Planet Fitness, Inc. (PLNT) FY 2021 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are one of the largest and fastest-growing franchisors and operators of fitness centers in the United States by number of members and locations, with a highly recognized national brand. Our mission is to enhance people’s lives and democratize fitness 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 December 31, 2021, we had approximately 15.2 million members and 2,254 stores in 50 states, the District of Columbia, Puerto Rico, Canada, Panama, Mexico and Australia. Of our 2,254 stores, 2,142 were franchised and 112 were corporate-owned.

As of December 31, 2021, we had commitments to open more than 1,000 new stores under existing ADAs.

COVID-19 Impact

On March 11, 2020, the World Health Organization declared a global pandemic related to the COVID-19 outbreak. The pandemic has caused unprecedented economic volatility and uncertainty, which negatively impacted our operating results. In response to the COVID-19 pandemic, we proactively closed all of our stores system wide in March 2020. Our stores began reopening in May 2020 as local guidelines allowed, and as of December 31, 2021, 2,246 of our stores were open and operating. COVID-19 may continue to impact areas in which our stores operate, particularly if stores re-close pursuant to local guidelines. As previously announced, members have not and will not be charged membership dues while our stores are temporarily closed and are credited for any membership dues paid for periods when our stores were closed. Compared to the periods prior to March 2020, we have experienced and may continue to experience decreased new store development and reduced equipment revenue in 2022 as a result of the COVID-19 pandemic.

As stores reopened we have recognized franchise revenue and corporate-owned store revenue associated with any membership dues collected prior to temporary store closures. We may have to defer revenue in the future if stores are required to re-close.

The duration of the COVID-19 pandemic and the extent of its impact on our business remains uncertain and difficult to predict. The COVID-19 pandemic may 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 compared to membership levels in March 2020, and the COVID-19 pandemic may have an ongoing impact on consumer behavior.

We took a number of actions to efficiently manage the business, as well as increase liquidity and financial flexibility in order to mitigate the impact of the COVID-19 pandemic on our business. Although the COVID-19 pandemic may 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.

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, NAF 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 50%, 51% and 40% of our total revenue for the years ended December 31, 2021, 2020 and 2019, respectively.

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•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 28%, 29%, and 23% of our total revenue for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, over 90% of our members paid their monthly dues by EFT, while the remainder prepaid annually in advance.

•Equipment segment revenue: Includes equipment revenue for new franchisee-owned stores as well as replacement equipment for existing franchisee-owned stores, in both the U.S. and Canada. Franchisee-owned stores are generally required to replace their equipment every five to seven years. This source of revenue comprised 22%, 20% and 37% of our total revenue for the years ended December 31, 2021, 2020 and 2019, respectively.

See Item 7: Critical Accounting Policies and Use of Estimates for further discussion on our revenue streams and revenue recognition policies.

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. and Canada 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. 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 and assembly services. These costs primarily consist of payroll, IT-related, marketing, legal and accounting expenses.

•NAF Expense: Consists of expenses incurred on behalf of the NAF. The use of amounts received by the NAF is restricted to advertising, product development, public relations, merchandising, and administrative expenses and programs to increase sales and further enhance the public reputation of the Planet Fitness brand.

Cash flows

We generate a significant portion of our cash flows from monthly membership dues, royalties, NAF revenue 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, NAF revenue and certain other fees, through our third-party hosted point-of-sale systems in the United States and Canada. We collect monthly dues from our corporate-owned store members on or around the 17th of each month, while annual fees are collected on or around the 1st day of the second month following the month in which the membership agreement was signed, provided our stores are open. Through our point-of-sale system, in the United States and Canada, we oversee the processing of membership billings for franchisee-owned stores. Our royalties and certain other fees are generally 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, although our billing and collection practices vary in certain international markets. 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.

Our corporate-owned stores also historically 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 for such equipment.

Each of these cash flows have been negatively impacted, we believe temporarily, by the COVID-19 pandemic.

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Recent Transactions

Securitized Financing Facility

Subsequent to the fiscal year ended on December 31, 2021, we completed the Series 2022-1 Issuance pursuant to which the Master Issuer issued the 2022 Notes in an aggregate outstanding principal amount of $900 million. In connection with such Series 2022-1 Issuance, the Master Issuer repaid the outstanding principal amount (and all accrued and unpaid interest thereon) of the Class A-2-I Notes, and the Master Issuer also entered into a new revolving financing facility that allows for the issuance of up to $75 million in 2022 Variable Funding Notes and certain letters of credit. On February 10, 2022, we borrowed in the full amount of the $75 million 2022 Variable Funding Notes and used such proceeds to repay the outstanding principal amount (together with all accrued and unpaid interest thereon) of the 2018 Variable Funding Notes in full.

Sunshine Acquisition

Subsequent to fiscal year ended December 31, 2021, on February 10, 2022, the Company and Pla-Fit Holdings acquired 100% of the equity interests of franchisee Sunshine Fitness, which operates 114 locations in Alabama, Florida, Georgia, North Carolina, and South Carolina. The purchase price of the acquisition was approximately $800.0 million including approximately $425.0 million in cash consideration and approximately $375.0 million of equity consideration.

Seasonality

Prior to the COVID-19 pandemic, our results were 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. The seasonality of our membership growth in 2020 and 2021 was meaningfully different than our historical patterns. We believe this was primarily a result of the COVID-19 pandemic.

Our Segments

We operate and manage our business in three business segments: Franchise, Corporate-owned stores and Equipment. Our Franchise segment includes operations related to our franchising business in the United States, Puerto Rico, Canada, Panama, Mexico and Australia, as well as revenues and expenses of the NAF. 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 and Canada. 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, 2021, 2020 and 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.

(1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with GAAP. Refer to “—Non-GAAP Financial Measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable GAAP measure.

