Mezzanine Equity |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Temporary Equity Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mezzanine Equity | Mezzanine Equity Mezzanine equity consists of Series A Preferred Stock. The following table summarizes the changes in mezzanine equity for the nine months ended September 30, 2021:
(1)During the nine months ended September 30, 2021, the Company granted 0.5 million shares of restricted Series A Preferred Stock to our CEO. At September 30, 2021, the 0.5 million shares of restricted Series A Preferred Stock associated with this award were issued and outstanding however, all of the shares remained unvested. During the three and nine months ended September 30, 2021, we recognized share-based compensation expense associated with this restricted Series A Preferred Stock award of $2.3 million and $4.0 million, respectively, the offset for which was recognized as an increase in mezzanine equity. Share-based compensation expense associated with this restricted Series A Preferred Stock award is included in General, administrative and marketing in our condensed consolidated statements of operations. Share-based compensation expense associated with this award is recognized over the vesting period based on the grant date fair value per share. For more information regarding this restricted Series A Preferred Stock award, see “—Restricted Series A Preferred Stock” below.
Series A Preferred Stock
Authorization and Designation
On January 11, 2021, our board of directors adopted and approved an amendment to the Certificate of Incorporation for Life Time Group Holdings, Inc., which (i) increased the amount of authorized shares of common stock, $0.01 par value per share, from 170.0 million to 200.0 million; and (ii) authorized 25.0 million shares of preferred stock, $0.01 par value per share. Also on January 11, 2021, our board of directors authorized 12.0 million shares of Series A Preferred Stock of Life Time Group Holdings, Inc., $0.01 par value per share. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series A Preferred Stock were set forth in the Certificate of Designations (“COD”), which the Company filed with the Secretary of State of the State of Delaware on January 22, 2021.
Voting Rights
Holders of Series A Preferred Stock were only entitled to vote on matters specifically related to the Series A Preferred Stock.
Dividend Rights
From and after the issue date, on each anniversary of the issue date, each share of Series A Preferred Stock was to accrue additional shares of Series A Preferred Stock as a paid-in-kind (“PIK”) dividend on the Liquidation Preference (defined in “—Liquidation Rights” below) in effect at the anniversary date at rate of 15.0% per annum. The PIK dividends were cumulative and compounded annually to the extent that they had not been paid by the Company. Accrued PIK dividends were payable, at the option of the Company, in either cash from any source of funds legally available or additional shares of Series A Preferred Stock. The holders of Series A Preferred Stock were entitled to participate in any dividends or distributions on our common stock or other junior stock of the Company on an as-if-converted basis (assuming full conversion of all outstanding shares of Series A Preferred Stock).
Liquidation Rights
The Series A Preferred Stock ranked senior to the Company’s common stock or other junior capital stock, with respect to dividend rights and rights on the distribution of assets, in the event of a change of control (“COC”) or any liquidation, winding up of dissolution of the business of the Company, whether voluntary or involuntary (a “Deemed Liquidation Event”). Upon the occurrence of a Deemed Liquidation Event, each holder of shares of Series A Preferred Stock was entitled to receive, for each share, out of assets of the Company legally available for distribution to stockholders or, in the case of a COC, out of the consideration payable to stockholders or the Company in such COC, a preferential amount equal to the greater of (i) the $20.00 per share issue price plus the amount of any accrued dividends (including accrued PIK shares) on such shares of Series A Preferred Stock (“Liquidation Preference”) and (ii) the per share amount of all cash, securities or other property to be distributed in respect of the common stock of the Company that such holder of Series A Preferred Stock would have been entitled to receive had the holder converted such Series A Preferred Stock into shares of common stock of the Company (“Deemed Conversion”), subject to certain adjustments set forth in the COD (details of which are described in “—Conversion Price Adjustments” below). All preferential amounts to be paid to the holders of Series A Preferred Stock in connection with a Deemed
Liquidation Event would be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company to the holders of the Company’s common stock or any other junior stock.
