (104) 691 55
Purchase accounting amortization(7) 4,211 4,146 12,635 12,429
Adjusted (loss) income before income taxes $ 2,219
595 11,980 (4,371) 39,128
Adjusted net (loss) income $ 1,624 Adjusted net (loss) income per share, diluted$ 0.02
Adjusted weighted-average shares outstanding(9) 86,512 92,386 86,618 93,153 (1)Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferredADA fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes forU.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805-Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting. (2)Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 - Business Combinations, in connection with the 2012 Acquisition, the Company's deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of$43 ,$44 ,$124 , and$173 in the three and nine months endedSeptember 30, 2020 and 2019, respectively, reflect the difference between the higher rent expense recorded in accordance withU.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of$87 ,$64 ,$276 , and$216 in the three and nine months endedSeptember 30, 2020 and 2019, respectively, are due to the amortization of favorable and unfavorable leases. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations. (3)Represents severance expense recorded in connection with a reduction in force and an equity award modification. 32 -------------------------------------------------------------------------------- Table of Contents (4)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. (5)Represents gains and losses related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate. (6)Represents certain other charges and gains that we do not believe reflect our underlying business performance. During the three and nine months endedSeptember 30, 2020 , this amount primarily includes expense of$1,956 that represents a reserve against an indemnification receivable, partially offset by a$1,358 one-time employee retention payroll tax credit received in connection with the CARES Act. (7)Includes$3,096 ,$3,096 ,$9,288 , and$9,288 of amortization of intangible assets, for the three and nine months endedSeptember 30, 2020 and 2019, recorded in connection with the 2012 Acquisition, and$1,115 ,$1,052 ,$3,346 and$2,867 of amortization of intangible assets for the three months endedSeptember 30, 2020 and 2019, respectively, recorded in connection with historical acquisitions of franchisee-owned stores. The adjustment represents the amount of actual non-cash amortization expense recorded, in accordance withU.S. GAAP, in each period. (8)Represents corporate income taxes at an assumed effective tax rate of 26.8% and 26.6% for the three and nine months endedSeptember 30, 2020 and 2019, respectively, applied to adjusted income (loss) before income taxes. (9)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. A reconciliation of net (loss) income per share, diluted, to Adjusted net (loss) income per share, diluted is set forth below for the three and nine months endedSeptember 30, 2020 and 2019: For the three months ended For the three months ended September 30, 2020 September 30, 2019 Net loss per Net income (in thousands, except per share share, per share, amounts) Net loss Weighted Average Shares diluted Net income Weighted Average Shares diluted Net (loss) income attributable to Planet Fitness, Inc.(1)$ (3,111) 80,221$ (0.04) $ 25,777 83,807$ 0.31 Assumed exchange of shares(2) (173) 6,291 3,915 8,579 Net (loss) income (3,284) 29,692
Adjustments to arrive at adjusted
income before income taxes(3) 5,503 15,346 Adjusted income before income taxes 2,219 45,038 Adjusted income tax expense(4) 595 11,980 Adjusted net income$ 1,624 86,512$ 0.02 $ 33,058 92,386$ 0.36 (1)Represents net (loss) income attributable toPlanet Fitness, Inc. and the associated weighted average shares, diluted of Class A common stock outstanding. (2)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. Also assumes the addition of net (loss) income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and Class B common shares for shares of Class A common stock. (3)Represents the total impact of all adjustments identified in the adjusted net (loss) income table above to arrive at adjusted (loss) income before income taxes. (4)Represents corporate income taxes at an assumed effective tax rate of 26.8% and 26.6% for the three months endedSeptember 30, 2020 and 2019, respectively, applied to adjusted (loss) income before income taxes. 33
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For the nine months ended For the nine months ended
September 30, 2020 September 30, 2019
Net loss per Net income
(in thousands, except per share share, per share,
amounts) Net loss Weighted Average Shares diluted Net income Weighted Average Shares diluted
Net (loss) income attributable to
Planet Fitness, Inc.(1) $ (23,681) 79,763 $ (0.30) $ 88,030 84,354 $ 1.04
Assumed exchange of shares(2) (1,205) 6,855 13,128 8,799
Net (loss) income (24,886) 101,158