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

(1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with GAAP. Refer to “—Non-GAAP Financial Measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable GAAP measure.

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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, average royalty fee percentages for franchisee-owned stores, monthly PF Black Card membership penetration percentage, EBITDA, Adjusted EBITDA, Segment EBITDA, four-wall EBITDA, royalty adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted. See “—Non-GAAP Financial Measures” below for our definition of EBITDA, Adjusted EBITDA, four-wall EBITDA, royalty adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted and why we present EBITDA, Adjusted EBITDA, four-wall EBITDA, royalty-adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, and a reconciliation of Adjusted net income per share, diluted to net income per share, diluted, the most directly comparable financial measure calculated in accordance with GAAP.

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 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. 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 the Company’s corporate-owned stores. While the Company does not record sales by franchisees as revenue, and such sales are not included in the Company’s consolidated financial statements, the Company believes that this operating measure aids in understanding how the Company derives its royalty revenue and is important in evaluating its performance. Provided our stores are open, we collect monthly dues on or around the 17th of every month and collect annual fees once per year from each member based upon when the member signed his or her membership agreement. System-wide sales were $3.4 billion, $2.4 billion and $3.2 billion, during the years ended December 31, 2021, 2020 and 2019, respectively.

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, 2021, 2020 and 2019:

(1)The term “debranded” 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.

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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 in March 2020 in response to COVID-19, and as of December 31, 2021, 2,246 were re-opened and operating, of which 2,134 were franchisee-owned stores and 112 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 for all stores that have been open and for which monthly membership dues have been billed for longer than 12 months, beginning with the thirteenth month and thereafter, as applicable. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year’s same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance.

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

We report same store sales for a given period as long as more than 50% of the stores in our same store sales base were open for every month in both the current period and corresponding prior year period. All of our stores were closed for a portion of the year ended December 31, 2020 due to COVID-19. Because none of our stores in the same store sales base billed monthly membership dues in all of the months included in the year ended December 31, 2020, we are not providing same store sales comparisons (“NC”) for the years ended December 31, 2021 and 2020.

The following table shows our same store sales for the years ended December 31, 2021, 2020 and 2019:

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Net member growth per store

Net member growth per store refers to the net change in total members in relation to total stores over time. We capture all membership changes daily through our point-of-sale system. We monitor a combination of membership growth, average members per store, average monthly EFT and transfers from or to an individual store location. We seek to make it simple for members to join, whether online, through our mobile application or in-store, and, while some memberships require a cancellation fee, we offer, and require our franchisees to offer, a non-committal membership option. This approach to memberships is part of our commitment to appeal to new and occasional gym users. As a result, we do not rely upon membership attrition as an operating metric in assessing our performance. We primarily attribute our membership growth to the continued net member growth in existing stores as well as the growth of our system-wide store base.

Average royalty fee percentages for the franchisee-owned stores

The average royalty fee percentage represents royalties collected by us from our franchisees as a percentage of the monthly membership dues and annual fees that are billed by the franchisees to their member base. We have varying royalty fee structures with our franchisee base, ranging from a tiered monthly fee to a royalty of 7.0% of total monthly EFT and annual membership fees across our franchisee base. Our royalty fee in the U.S. and Canada has increased over time to a current rate of 7.0% and 6.59%, respectively, for new franchisees.

PF Black Card penetration percentage

Our PF Black Card penetration percentage represents the number of our members that have opted to enroll in our PF Black Card membership program as a percentage of our total active membership base. PF Black Card members pay higher monthly membership dues than our standard membership and receive additional benefits for these additional fees. These benefits include access to all of our stores system-wide, guest privileges and access to exclusive areas in our stores that provide amenities such as water massage beds, massage chairs, tanning equipment and more. We view PF Black Card penetration percentage as a critical metric in assessing the performance and growth of our business.

Non-GAAP Financial Measures

We refer to EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA as we use these measures to evaluate our operating performance and we believe these measures are useful to investors in evaluating our performance. EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA as presented in this Form 10-K are supplemental measures of our performance that are neither required by, nor presented in accordance with GAAP. EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall 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, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in “Our Segments” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA.

We define EBITDA as net income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our Board of Directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as EBITDA, 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, transaction fees, stock offering-related costs, severance expense, pre-opening costs and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. Four-wall EBITDA is an assessment of our average corporate-owned store-level profitability for stores included in the same-store-sales base, which includes local and national advertising expense and adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance. Royalty adjusted four-wall EBITDA then applies the current royalty rate. Accordingly, we believe that Royalty adjusted four-wall EBITDA is comparable to a franchise store under our current franchise agreement and is useful to investors to assess the operating performance of an average store in our system. Management also uses such metrics in assessing store-level operating performance over time.

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A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the years ended December 31, 2021, 2020 and 2019:

(1)Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for 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. For the years ended December 31, 2021, 2020 and 2019, these amounts represent the additional revenue that would have been recognized in those years 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 is being recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall 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 $0.2 million, $0.1 million and $0.2 million in the years ended December 31, 2021, 2020 and 2019, respectively, reflect the difference between the higher rent expense recorded in accordance with GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $0.3 million, $0.4 million and $0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. 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 the impact of a non-cash loss recorded in accordance with ASC 805—Business Combinations related to our acquisitions of franchisee-owned stores. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations.

(4)Represents severance expense recorded in connection with a reduction in force in 2020.

(5)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.

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(6)Represents costs associated with legal matters in which the Company is a defendant. The 2020 amount includes expense of $3.8 million related to the settlement of legal claims, and a $2.0 million reserve against an indemnification receivable related to a legal matter.

(7)Represents credit loss expense on our held-to-maturity investment based upon facts and circumstances that existed as of December 31, 2021 related to the investee's performance and overall financial condition.