Conversion Rights
Upon the (i) consummation of an initial public offering, (ii) consummation of a Qualifying Private Sale (“QPS”) or (iii) election of holders of at least 75% of the then outstanding shares of Series A Preferred Stock, each of the outstanding shares of Series A Preferred was to automatically convert (“Automatic Conversion”) into a number of shares of common stock of the Company equal to the Liquidation Preference, subject to certain adjustments set forth in the COD (details of which are described in “—Liquidation Preference Adjustments” below), divided by the $20.00 issue price, subject to certain adjustments set forth in the COD (“Conversion Price”) (details of which are described in “—Conversion Price Adjustments” below).
Liquidation Preference Adjustments
In the event of an Automatic Conversion or a Deemed Conversion of shares of Series A Preferred Stock into common shares of the Company, the accrued dividends on such shares of Series A Preferred Stock were to be (a) reduced to zero, in the event that the fair value of each share of the Company’s common stock into which such share of Series A Preferred Stock is convertible would equal or exceed the sum of (i) the Liquidation Preference (assuming, for this purpose, that the accrued dividends included in this amount shall not have been reduced to zero) and (ii) any cash dividends paid in respect of such share of Series A Preferred Stock, or (b) reduced to such amount as would provide each holder of such shares of Series A Preferred Stock the 15.0% annual dividend rate from the issue date to the conversion date, in the event that the fair value of each share of the Company’s common stock into which such share of Series A Preferred Stock is convertible exceeds the $20.00 initial price per share but is less than the sum of (i) the Liquidation Preference (assuming, for this purpose, that the accrued dividends included in this amount shall not have been reduced) and (ii) any cash dividends paid in respect of such share of Series A Preferred Stock.
Conversion Price Adjustments
The Conversion Price, as defined in the COD, means the $20.00 issue price, subject to anti-dilution adjustments; provided, however, that (i) with respect to any shares of Series A Preferred Stock that are converted into the Company’s common stock upon the consummation of an initial public offering, the Conversion Price shall equal the lesser of (a) the $20.00 issue price and (b) the initial public offering price, as applicable, and (ii) with respect to any shares of Series A Preferred Stock that are converted into the Company’s common stock upon the consummation of a QPS, the Conversion Price share equal the lesser of (a) the $20.00 issue price and (b) the price per share paid by the third party purchased in such transaction, as applicable.
Mandatory Redemption
On July 22, 2026 (the “Redemption Date”), the Company would be required to redeem any and all outstanding shares of Series A Preferred stock, from any source of funds legally available for such purpose at a price per share equal to the Liquidation Preference in respect of the redeemed shares.
Series A Preferred Stock Issuance
The fair value of the 5.4 million shares of Series A Preferred Stock that the Company issued, as well as the 0.5 million shares associated with the restricted Series A Preferred Stock award that the Company granted to our CEO, during the nine months ended September 30, 2021 was estimated using an as-converted value plus risky put option model. The put option value was estimated using the Black-Scholes option pricing model. Primary assumptions used in determining the estimated issuance date fair value of the Series A Preferred Stock include: the estimated equity value associated with the then outstanding common stock of Life Time Group Holdings, Inc., a strike price of $20.00 per share, PIK dividend yield rate of 15.0%, expected term of 1.0 years, volatility rate of 65.00% and a risk-free rate of 0.08%. For more information regarding the Contribution Agreement and issuance of the Series A Preferred Stock, see Note 6, Debt. For more information regarding the restricted Series A Preferred Stock, see “—Restricted Series A Preferred Stock” below).
Restricted Series A Preferred Stock
During the second quarter of 2021, in lieu of the vast majority of cash compensation for our CEO for 2021, the Company granted an award of 0.5 million shares of restricted Series A Preferred Stock to our CEO, 50% of which vests on each anniversary of the grant date with 100% full vesting on the date that is 180 days after an initial underwritten public offering. Effective as of the grant date, our CEO has all of the rights of a stockholder with respect to these 0.5 million outstanding shares of restricted Series A Preferred Stock, including the right to receive PIK share or cash dividends. Immediately prior to the granting of this equity award, we had recognized an accrued compensation liability of approximately $1.6 million associated with our CEO’s 2021 compensation. For accounting purposes, the settlement of this $1.6 million accrued compensation liability through issuance of the restricted Series A Preferred Stock award was recognized as a decrease in Accrued expenses and other current liabilities and an increase in Additional paid-in capital on our condensed consolidated balance sheet. As of September 30, 2021, all of the restricted Series A Preferred Stock shares subject to this award were both unvested and outstanding.