Adjustments to arrive at adjusted
(loss)
income before income taxes(3) 8,575 45,939
Adjusted (loss) income before
income taxes (16,311) 147,097
Adjusted income tax (benefit)
expense(4) (4,371) 39,128
Adjusted net (loss) income $ (11,940) 86,618$ (0.14) $ 107,969 93,153$ 1.16 (1)Represents net (loss) income attributable toPlanet Fitness, Inc. and the associated weighted average shares, diluted of Class A common stock outstanding. (2)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. Also assumes the addition of net (loss) income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and Class B common shares for shares of Class A common stock. (3)Represents the total impact of all adjustments identified in the adjusted net (loss) income table above to arrive at adjusted (loss) income before income taxes. (4)Represents corporate income taxes at an assumed effective tax rate of 26.8% and 26.6% for the nine months endedSeptember 30, 2020 and 2019, respectively, applied to adjusted (loss) income before income taxes. 34 -------------------------------------------------------------------------------- Table of Contents Results of operations The following table sets forth our condensed consolidated statements of operations as a percentage of total revenue for the three and nine months endedSeptember 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Revenue: Franchise revenue 44.8 % 32.0 % 41.2 % 33.1 % Commission income - % 0.4 % 0.2 % 0.5 % National advertising fund revenue 11.9 % 7.6 % 9.7 % 7.4 % Franchise segment 56.7 % 40.0 % 51.1 % 41.0 % Corporate-owned stores 26.8 % 24.4 % 28.7 % 23.9 % Equipment 16.5 % 35.6 % 20.2 % 35.1 % Total revenue 100.0 % 100.0 % 100.0 % 100.0 % Operating costs and expenses: Cost of revenue 14.5 % 27.7 % 16.7 % 27.2 % Store operations 20.3 % 13.4 % 22.8 % 12.7 % Selling, general and administrative 17.4 % 12.5 % 18.7 % 11.7 % National advertising fund expense 19.1 % 7.6 % 16.9 % 7.4 % Depreciation and amortization 12.9 % 7.1 % 14.5 % 6.5 % Other loss (gain) 0.6 % (0.1) % 0.2 % - % Total operating costs and expenses 84.8 % 68.2 % 89.8 % 65.5 % Income from operations 15.2 % 31.8 % 10.2 % 34.5 % Other income (expense), net: Interest income 0.3 % 1.1 % 1.0 % 1.1 % Interest expense (19.6) % (8.9) % (22.5) % (8.9) % Other expense - % - % (0.3) % (1.0) % Total other expense, net (19.3) % (7.8) % (21.8) % (8.8) % (Loss) income before income taxes (4.1) % 24.0 % (11.6) % 25.7 % (Benefit) provision for income taxes (1.0) % 6.2 % (2.6) % 5.4 % Net (loss) income (3.1) % 17.8 % (9.0) % 20.3 % Less net (loss) income attributable to non-controlling interests (0.2) % 2.3 % (0.4) % 2.6 % Net (loss) income attributable toPlanet Fitness , Inc. (2.9) % 15.5 % (8.6) % 17.7 % 35
-------------------------------------------------------------------------------- Table of Contents The following table sets forth a comparison of our condensed consolidated statements of operations for the three and nine months endedSeptember 30, 2020 and 2019: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 (in thousands) Revenue: Franchise revenue$ 47,171 $ 53,443 $ 112,296 $ 164,624 Commission income 48 614 483 2,673 National advertising fund revenue 12,538 12,652 26,509 36,986 Franchise segment 59,757 66,709 139,288 204,283 Corporate-owned stores 28,289 40,742 78,224 118,481 Equipment 17,337 59,364 55,335 174,528 Total revenue 105,383 166,815 272,847 497,292 Operating costs and expenses: Cost of revenue 15,302 46,194 45,625 135,071 Store operations 21,371 22,295 62,209 63,363 Selling, general and administrative 18,295 20,928 51,143 57,944 National advertising fund expense 20,157 12,652 46,240 36,986 Depreciation and amortization 13,636 11,832 39,436 32,316 Other loss (gain) 580 (147) 606 99 Total operating costs and expenses 89,341 113,754 245,259 325,779 Income from operations 16,042 53,061 27,588 171,513 Other income (expense), net: Interest income 349 1,808 2,635 5,585 Interest expense (20,686) (14,807) (61,394) (44,192) Other expense (24) (61) (784) (4,824) Total other expense, net (20,361) (13,060) (59,543) (43,431) (Loss) income before income taxes (4,319) 40,001 (31,955) 128,082 (Benefit) provision for income taxes (1,035) 10,309 (7,069) 26,924 Net (loss) income (3,284) 29,692 (24,886) 101,158 Less net (loss) income attributable to non-controlling interests (173) 3,915 (1,205) 13,128 Net (loss) income attributable toPlanet Fitness , Inc.$ (3,111)