(8)Represents dividend income recognized on a held-to-maturity investment.

(9)Represents an insurance recovery of previously recognized expenses related to the settlement of legal claims

(10)Represents gains and losses related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate.

(11)Represents certain other charges and gains that we do not believe reflect our underlying business performance. The 2020 amount includes a $1.4 million gain related to an employee retention payroll tax credit received in connection with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

Adjusted net income assumes all net income is attributable to Planet Fitness, Inc., which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock of Planet Fitness, Inc., adjusted for certain non-recurring items that we do not believe directly reflect our core operations. Adjusted net income per share, diluted, is calculated by dividing Adjusted net income by the total weighted-average shares of Class A common stock outstanding assuming the full exchange of all outstanding Holdings Units and corresponding Class B common stock as of the beginning of each period presented. Adjusted net income and Adjusted net income per share, diluted, are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. We believe Adjusted net income and Adjusted net income per share, diluted, supplement GAAP measures and enable us to more effectively evaluate our performance period-over-period. A reconciliation of Adjusted net income to net income, the most directly comparable GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below.

(1)Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for 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. For the years ended December 31, 2021, 2020 and 2019, these amounts represent the additional revenue that would have been recognized in those years if

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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 is being recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall 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 $0.2 million, $0.1 million and $0.2 million in the years ended December 31, 2021, 2020 and 2019, respectively, reflect the difference between the higher rent expense recorded in accordance with GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $0.3 million, $0.4 million and $0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. 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 the impact of a non-cash loss recorded in accordance with ASC 805—Business Combinations related to our acquisition of franchisee-owned stores. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations.

(4)Represents severance expense recorded in connection with a reduction in force in 2020.

(5)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.

(6)Represents costs associated with legal matters in which the Company is a defendant. The 2020 amount includes expense of $3.8 million related to the settlement of legal claims, and a $2.0 million reserve against an indemnification receivable related to a legal matter.

(7)Represents credit loss expense on our held-to-maturity investment based upon facts and circumstances that existed as of December 31, 2021 related to the investee's performance and overall financial condition.

(8)Represents dividend income recognized on a held-to-maturity investment.

(9)Represents an insurance recovery of previously recognized expenses related to the settlement of legal claims.

(10)Represents gains and losses related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate.

(11)Represents certain other charges and gains that we do not believe reflect our underlying business performance. In 2020, this amount includes $1.4 million gain related to an employee retention payroll tax credit received in connection with the CARES Act.

(12)Includes $12.4 million of amortization of intangible assets, other than favorable leases, for each of the years ended December 31, 2021, 2020 and 2019, recorded in connection with the 2012 Acquisition, and $4.3 million, $4.5 million and $4.0 million of amortization of intangible assets for the years ended December 31, 2021, 2020 and 2019, respectively, created in connection with historical acquisitions of franchisee-owned stores. The adjustment represents the amount of actual non-cash amortization expense recorded, in accordance with GAAP, in each period.

(13)Represents corporate income taxes at an assumed effective tax rate of 27.0%, 26.6% and 26.8% for the years ended December 31, 2021, 2020 and 2019, respectively, applied to adjusted income before income taxes.

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

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A reconciliation of net income (loss) per share, diluted, to Adjusted net income per share, diluted, is set forth below for the years ended December 31, 2021, 2020 and 2019:

(1)Represents net income attributable to Planet Fitness, Inc. for the year ended December 31, 2021 and the associated weighted average shares of Class A common stock outstanding (see Note 15 to our consolidated financial statements included elsewhere in this Form 10-K).

(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 of Planet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock.

(3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes, and the impact of dilutive stock options and RSUs.

(4)Represents corporate income taxes at an assumed effective tax rate of 27.0% applied to adjusted income before income taxes.

(1)Represents net loss attributable to Planet Fitness, Inc. for the year ended December 31, 2020 and the associated weighted average shares of Class A common stock outstanding (see Note 15 to our consolidated financial statements included elsewhere in this Form 10-K).

(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 of Planet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock.

(3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes.

(4)Represents corporate income taxes at an assumed effective tax rate of 26.6% applied to adjusted income before income taxes.

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(1)Represents net income attributable to Planet Fitness, Inc. for the year ended December 31, 2019, and the associated weighted average shares of Class A common stock outstanding (see Note 15 to our consolidated financial statements included elsewhere in this form 10-K).

(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 of Planet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock.

(3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes.

(4)Represents corporate income taxes at an assumed effective tax rate of 26.8% applied to adjusted income before income taxes.

The following table reconciles Corporate-owned stores segment EBITDA to four-wall EBITDA to royalty adjusted four-wall EBITDA for the year ended December 31, 2021:

(1)Includes the impact of stores open less than 13 months and those which have not yet opened.

(2)Reflects administrative costs attributable to the Corporate-owned stores segment but not directly related to store operations.

(3)Reflects certain intercompany charges and other fees which are eliminated in consolidation.

(4)Represents the impact of certain purchase accounting adjustments associated with the 2012 Acquisition and our historical acquisitions of franchisee-owned stores. These are primarily related to fair value adjustments to deferred rent.

(5)Includes the effect of royalties at a rate of 7.0% as if the stores were similar to a franchisee-owned store at the current franchise royalty rate.

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Results of Operations

The following table sets forth our consolidated statements of operations as a percentage of total revenue for the years ended December 31, 2021, 2020 and 2019:

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The following table sets forth a comparison of our consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019:

Comparison of the years ended December 31, 2021 and December 31, 2020

Revenue

Total revenues were $587.0 million in 2021, compared to $406.6 million in 2020, an increase of $180.4 million, or 44.4%.

Franchise segment revenue was $290.7 million in the year ended December 31, 2021 compared to $206.2 million in the year ended December 31, 2020, an increase of $84.6 million, or 41.0%.