Share-based compensation expense associated with this restricted Series A Preferred Stock award will be recognized over the vesting period based on the grant date fair value per share, reduced by the $1.6 million of compensation expense associated with the accrued compensation liability that had previously been recognized. During the three and nine months ended September 30, 2021, we recognized share-based compensation expense associated with this restricted Series A Preferred Stock award of $2.3 million and $4.0 million, respectively, the offset for which was recognized as an increase in Mezzanine equity on our condensed consolidated balance sheet (details of which are described in “—Mezzanine Equity Classification” below). Share-based compensation expense associated with this restricted Series A Preferred Stock award is included in General, administrative and marketing in our condensed consolidated statements of operations. As of September 30, 2021, unrecognized share-based compensation expense related to this restricted Series A Preferred Stock award was approximately $8.1 million. The estimated fair value associated with this restricted Series A Preferred Stock award will be recognized as share-based compensation expense if and when the related recognition conditions, for accounting purposes, are met. With the consummation of the IPO, previously unrecognized share-based compensation expense associated with this restricted Series A Preferred Stock award will be recognized effective with the date that is 180 days after the effective date associated with such initial public offering. For more information on share-based compensation, see Note 9, Stockholders’ Equity.
Mezzanine Equity Classification
We applied the guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”), in order to determine the appropriate accounting for both the Series A Preferred Stock that the Company issued, as well as the restricted Series A Preferred Stock award that the Company granted to our CEO, during the nine months ended September 30, 2021. Based on our analysis, we determined that these shares of Series A Preferred Stock (i) do not meet any of the conditions that would require liability accounting, (ii) are more akin to an equity-like host and (iii) do not contain any embedded features that require bifurcation. Also, because these shares of Series A Preferred Stock are (x) redeemable upon the occurrence of certain Deemed Liquidation Events that are not solely within the Company’s control; and (y) required to be redeemed at a determinable price on the Redemption Date, we determined that the carrying value of the Series A Preferred Stock that the Company issued, as well the offset to the recognized share-based compensation expense associated with the restricted Series A Preferred Stock award, is required to be classified as temporary mezzanine equity on our September 30, 2021 condensed consolidated balance sheet. Accordingly, the issuance date fair value of $149.6 million associated with the 5.4 million shares of Series A Preferred Stock that the Company issued during the nine months ended September 30, 2021 was recognized as an increase in Mezzanine equity on our September 30, 2021 condensed consolidated balance sheet. Also, the offset to the $4.0 million of share-based compensation expense associated with the restricted Series A Preferred Stock award that we recognized during the nine months ended September 30, 2021 was recognized as an increase in Mezzanine equity on our September 30, 2021 condensed consolidated balance sheet.
At September 30, 2021, the outstanding shares of Series A Preferred Stock were not redeemable, and we determined that it was not probable that these shares would become redeemable.
Accrued Dividends
At September 30, 2021, PIK dividend shares totaling approximately 0.6 million shares had accrued on the outstanding Series A Preferred Stock and the underlying shares associated with the restricted Series A Preferred Stock award. At September 30, 2021, the estimated fair value of these PIK dividend shares was approximately $16.4 million. Based on the applicable accounting guidance, because the PIK dividend feature is discretionary, each accrued PIK share is required to be measured on the basis of its fair value on the commitment date, which is generally the dividend accrual date. Accordingly, we recognized the $16.4 million estimated fair value of the accrued PIK dividends as a non-cash increase in Accrued expenses and other current liabilities and a decrease in Additional paid-in capital on our September 30, 2021 condensed consolidated balance sheet.
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