Comparison of the three months endedSeptember 30, 2020 and three months endedSeptember 30, 2019 Revenue Total revenues were$105.4 million in the three months endedSeptember 30, 2020 , compared to$166.8 million in the three months endedSeptember 30, 2019 , a decrease of$61.4 million , or 36.8%. Franchise segment revenue was$59.8 million in the three months endedSeptember 30, 2020 , compared to$66.7 million in the three months endedSeptember 30, 2019 , a decrease of$7.0 million , or 10.4%. Franchise revenue was$47.2 million in the three months endedSeptember 30, 2020 compared to$53.4 million in the three months endedSeptember 30, 2019 , a decrease of$6.3 million or 11.7%. Included in franchise revenue is royalty revenue of$43.1 million , franchise and other fees of$2.6 million , and placement revenue of$1.5 million for the three months endedSeptember 30, 2020 , compared to royalty revenue of$46.0 million , franchise and other fees of$3.2 million , and placement revenue of$4.3 million for the three months endedSeptember 30, 2019 . Of the$43.1 million in franchise royalty revenue,$3.9 million represents the recognition of revenue that was deferred in March related to temporary store closures as stores reopened. The franchise revenue decreases in the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 were primarily due to COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels, partially offset by higher royalties on annual fees as a result of catch-up annual fee billings from periods when stores were closed, as they reopen. 36 -------------------------------------------------------------------------------- Table of Contents Commission income, which is included in our franchise segment, was$0 in the three months endedSeptember 30, 2020 compared to$0.6 million in the three months endedSeptember 30, 2019 . The decrease was primarily attributable to fewer franchisees on our commission structure compared to the prior year period and store closures associated with COVID-19. National advertising fund revenue was$12.5 million in the three months endedSeptember 30, 2020 , compared to$12.7 million in the three months endedSeptember 30, 2019 . Of the$12.5 million in national advertising fund revenue,$1.2 million was due to the recognition of revenue that was deferred inMarch 2020 related to temporary store closures, which was recognized as stores reopened. The decrease in national advertising fund revenue in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 was primarily a result of the temporary closures beginning inMarch 2020 related to COVID-19, partially offset by a higher national advertising fund rate of 3.25% beginning inSeptember 2020 and continuing for the remainder of the year, as approved by a vote of the franchisees to help offset lost national advertising fund revenues during the closure period. Revenue from our corporate-owned stores segment was$28.3 million in the three months endedSeptember 30, 2020 , compared to$40.7 million in the three months endedSeptember 30, 2019 , a decrease of$12.5 million , or 30.6%. Of the$28.3 million in corporate-owned store revenue,$2.2 million was due to the recognition of revenue that was deferred in March related to temporary store closures as stores reopened. The decrease was primarily a result of temporary store closures related to COVID-19 beginning inMarch 2020 , as well as reduced membership levels, partially offset by revenue as a result of the acquisition of 12 franchisee-owned stores onDecember 16, 2019 , and the opening of nine new corporate-owned stores sinceJuly 1, 2019 . Equipment segment revenue was$17.3 million in the three months endedSeptember 30, 2020 , compared to$59.4 million in the three months endedSeptember 30, 2019 , a decrease of$42.0 million , or 70.8%. The decrease was driven by lower equipment sales to new and existing franchisee-owned stores in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily as a result of COVID-19 related closures beginning inMarch 2020 , and the 12-month extension we gave to franchisees for all new store development and re-equipment investment obligations. Cost of revenue Cost of revenue was$15.3 million in the three months endedSeptember 30, 2020 compared to$46.2 million in the three months endedSeptember 30, 2019 , a decrease of$30.9 million , or 66.9%. Cost of revenue, which primarily relates to our equipment segment, decreased as a result of lower equipment sales to new and existing franchisee-owned stores in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 as a result of COVID-19 related closures beginning inMarch 2020 . Store operations Store operation expenses, which relate to our corporate-owned stores segment, were$21.4 million in the three months endedSeptember 30, 2020 compared to$22.3 million in the three months endedSeptember 30, 2019 , a decrease of$0.9 million , or 4.1%. The decrease was primarily attributable to lower operating and marketing expenses as a result of COVID-19 related closures beginning inMarch 2020 , partially offset by higher expenses as a result of the acquisition of 12 franchisee-owned stores onDecember 16, 2019 , and the opening of nine new corporate-owned stores sinceJuly 1, 2019 . Selling, general and administrative Selling, general and administrative expenses were$18.3 million in the three months endedSeptember 30, 2020 compared to$20.9 million in the three months endedSeptember 30, 2019 , a decrease of$2.6 million , or 12.6%. The$2.6 million decrease was primarily due to lower variable compensation expense, decreased