Franchise revenue was $237.6 million in the year ended December 31, 2021 compared to $162.2 million in the year ended December 31, 2020, an increase of $75.4 million or 46.5%. Included in franchise revenue is royalty revenue of $205.9 million, franchise and other fees of $21.7 million, and placement revenue of $10.0 million for the year ended December 31, 2021, compared to royalty revenue of $142.5 million, franchise and other fees of $12.7 million, and placement revenue of $6.9 million for the year ended December 31, 2020. The increases in franchise revenue in the year ended December 31, 2021 as compared to the year ended December 31, 2020 were primarily due to temporary store closures related to COVID-19 beginning in March 2020.

Commission income, which is included in our franchise segment, was $0.8 million in the year ended December 31, 2021 compared to $0.7 million in the year ended December 31, 2020.

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National advertising fund revenue was $52.4 million in the year ended December 31, 2021, compared to $43.3 million in the year ended December 31, 2020, an increase of $9.1 million, or 20.9%. The increase in national advertising fund revenue in the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily a result of the temporary store closures related to COVID-19 beginning in March 2020.

Revenue from our corporate-owned stores segment was $167.2 million in the year ended December 31, 2021, compared to $117.1 million in the year ended December 31, 2020, an increase of $50.1 million, or 42.7%. The increase was primarily attributable to temporary store closures related to COVID-19 beginning in March 2020, as well as the opening of 12 new corporate-owned stores since January 1, 2020.

Equipment segment revenue was $129.1 million in the year ended December 31, 2021, compared to $83.3 million in the year ended December 31, 2020, an increase of $45.8 million, or 54.9%. The increase was driven by higher equipment sales to new and existing franchisee-owned stores in the year ended December 31, 2021, as compared to the year ended December 31, 2020. Also contributing to the increase was the 15% discount offered to franchisees on equipment sales in the prior year as a result of the COVID-19 pandemic.

Cost of revenue

Cost of revenue was $101.0 million in the year ended December 31, 2021 compared to $71.0 million in the year ended December 31, 2020, an increase of $30.0 million, or 42.3%. Cost of revenue, which primarily relates to our equipment segment, increased as a result of higher equipment sales to new and existing franchisee-owned stores in the year ended December 31, 2021, as compared to the year ended December 31, 2020.

Store operations

Store operation expenses, which relates to our Corporate-owned stores segment, were $110.7 million in the year ended December 31, 2021 compared to $87.8 million in the year ended December 31, 2020, an increase of $22.9 million, or 26.1%. The increase was primarily attributable to higher expenses as a result of the opening of 12 new corporate-owned stores since January 1, 2020 as well as lower operating and marketing expenses in the prior year as a result of COVID-19 related closures beginning in March 2020.

Selling, general and administrative

Selling, general and administrative expenses were $94.5 million in the year ended December 31, 2021 compared to $68.6 million in the year ended December 31, 2020, an increase of $26.0 million, or 37.8%. The increase was primarily driven by higher incentive and stock-based compensation, local marketing support for our California re-openings, and higher insurance premiums in the year ended December 31, 2021, as compared to the year ended December 31, 2020.

National advertising fund expense

National advertising fund expense was $59.4 million in the year ended December 31, 2021, compared to $61.3 million in the year ended December 31, 2020, with the decrease primarily as a result of higher advertising spending in 2020 to promote store reopenings.

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 reacquired franchise rights.

Depreciation and amortization expense was $62.8 million in the year ended December 31, 2021 compared to $53.8 million in the year ended December 31, 2020, an increase of $9.0 million, or 16.7%. The increase was primarily attributable to the opening of corporate-owned stores since January 1, 2020 and depreciation of new information systems assets.

Other loss

Other loss was $15.1 million in the year ended December 31, 2021 compared to $4.4 million in the year ended December 31, 2020. The $15.1 million loss in the year ended December 31, 2021 includes $17.5 million of credit loss expense on our held-to-maturity investment based upon facts and circumstances that existed as of December 31, 2021 related to the investee's performance and overall financial condition, partially offset by a gain of $2.5 million from an insurance recovery related to the settlement of legal claims. The loss of $4.4 million in the year ended December 31, 2020 includes expense of $3.8 million related to the settlement of legal claims and expense of $2.0 million from a reserve against an indemnification receivable related to a legal matter, partially offset by a $1.4 million gain related to an employee retention payroll tax credit received in connection with the CARES Act.

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Interest income

Interest income was $0.9 million in the year ended December 31, 2021 compared to $2.9 million in the year ended December 31, 2020. The decrease was primarily a result of lower interest rates in the year ended December 31, 2021 compared to the year ended December 31, 2020.

Interest expense

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

Interest expense was $81.2 million in the year ended December 31, 2021 compared to $82.1 million in the year ended December 31, 2020, a decrease of $0.9 million, or 1.1%.

Other income (expense)

Other expense was $11.1 million in the year ended December 31, 2021 compared to income of $4.9 million in the year ended December 31, 2020. These amounts included expense of $11.7 million and income of $5.9 million attributable to the remeasurement of our tax benefit arrangements due to changes in our effective tax rate in the years ended December 31, 2021 and December 31, 2020, respectively. Other income (expense) also includes the effects of foreign currency gains and losses.

Provision for income taxes

Income tax expense was $5.7 million for the year ended December 31, 2021 compared to $0.7 million for the year ended December 31, 2020, an increase of $5.0 million. The $5.0 million increase is primarily attributable to our higher income before taxes in the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily as a result of COVID-19 related temporary closures beginning in March 2020, partially offset by an income tax benefit recorded in 2021 to remeasure deferred taxes.