travel and lower equipment placement expenses during the three months endedSeptember 30, 2020 related to COVID-19 compared to the prior year quarter. National advertising fund expense National advertising fund expense was$20.2 million in the three months endedSeptember 30, 2020 compared to$12.7 million in the three months endedSeptember 30, 2019 , as a result of increased advertising and marketing expenses. Depreciation and amortization Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements. Depreciation and amortization expense was$13.6 million in the three months endedSeptember 30, 2020 compared to$11.8 million in the three months endedSeptember 30, 2019 , an increase of$1.8 million , or 15.2%. The increase was primarily attributable to franchisee-store acquisitions, the opening of corporate-owned stores sinceJuly 1, 2019 and depreciation of new information systems assets. 37 -------------------------------------------------------------------------------- Table of Contents Other loss (gain) Other loss (gain) was a loss of$0.6 in the three months endedSeptember 30, 2020 compared to a gain of$0.1 in the three months endedSeptember 30, 2019 . In the three months endedSeptember 30, 2020 , this includes expense of$2.0 million that represents a reserve against an indemnification receivable, partially offset by a$1.4 million employee retention payroll tax credit received in connection with the CARES Act. Interest income Interest income was$0.3 million in the three months endedSeptember 30, 2020 , compared to$1.8 million in the three months endedSeptember 30, 2019 , primarily as a result of lower interest rates in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Interest expense Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs. Interest expense was$20.7 million in the three months endedSeptember 30, 2020 compared to$14.8 million in the three months endedSeptember 30, 2019 . The increase is primarily attributable to the issuance of$550.0 million of 2019 Notes inDecember 2019 . Other expense Other expense was zero in the three months endedSeptember 30, 2020 compared to$0.1 million in the three months endedSeptember 30, 2019 . (Benefit) provision for income taxes Provision for income taxes was a benefit of$1.0 million in the three months endedSeptember 30, 2020 , compared to expense of$10.3 million in the three months endedSeptember 30, 2019 , a decrease of$11.3 million . The decrease in the provision for income taxes was primarily attributable to the Company's net loss in the three months endedSeptember 30, 2020 as compared to net income during three months endedSeptember 30, 2019 , primarily as a result of COVID-19 related closures beginning inMarch 2020 . Segment results Franchise Segment EBITDA for the franchise segment was$31.1 million in the three months endedSeptember 30, 2020 compared to$44.3 million in the three months endedSeptember 30, 2019 , a decrease of$13.2 million , or 29.8%. The franchise segment EBITDA decrease in the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 was primarily due to reduced revenue from COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels, partially offset by higher royalties on annual fees as a result of catch-up annual fee billings from periods when stores were closed, as they reopen and lower franchise-related payroll and operational expenses. Depreciation and amortization was$2.0 million in both the three months endedSeptember 30, 2020 and the three months endedSeptember 30, 2019 . Corporate-owned stores Segment EBITDA for the corporate-owned stores segment was$5.7 million in the three months endedSeptember 30, 2020 compared to$16.8 million in the three months endedSeptember 30, 2019 , a decrease of$11.1 million , or 66.0%. The corporate-owned store segment EBITDA decrease was primarily due to lower revenue as a result of COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels. Depreciation and amortization was$7.7 million and$6.9 million for the three months endedSeptember 30, 2020 and 2019, respectively. The increase in depreciation and amortization was primarily attributable to the stores acquired and opened sinceJuly 1, 2019 . Equipment Segment EBITDA for the equipment segment was$2.3 million in the three months endedSeptember 30, 2020 compared to$13.7 million in the three months endedSeptember 30, 2019 , a decrease of$11.5 million , or 83.5%,$8.5 million of which was driven by lower equipment sales to new and existing franchisee-owned stores in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 as a result of COVID-19 related closures beginning inMarch 2020 . An additional$3.0 million of such decrease was due to the 15% discount offered to franchisees for equipment orders placed in 2020. Depreciation and amortization was$1.3 million for both the three months endedSeptember 30, 2020 and 2019. 