Segment results

Franchise

Franchise segment EBITDA was $194.3 million in the year ended December 31, 2021 compared to $115.0 million in the year ended December 31, 2020, an increase of $79.3 million, or 69.0%. The increase in the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to temporary store closures related to COVID-19 beginning in March 2020, higher NAF revenue and lower NAF expense, partially offset by higher franchise-related payroll and operational expenses. Depreciation and amortization was $7.5 million in the year ended December 31, 2021 and $7.8 million in the year ended December 31, 2020.

Corporate-owned stores

Corporate-owned stores segment EBITDA was $49.2 million in the year ended December 31, 2021 compared to $23.7 million in the year ended December 31, 2020, an increase of $25.5 million, or 107.8%. The corporate-owned store segment EBITDA increase was primarily due to temporary store closures related to COVID-19 beginning in March 2020, as well as the opening of 12 new corporate-owned stores since January 1, 2020. Depreciation and amortization was $35.8 million for the year ended December 31, 2021, compared to $30.5 million for the year ended December 31, 2020. The increase in depreciation and amortization was primarily attributable to capital expenditures on existing stores and the opening of new corporate-owned stores since January 1, 2020.

Equipment

Equipment segment EBITDA was $29.7 million in the year ended December 31, 2021 compared to $13.1 million in the year ended December 31, 2020, an increase of $16.6 million, or 126.6%. The increase was driven by higher equipment sales to new and existing franchisee-owned stores in the year ended December 31, 2021 compared to the year ended December 31, 2020, and the 15% discount offered to franchisees on equipment sales in the prior year as a result of the COVID-19 pandemic. Depreciation and amortization was $5.0 million for both the years ended December 31, 2021 and December 31, 2020.

Comparison of the years ended December 31, 2020 and December 31, 2019

Revenue

Total revenues were $406.6 million in 2020, compared to $688.8 million in 2019, a decrease of $282.2 million, or 41.0%.

Franchise segment revenue was $206.2 million in the year ended December 31, 2020 compared to $277.6 million in the year ended December 31, 2019, a decrease of $71.4 million, or 25.7%.

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Franchise revenue was $162.2 million in the year ended December 31, 2020 compared to $223.1 million in the year ended December 31, 2019, a decrease of $61.0 million or 27.3%. Included in franchise revenue is royalty revenue of $142.5 million, franchise and other fees of $12.7 million, and placement revenue of $6.9 million for the year ended December 31, 2020, compared to royalty revenue of $188.0 million, franchise and other fees of $17.1 million, and placement revenue of $17.8 million for the year ended December 31, 2019. The decreases in franchise revenue in the year ended December 31, 2020 as compared to the year ended December 31, 2019 were primarily due to COVID-19 related store closures beginning in March 2020, as well as reduced membership levels.

Commission income, which is included in our franchise segment, was $0.7 million in the year ended December 31, 2020 compared to $4.3 million in the year ended December 31, 2019, a decrease of $3.6 million or 83.8%. 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 $43.3 million in the year ended December 31, 2020, compared to $50.2 million in the year ended December 31, 2019. The decrease in national advertising fund revenue in the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily a result of the temporary closures beginning in March 2020 related to COVID-19 as well as reduced membership levels, partially offset by a higher national advertising fund rate of 3.25% beginning in September 2020 through 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 $117.1 million in the year ended December 31, 2020, compared to $159.7 million in the year ended December 31, 2019, a decrease of $42.6 million, or 26.6%. The decrease was primarily a result of temporary store closures related to COVID-19 beginning in March 2020, as well as reduced membership levels, partially offset by revenue as a result of the acquisition of 16 franchisee-owned stores and the opening of 11 new corporate-owned stores since January 1, 2019.

Equipment segment revenue was $83.3 million in the year ended December 31, 2020, compared to $251.5 million in the year ended December 31, 2019, a decrease of $168.2 million, or 66.9%. The decrease was driven by lower equipment sales to new and existing franchisee-owned stores in the year ended December 31, 2020, as compared to the year ended December 31, 2019 primarily as a result of COVID-19 related closures beginning in March 2020, the 12-month and 18-month extensions we gave to franchisees for all new store development and re-equipment investment obligations, respectively, and the 15% discount offered to franchisees on equipment purchased in 2020.

Cost of revenue

Cost of revenue was $71.0 million in the year ended December 31, 2020 compared to $194.4 million in the year ended December 31, 2019, a decrease of $123.5 million, or 63.5%. 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 year ended December 31, 2020, as compared to the year ended December 31, 2019.

Store operations

Store operation expenses, which relates to our Corporate-owned stores segment, were $87.8 million in the year ended December 31, 2020 compared to $86.1 million in the year ended December 31, 2019, an increase of $1.7 million, or 2.0%. The increase was primarily attributable to higher expenses as a result of the acquisition of 16 franchisee-owned stores and the opening of 11 new corporate-owned stores since January 1, 2019, partially offset by lower operating and marketing expenses as a result of COVID-19 related closures beginning in March 2020.

Selling, general and administrative

Selling, general and administrative expenses were $68.6 million in the year ended December 31, 2020 compared to $78.8 million in the year ended December 31, 2019, a decrease of $10.2 million, or 13.0%. The decrease was primarily due to lower variable compensation expense, decreased travel and lower equipment placement expenses related to COVID-19 during the year ended December 31, 2020, as compared to the year ended December 31, 2019.

National advertising fund expense

National advertising fund expense was $61.3 million in the year ended December 31, 2020, compared to $50.2 million in the year ended December 31, 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 reacquired franchise rights.

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Depreciation and amortization expense was $53.8 million in the year ended December 31, 2020 compared to $44.3 million in the year ended December 31, 2019, an increase of $9.5 million, or 21.4%. The increase was primarily attributable to the opening and acquisition of corporate-owned stores since January 1, 2019 and depreciation of new information systems assets.

Other loss

Other loss was $4.4 million in the year ended December 31, 2020 compared to $1.8 million in the year ended December 31, 2019. The $4.4 million loss in the year ended December 31, 2020 includes expense of $3.8 million related to the settlement of legal claims, and $2.0 million represents a reserve against an indemnification receivable related to a legal matter, partially offset by a $1.4 million gain related to an employee retention payroll tax credit received in connection with the CARES Act. The loss of $1.8 million in the year ended December 31, 2019 was primarily attributable to a loss on reacquired franchise rights associated with the acquisition of 12 franchisee-owned stores on December 16, 2019.

Interest income

Interest income was $2.9 million in the year ended December 31, 2020 compared to $7.1 million in the year ended December 31, 2019. The decrease was primarily a result of lower interest rates in the year ended December 31, 2020 compared to the year ended December 31, 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 $82.1 million in the year ended December 31, 2020 compared to $60.9 million in the year ended December 31, 2019, an increase of $21.3 million, or 34.9%. The increase in interest expense was primarily a result of higher interest expense related to the issuance of $550 million of 2019 Notes in December 2019.

Other income (expense)

Other income was $4.9 million in the year ended December 31, 2020 compared to expense of $6.1 million in the year ended December 31, 2019. These amounts included income of $5.9 million and expense of $6.0 million attributable to the remeasurement of our tax benefit arrangements due to changes in our effective tax rate in the years ended December 31, 2020 and December 31, 2019, respectively. Other income (expense) also includes the effects of foreign currency gains and losses.

Provision for income taxes

Income tax expense was $0.7 million for the year ended December 31, 2020 compared to $37.8 million for the year ended December 31, 2019, a decrease of $37.1 million. The $37.1 million decrease is primarily attributable to our decreased income before taxes partially offset by changes from the remeasurement of our deferred taxes and by our increased pro-rata share of income from Pla-Fit Holdings for the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.

Segment results

Franchise

Franchise segment EBITDA was $115.0 million in the year ended December 31, 2020 compared to $192.3 million in the year ended December 31, 2019, a decrease of $77.3 million, or 40.2%. The decrease in the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to COVID-19 related store closures beginning in March 2020, reduced membership levels, and higher NAF expense, partially offset by lower franchise-related payroll and operational expenses. Depreciation and amortization was $7.8 million in the year ended December 31, 2020 and $7.9 million in the year ended December 31, 2019.

Corporate-owned stores

Corporate-owned stores segment EBITDA was $23.7 million in the year ended December 31, 2020 compared to $65.6 million in the year ended December 31, 2019, a decrease of $41.9 million, or 63.9%. The corporate-owned store segment EBITDA decrease was primarily due to COVID-19 related store closures beginning in March 2020, as well as reduced membership levels. Depreciation and amortization was $30.5 million for the year ended December 31, 2020, compared to $25.5 million for the year ended December 31, 2019. The increase in depreciation and amortization was primarily attributable to capital expenditures on existing stores and the acquisition and opening of new corporate-owned stores since January 1, 2019.

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Equipment

Equipment segment EBITDA was $13.1 million in the year ended December 31, 2020 compared to $59.6 million in the year ended December 31, 2019, a decrease of $46.5 million, or 78.0%. The decrease was driven by lower equipment sales to new and existing franchisee-owned stores in the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily as a result of COVID-19 related closures beginning in March 2020, the 12-month and 18-month extensions we gave to franchisees for all new store development and re-equipment investment obligations, respectively, and the 15% discount offered to franchisees on equipment purchased in 2020. Depreciation and amortization was $5.0 million for both the years ended December 31, 2020 and December 31, 2019.

Liquidity and Capital Resources

As of December 31, 2021, we had $545.9 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 our 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 our 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 could be adversely affected by the occurrence of any of the events described under “Risk Factors.” 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 years ended December 31, 2021 and 2020:

Operating activities

For the year ended December 31, 2021, net cash provided by operating activities was $189.3 million compared to $31.1 million in the year ended December 31, 2020, an increase of $158.2 million. Of the increase, $103.1 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, and $55.0 million was primarily due to lower cash used for working capital in accrued expenses and accounts payable, payments pursuant to tax benefit arrangements, and other assets, partially offset by lower cash generated due to an increase in accounts receivable in the year ended December 31, 2021, compared to the year ended December 31, 2020.

Investing activities

For the year ended December 31, 2021, net cash used in investing activities was $90.9 million compared to $52.3 million in the year ended December 31, 2020, an increase of $38.6 million. Of the increase, $35.0 million was due to cash used for investments, $1.9 million was due to the acquisition of 2 franchisee-owned stores in the year ended December 31, 2021 and $1.5 million was due to higher capital expenditures.

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Capital expenditures for the years ended December 31, 2021 and 2020:

Financing activities

For the year ended December 31, 2021, net cash used in financing activities was $10.2 million compared to net cash provided by financing activities of $57.9 million in the year ended December 31, 2020, a decrease of $68.1 million. In the year ended December 31, 2021 we had repayments of long-term debt of $17.5 million partially offset by proceeds from issuance of Class A common stock of $8.2 million. In the year ended December 31, 2020, we had net proceeds from borrowings under our variable funding notes and repayments of long-term debt for a combined cash inflow of $57.5 million and proceeds from issuance of Class A common stock of $2.6 million. Distributions to members of Pla-Fit Holdings were $0.8 and $1.8 million in the years ended December 31, 2021 and December 31, 2020, respectively.