38 -------------------------------------------------------------------------------- Table of Contents Comparison of the nine months endedSeptember 30, 2020 and nine months endedSeptember 30, 2019 Revenue Total revenues were$272.8 million in the nine months endedSeptember 30, 2020 , compared to$497.3 million in the nine months endedSeptember 30, 2019 , a decrease of$224.4 million , or 45.1%. Franchise segment revenue was$139.3 million in the nine months endedSeptember 30, 2020 , compared to$204.3 million in the nine months endedSeptember 30, 2019 , a decrease of$65.0 million , or 31.8%. Franchise revenue was$112.3 million in the nine months endedSeptember 30, 2020 compared to$164.6 million in the nine months endedSeptember 30, 2019 , a decrease of$52.3 million or 31.8%. Included in franchise revenue is royalty revenue of$98.7 million , franchise and other fees of$9.2 million , and placement revenue of$4.4 million for the nine months endedSeptember 30, 2020 , compared to royalty revenue of$139.8 million , franchise and other fees of$12.7 million , and placement revenue of$12.1 million for the nine months endedSeptember 30, 2019 . The franchise revenue decreases in the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 were primarily due to COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels. Commission income, which is included in our franchise segment, was$0.5 million in the nine months endedSeptember 30, 2020 compared to$2.7 million in the nine months endedSeptember 30, 2019 . The$2.2 million decrease was primarily attributable to fewer franchisees on our commission structure compared to the prior year period and store closures associated with COVID-19. National advertising fund revenue was$26.5 million in the nine months endedSeptember 30, 2020 , compared to$37.0 million in the nine months endedSeptember 30, 2019 . The decrease in national advertising fund revenue in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily a result of the temporary closures beginning inMarch 2020 related to COVID-19. Revenue from our corporate-owned stores segment was$78.2 million in the nine months endedSeptember 30, 2020 , compared to$118.5 million in the nine months endedSeptember 30, 2019 , a decrease of$40.3 million , or 34.0%. The decrease was primarily attributable to store closures associated with COVID-19, as well as reduced membership levels, partially offset as a result of the acquisition of four franchisee-owned stores onMay 30, 2019 , the acquisition of 12 franchisee-owned stores onDecember 16, 2019 , and the opening of nine new corporate-owned stores sinceJanuary 1, 2019 . Equipment segment revenue was$55.3 million in the nine months endedSeptember 30, 2020 , compared to$174.5 million in the nine months endedSeptember 30, 2019 , a decrease of$119.2 million , or 68.3%. The decrease was driven by lower equipment sales to new and existing franchisee-owned stores in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily as a result of COVID-19 related closures beginning inMarch 2020 , and the 12-month extension we gave to franchisees for all new store development and re-equipment investment obligations. Cost of revenue Cost of revenue was$45.6 million in the nine months endedSeptember 30, 2020 compared to$135.1 million in the nine months endedSeptember 30, 2019 , a decrease of$89.4 million , or 66.2%. Cost of revenue, which primarily relates to our equipment segment, decreased as a result of lower equipment sales to new and existing franchisee-owned stores in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 as a result of COVID-19 related closures beginning inMarch 2020 . Store operations Store operation expenses, which relate to our corporate-owned stores segment, were$62.2 million in the nine months endedSeptember 30, 2020 compared to$63.4 million in the nine months endedSeptember 30, 2019 , a decrease of$1.2 million , or 1.8%. The decrease was primarily attributable to lower operating and marketing expenses as a result of COVID-19 related closures beginning inMarch 2020 , partially offset by higher expenses as a result of the acquisition of four franchisee-owned stores onMay 30, 2019 , the acquisition of 12 franchisee-owned stores onDecember 16, 2019 , and the opening of nine new corporate-owned stores sinceJanuary 1, 2019 . Selling, general and administrative Selling, general and administrative expenses were$51.1 million in the nine months endedSeptember 30, 2020 compared to$57.9 million in the nine months endedSeptember 30, 2019 , a decrease of$6.8 million , or 11.7%. The$6.8 million decrease was primarily due to lower variable compensation expense, reduced travel and lower equipment placement expenses during the nine months endedSeptember 30, 2020 related to COVID-19 compared to the prior year quarter. 