The following table presents summary cash flow information for the years ended December 31, 2020 and 2019:

Operating activities

For the year ended December 31, 2020, net cash provided by operating activities was $31.1 million compared to $204.3 million in the year ended December 31, 2019, a decrease of $173.2 million. Of the decrease, $168.7 million was due to lower net income after adjustments to reconcile net income to net cash provided by operating activities, and $4.5 million was primarily due to higher cash used for working capital in income tax, deferred revenue, and inventory, partially offset by higher cash generated due to a decrease in accounts receivable in the year ended December 31, 2020, compared to the year ended December 31, 2019.

Investing activities

For the year ended December 31, 2020, net cash used in investing activities was $52.3 million compared to $110.7 million in the year ended December 31, 2019, a decrease in cash used of $58.4 million. Of the decrease, $52.6 million was due to the acquisition of 16 franchisee-owned stores in the year ended December 31, 2019 and $5.3 million was due to lower capital expenditures.

Capital expenditures for the years ended December 31, 2020 and 2019:

Financing activities

For the year ended December 31, 2020, net cash provided by financing activities was $57.9 million compared to net cash provided by financing activities of $64.3 million in the year ended December 31, 2019, a decrease of $6.5 million. In the year

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ended December 31, 2020 we had net proceeds from borrowings under our variable funding notes and repayments of long-term debt for a combined impact of $57.5 million. In the year ended December 31, 2019, we had net proceeds from the issuance and repayments of long-term debt of $527.4 million, $458.2 million of cash used to repurchase and retire 6.1 million shares of our Class A common stock, and distributions to members of Pla-Fit Holdings of $7.4 million.

Securitized Financing Facility

On August 1, 2018, the Master Issuer, a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary of Pla-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 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 2018 Variable Funding Notes that allowed for the incurrence of up to $75 million in revolving loans and/or letters of credit under the Master Issuer’s Series 2018-1 Variable Funding Senior Notes, Class A-1. We fully drew down on the 2018 Variable Funding Notes on March 20, 2020. Outstanding amounts under the 2018 Variable Funding Notes bore interest at a variable rate, which was 2.15% as of December 31, 2021. On December 3, 2019, the Master Issuer the 2019 Notes with an initial principal amount of $550 million. The 2019 Notes were issued under the 2018 Indenture and a related supplemental indenture dated December 3, 2019.

As noted above, we borrowed the full $75 million in 2018 Variable Funding Notes on March 20, 2020. The 2018 Variable Funding Notes accrued interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.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 2018 Variable Funding Notes. There was a commitment fee on the unused portion of the 2018 Variable Funding Notes of 0.5% based on utilization.

Subsequent to the fiscal year ended on December 31, 2021, on February 10, 2022, we issued the 2022 Class A-2 Notes, which consist of two tranches: the 2022 Class A-2-I Senior Secured Notes with an anticipated repayment term of five years, with an aggregate principal amount of $425 million and a fixed interest rate of 3.251% per annum, payable quarterly, and the 2022 Class A-2-II Senior Secured Notes with an anticipated repayment term of ten years, with an aggregate principal amount of $475 million and a fixed interest rate of 4.008% per annum, payable quarterly. The 2022 Class A-2 Notes were issued by the Master Issuer in a privately placed securitization transaction. In conjunction with the issuance, the Master Issuer used a portion of the net proceeds for the repayment in full of approximately $556 million in aggregate principal amount of the Series 2018-1 Class A-2-I Notes (together with any accrued and unpaid interest on such Series 2018-1 Class A-2-I Notes), and paid the transaction costs and funded the reserve accounts associated with the securitized financing facility and funded a portion of the Sunshine Acquisition.

In addition to the 2022 Class A-2 Notes, the 2022 refinancing transaction also included a revolving financing facility that allows for the incurrence of up to $75 million in 2022 Variable Funding Notes, which replaces the Master Issuer’s 2018 Variable Funding Notes. After closing, all $75 million of the 2022 Variable Funding Notes were drawn and used to pay down the borrowed balance under the 2018 Variable Funding Notes. The 2022 Variable Funding Notes accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) adjusted term secured overnight financing rate (“SOFR”), 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 2022 Variable Funding Notes. There is a commitment fee on the unused portion of the 2022 Variable Funding Notes of 0.5% based on utilization.

The 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 that act as guarantors of the Notes and that have pledged substantially all of their assets to secure the 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 in September 2048, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2018 Class A-2-II Notes will be repaid in September 2025. The legal final maturity date of the 2019 Notes is in December 2049, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2019 Notes will be repaid in December 2029. The legal final maturity date of the 2022 Notes is in December 2015, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the 2022 Class A-2-I Notes will be repaid in December 2026 and the 2022 Class A-2-II Notes will be repaid in December 2031. If the Master Issuer has not repaid or refinanced the Notes prior to their respective anticipated repayment dates, additional interest will accrue pursuant to the Indenture.

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The 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 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 Notes are in stated ways defective or ineffective, (iv) a cap on non-securitized indebtedness of $50 million (provided that we 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 incurrence test on us 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 such 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 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 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 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. We hold restricted cash which primarily represents cash collections held by the Trustee, interest, principal, and commitment fee reserves held by the Trustee related to the Notes. As of December 31, 2021, we had restricted cash held by the Trustee of $42 million. 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.

Share Repurchase Program

2019 share repurchase program

On November 5, 2019, our board of directors approved a share repurchase program of up to $500 million (the “2019 Share Repurchase Program”).

On December 4, 2019, the Company entered into a $300 million accelerated share repurchase agreement (the “2019 ASR Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”). Pursuant to the terms of the 2019 ASR Agreement, on December 5, 2019, the Company paid JPMC $300 million upfront in cash and received approximately 3.3 million shares of the Company’s Class A common stock, which were retired. Final settlement of the ASR Agreement occurred on March 2, 2020. At final settlement, JPMC delivered approximately 667,000 additional shares of the Company’s Class A common stock, based on a weighted average cost per share of $75.82 over the term of the 2019 ASR Agreement, which were retired.

On March 18, 2020, the Company announced the suspension of its 2019 share repurchase program. If the 2019 share repurchase program is reinstated, the timing of purchases and amount of stock repurchased will be subject to the Company’s discretion and will depend on market and business conditions, the Company’s general working capital needs, stock price, applicable legal requirements and other factors. Our ability to repurchase shares at any particular time is also subject to the terms of the Indenture governing the Securitized Senior Notes. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. The Company may reinstate or terminate the program at any time.

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Contractual Obligations and Commitments

The following table presents contractual obligations and commercial commitments as of December 31, 2021.

(1)Long-term debt payments include scheduled principal payments only.

(2)Timing of payments under tax benefit arrangements is estimated.

(3)As of December 31, 2021, we had advertising purchase commitments of approximately $60.7 million, including commitments for the NAF.

(4)Purchase obligations consists of $19.7 million for open purchase orders primarily related to equipment to be sold to franchisees. For the majority of our equipment purchase obligations, our policy is to require the franchisee to provide us with either a deposit or proof of a committed financing arrangement.

Off-Balance Sheet Arrangements

As of December 31, 2021, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $6.7 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at December 31, 2021 was not material, and no accrual has been recorded for our potential obligation under these arrangements. In 2019, in connection with a real estate partnership, the Company began guaranteeing certain leases of its franchisees up to a maximum period of ten years, with earlier expiration dates if certain conditions are met. See Note 17 to our consolidated financial statements included elsewhere in this Form 10-K for more information regarding these operating leases and guarantees.

Critical Accounting Estimates

Our discussion and analysis of operating results and financial condition are based upon our consolidated financial statements included elsewhere in this Form 10-K. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting estimates involve a higher degree of judgment and complexity.

Business combinations

We account for business combinations using the purchase method of accounting which results in the assets acquired and liabilities assumed being recorded at fair value at the date of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill.

The valuation methodologies used are based on the nature of the asset or liability. The significant assets and liabilities measured at fair value include property and equipment, intangible assets, deferred revenue and favorable and unfavorable leases. For the 2012 Acquisition, intangible assets consisted of trade and brand names, member relationships, franchisee relationships related to both our franchise and equipment segments, non-compete agreements, order backlog and favorable and unfavorable leases. For other acquisitions, which consist of acquisitions of stores from franchisees, intangible assets generally consist of member relationships, re-acquired franchise rights, and favorable and unfavorable leases.

The Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities, including third-party valuation experts. The fair value of trade and brand names is estimated using the relief from royalty method, an income approach to valuation, which includes projecting future system-wide sales and other estimates. Membership relationships and franchisee relationships are valued based on an estimate of future revenues and costs related to the respective contracts over the remaining expected lives. Our valuation includes assumptions related to the projected attrition and renewal rates on those existing franchise and membership arrangements being valued. Re-acquired franchise rights are valued using an

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excess earnings approach. The valuation of re-acquired franchise rights is determined using an estimation of future royalty income and related expenses associated with existing franchise contracts at the acquisition date. For re-acquired franchise rights with terms that are either favorable or unfavorable (from our perspective) to the terms included in our current franchise agreements, a gain or charge is recorded at the time of the acquisition to the extent of the favorability or unfavorability, respectively. Favorable and unfavorable operating leases are recorded based on differences between contractual rents under the respective lease agreements and prevailing market rents at the lease acquisition date, and are recorded as a component of the ROU asset. Deferred revenue is valued based on our estimated costs to fulfill the obligations assumed, plus a normal profit margin. No deferred revenue amounts are recognized for enrollment fees in our business combinations as there is no remaining obligation.

Income taxes

Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from acquisitions and the recapitalization transactions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

In determining the provision for income taxes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment.

As of December 31, 2021, we had $539.3 million of net deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. As of December 31, 2021, the Company has provided a valuation allowance of $4.6 million against the portion of its deferred tax assets that would generate capital losses for which the Company does not have sufficient positive evidence to support its recoverability.

We recognize the effects of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Tax Benefit Arrangements

As described in Note 16 to the consolidated financial statements included in Part II, Item 8, we are a party to the tax benefit arrangements under which we are contractually committed to pay the non-controlling interest holders 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. Amounts payable under the tax benefit arrangements are contingent upon, among other things, (i) generation of future taxable income over the term of the tax benefit arrangements and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the tax benefit arrangements to utilize the tax benefits, then we would not be required to make the related payments. Therefore, we would only recognize a liability for tax benefit arrangement payments if we determine it is probable that we will generate sufficient future taxable income over the term of the tax benefit arrangements to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions. As of December 31, 2021, we recognized $528.1 million of liabilities relating to our obligations under the tax benefit arrangements. We concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred. Changes in the projected liability resulting from these tax benefit arrangements may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and impact the expected future tax benefits to be received by the Company. Changes in the projected liability under these tax benefit arrangements will be recorded as a component of other income (expense) each period.

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Investments and allowance for expected credit losses

Our held-to-maturity securities are reported at amortized cost. We reserve for expected credit losses on our held-to-maturity debt securities through the allowance for expected credit losses. The allowance for expected credit losses estimate reflects a lifetime loss estimate and is based on historical loss information for assets with similar risk characteristics, adjusted for management’s expectations. Adjustments for management’s expectations may be based on factors such as investee earnings performance, recent financing rounds at reduced valuations, changes in the regulatory, economic or technological environment of an investee or doubt about an investee’s ability to continue as a going concern. An increase or a decrease in the allowance for expected credit losses is recorded through other gain (loss) as a credit loss expense or a reversal thereof. The allowance for expected credit losses is presented as a deduction from the amortized cost of the held-to-maturity securities. A held-to-maturity investment security and its allowance for expected credit losses is written off when deemed uncollectible.

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