39 -------------------------------------------------------------------------------- Table of Contents National advertising fund expense National advertising fund expense was$46.2 million in the nine months endedSeptember 30, 2020 compared to$37.0 million in the nine months endedSeptember 30, 2019 , as a result of increased advertising and marketing expenses. Depreciation and amortization Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements. Depreciation and amortization expense was$39.4 million in the nine months endedSeptember 30, 2020 compared to$32.3 million in the nine months endedSeptember 30, 2019 , an increase of$7.1 million , or 22.0%. The increase was primarily attributable to the acquisition and opening of corporate-owned stores sinceJanuary 1, 2019 and depreciation on new information systems assets. Other loss Other loss was$0.6 in the nine months endedSeptember 30, 2020 compared to$0.1 million in the nine months endedSeptember 30, 2019 . In the nine months endedSeptember 30, 2020 , this includes expense of$2.0 million that represents a reserve against an indemnification receivable, partially offset by a$1.4 million employee retention payroll tax credit received in connection with the CARES Act. Interest income Interest income was$2.6 million in the nine months endedSeptember 30, 2020 compared to$5.6 million in the nine months endedSeptember 30, 2019 , primarily as a result of lower interest rates in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Interest expense Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs. Interest expense was$61.4 million in the nine months endedSeptember 30, 2020 compared to$44.2 million in the nine months endedSeptember 30, 2019 . The increase is primarily attributable to the issuance of$550.0 million of 2019 Notes inDecember 2019 . Other expense Other expense was$0.8 million in the nine months endedSeptember 30, 2020 and$4.8 million in the nine months endedSeptember 30, 2019 . Other expense was primarily attributable to foreign currency losses, partially offset by a gain on the remeasurement of our tax benefit arrangements due to changes in our effective tax rate in the nine months endedSeptember 30, 2020 . In the nine months endedSeptember 30, 2019 , the other expense is attributable to the remeasurement of our tax benefit arrangements primarily due to changes in our effective tax rate. (Benefit) provision for income taxes The provision for income taxes was a benefit of$7.1 million in the nine months endedSeptember 30, 2020 , compared to expense of$26.9 million in the nine months endedSeptember 30, 2019 . The decrease in the provision for income taxes was primarily attributable to the Company's net loss in the nine months endedSeptember 30, 2020 as compared to net income for the nine months endedSeptember 30, 2019 , primarily as a result of COVID-19 related closures beginning inMarch 2020 . Segment results Franchise Segment EBITDA for the franchise segment was$71.4 million in the nine months endedSeptember 30, 2020 compared to$141.5 million in the nine months endedSeptember 30, 2019 , a decrease of$70.2 million , or 49.6%. The franchise segment EBITDA decrease in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels, partially offset by lower franchise-related payroll and operational expenses. Depreciation and amortization was$5.8 million and$6.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively. 40 -------------------------------------------------------------------------------- Table of Contents Corporate-owned stores Segment EBITDA for the corporate-owned stores segment was$11.4 million in the nine months endedSeptember 30, 2020 compared to$50.5 million in the nine months endedSeptember 30, 2019 , a decrease of$39.1 million , or 77.5%. The corporate-owned store segment EBITDA decrease was primarily due to COVID-19 related store closures beginning inMarch 2020 , as well as reduced membership levels. Depreciation and amortization was$22.2 million and$18.7 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in depreciation and amortization was primarily attributable the acquisition and opening of corporate-owned stores sinceJanuary 1, 2019 . Equipment Segment EBITDA for the equipment segment was$9.9 million in the nine months endedSeptember 30, 2020 compared to$40.9 million in the nine months endedSeptember 30, 2019 , a decrease of$31.0 million , or 75.7%, driven by lower equipment sales to new and existing franchisee-owned stores in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily as a result of COVID-19 related closures beginning inMarch 2020 . Depreciation and amortization was$3.8 million for both the nine months endedSeptember 30, 2020 and 2019. Liquidity and capital resources As ofSeptember 30, 2020 , we had$419.7 million of cash and cash equivalents. We require cash principally to fund day-to-day operations, to finance capital investments, to service our outstanding debt and tax benefit arrangements and to address our working capital needs. Based on our current level of operations, we believe that with the available cash balance, the cash generated from our operations, and amounts we have drawn under our Variable Funding Notes will be adequate to meet our anticipated debt service requirements and obligations under the tax benefit arrangements, capital expenditures and working capital needs for at least the next 12 months. We believe that we will be able to meet these obligations even if we continue to experience a reduction in sales and profits as a result of the COVID-19 pandemic. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under "Risk Factors" in this Quarterly Report on Form 10-Q, "Risk Factors" in the Quarterly Reports on Form 10-Q, and "Risk factors" in the Annual Report. There can be no assurance that our business will generate sufficient cash flows from operations or otherwise to enable us to service our indebtedness, including our Securitized Senior Notes, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance our indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control, including potential future impacts related to the COVID-19 pandemic. The following table presents summary cash flow information for the nine months endedSeptember 30, 2020 and 2019: Nine months endedSeptember 30 , (in thousands) 2020
2019
Net cash (used in) provided by: Operating activities$ (2,115) $ 152,737 Investing activities (36,437) (52,155) Financing activities 61,753 (170,840) Effect of foreign exchange rates on cash (394) 370 Net increase (decrease) in cash$ 22,807
Operating activities For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$2.1 million compared to net cash provided by operating activities of$152.7 million in the nine months endedSeptember 30, 2019 , a decrease of$154.9 million . Of the decrease,$146.3 million is due to lower net (loss) income after adjustments to reconcile net (loss) income to net cash provided by operating activities in the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , and$8.5 million is due to unfavorable changes in working capital primarily from other assets, other current assets and deferred revenue, partially offset by favorable changes in working capital primarily in accounts receivable. 41 -------------------------------------------------------------------------------- Table of Contents Investing activities Cash flow used in investing activities related to the following capital expenditures for the nine months endedSeptember 30, 2020 and 2019: Nine months ended September 30, (in thousands) 2020 2019
New corporate-owned stores and corporate-owned stores not yet opened
$ 11,071 $ 10,570 Existing corporate-owned stores 15,456 12,775 Information systems 9,853 12,726 Corporate and all other 339 1,067 Total capital expenditures
For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$36.4 million compared to$52.2 million in the nine months endedSeptember 30, 2019 , a decrease of$15.7 million . The primary driver for the decrease in cash used in investing activities was the acquisition of franchisee-owned stores in the nine months endedSeptember 30, 2019 compared to$0 in the nine months endedSeptember 30, 2020 . Financing activities For the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$61.8 million compared to cash used of$170.8 million in the nine months endedSeptember 30, 2019 , an increase of$232.6 million . The primary driver of the increase in nine months endedSeptember 30, 2020 was the Company's incurrence of$75.0 million of borrowings under its Variable Funding Notes, partially offset by principal payments on long-term debt compared to a decrease in cash from financing activities in the nine months endedSeptember 30, 2019 , primarily as a result of a$157.9 million share repurchase and principal payments on long-term debt. Securitized Financing Facility OnAugust 1, 2018 , the Master Issuer, a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary ofPla-Fit Holdings, LLC , entered into the 2018 Indenture under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued the 2018 Class A-2-I Notes with an initial principal amount of$575 million and the 2018 Class A-2-II Notes with an initial principal amount of$625 million . In connection with the issuance of the 2018 Notes, the Master Issuer also entered into the Variable Funding Notes that allow for the incurrence of up to$75 million in revolving loans and/or letters of credit, which the Company fully drew down onMarch 20, 2020 . OnDecember 3, 2019 the Master Issuer issued the 2019 Notes with an initial principal amount of$550 million . The 2019 Notes were issued under the Indenture. The Securitized Senior Notes were issued in a securitization transaction pursuant to which most of the Company's domestic revenue-generating assets, consisting principally of franchise-related agreements, certain corporate-owned store assets, equipment supply agreements and intellectual property and license agreements for the use of intellectual property, were assigned to the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly-owned indirect subsidiaries of the Company (the "securitization entities") that act as guarantors of the Securitized Senior Notes and that have pledged substantially all of their assets to secure the Securitized Senior Notes. Interest and principal payments on the Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the 2018 Notes is inSeptember 2048 , but the Anticipated Repayment Dates of the 2018 Class A-2-I Notes and the 2018 Class A-2-II Notes areSeptember 2022 andSeptember 2025 respectively, unless earlier prepaid to the extent permitted under the Indenture. The legal final maturity date of the 2019 Notes is inDecember 2049 , but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2019 Notes will be repaid inDecember 2029 . If the Master Issuer has not repaid or refinanced the Notes prior to the respective Anticipated Repayment Dates, additional interest will accrue pursuant to the Indenture. The Variable Funding Notes will accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) theLondon interbank offered rate forU.S. Dollars, or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Variable Funding Notes. There is a commitment fee on the unused portion of the Variable Funding Notes of 0.5% based on utilization. It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior toSeptember 2023 , subject to two additional one-year extension options. Following the anticipated repayment date (and any extensions thereof) additional interest will accrue on the Variable Funding Notes equal to 5.0% per year. 42
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Table of Contents In connection with the issuance of the 2018 Notes and 2019 Notes, the Company incurred debt issuance costs of$27.1 million and$10.6 million , respectively. The debt issuance costs are being amortized to "Interest expense" through the Anticipated Repayment Dates of the Notes utilizing the effective interest rate method. The Securitized Senior Notes are subject to covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Securitized Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Securitized Senior Notes are in stated ways defective or ineffective, (iv) a cap on non-securitized indebtedness of$50 million (provided that the Company may incur non-securitized indebtedness in excess of such amount, subject to the leverage ratio cap described below, under certain conditions, including if the relevant lenders execute a non-disturbance agreement that acknowledges the bankruptcy-remote status of the Master Issuer and its subsidiaries and of their respective assets), (v) a leverage ratio cap on the Company of 7.0x (calculated without regard for any indebtedness subject to the$50 million cap) and (vi) covenants relating to recordkeeping, access to information and similar matters. Pursuant to a parent company support agreement, we have agreed to cause our subsidiary to perform each of its obligations (including any indemnity obligations) and duties under the Management Agreement and under the contribution agreements entered into in connection with the securitized financing facility, in each case as and when due. To the extent that our subsidiary has not performed any such obligation or duty within the prescribed time frame after such obligation or duty was required to be performed, we have agreed to either (i) perform such obligation or duty or (ii) cause such obligations or duties to be performed on our behalf. The Securitized Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, certain manager termination events, an event of default, and the failure to repay or refinance the Notes on the applicable scheduled Anticipated Repayment Dates. The Securitized Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Securitized Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. In accordance with the Indenture, certain cash accounts have been established with the Trustee for the benefit of the trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents cash collections held by the Trustee, interest, principal, and commitment fee reserves held by the Trustee related to the Securitized Senior Notes. As ofSeptember 30, 2020 , the Company had restricted cash held by the Trustee of$65.9 million , which includes pre-funding of principal and interest payments through the remainder of 2020. Restricted cash has been combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows. Off-balance sheet arrangements As ofSeptember 30, 2020 , our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees up to a maximum period of ten years with earlier expiration dates possible if certain conditions are met. Our maximum total obligation under these lease guarantee agreements is approximately$14.3 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees atSeptember 30, 2020 was not material, and no accrual has been recorded for our potential obligation under these arrangements. Critical accounting policies and use of estimates There have been no material changes to our critical accounting policies and use of estimates from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report.
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