UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ
Annual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2019
¨
Transition Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                to             
Commission file number: 001-36803
Town Sports International Holdings, Inc.
(Exact name of Registrant as specified in its charter)
 
DELAWARE
 
20-0640002
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1001 US North Highway 1, Suite 201, Jupiter, Florida 33477
(Address and zip code of Registrant’s principal executive office)
399 Executive Boulevard, Elmsford, New York 10523
(Mailing address)
(212) 246-6700
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value
CLUB
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨  No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨  No  þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    Yes  þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
þ
  
Smaller reporting company
 
þ
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨  No  þ
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $32.7 million (computed by reference to the last reported sale price on The Nasdaq Global Market on that date). The registrant does not have any non-voting common stock outstanding.
As of March 16, 2020, there were 29,564,762 shares of Common Stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2020 Annual Meeting of Stockholders, to be filed not later than April 29, 2020 are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.




TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
1
Item 1A.
10
Item 1B.
23
Item 2.
23
Item 3.
24
Item 4.
25
 
 
 
 
 
Item 5.
26
Item 6.
26
Item 7.
27
Item 7A.
37
Item 8.
37
Item 9.
38
Item 9A.
38
Item 9B.
38
 
 
 
 
 
Item 10.
39
Item 11.
39
Item 12.
39
Item 13.
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Item 14.
39
 
 
 
 
 
Item 15.
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41
 
F-1
 
 
Item 16.
 




TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
PART I

FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding future financial results and performance, potential sales revenue, potential club closures, results of cost savings initiatives, legal contingencies and tax benefits and contingencies, future declarations and payments of dividends, and the existence of adverse litigation and other risks, uncertainties and factors set forth under Item 1A., entitled “Risk Factors,” of this Annual Report and in our other reports and documents filed with the Securities and Exchange Commission (“SEC”). You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “could,” or the negative version of these words or other comparable words. These statements are subject to various risks and uncertainties, many of which are outside our control, including, among others, the level of market demand for our services, economic conditions affecting our business, the success of our pricing model, the geographic concentration of our clubs, competitive pressure, the ability to achieve reductions in operating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of federal and state tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, and other specific factors discussed herein and in other SEC filings made by us. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.
Item 1.     Business
In this Annual Report, unless otherwise stated or the context otherwise indicates, references to “the Company,” “we,” “our,” “TSI Holdings” and similar references refer to Town Sports International Holdings, Inc. and its subsidiaries. References to “TSI LLC” refer to Town Sports International, LLC, and “TSI Group” refer to Town Sports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company. The Company is a diversified holding company with subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States of America (“United States”, “U.S.”).  TSI Group was formed in 2017 to invest in public and private equities and real estate. TSI Holdings’ corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for stockholders.
General
Based on the number of clubs, we are one of the leading owners and operators of fitness clubs in the United States, particularly in the Northeast and Mid-Atlantic regions. As of December 31, 2019, we owned and operated 186 fitness clubs (“clubs”) and collectively served approximately 605,000 members under various brand names, primarily located in the United States.

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Brand
 
Count
New York Sports Clubs
 
99
 
Boston Sports Clubs
 
31
 
Washington Sports Clubs
 
9
 
Philadelphia Sports Clubs
 
5
 
Lucille Roberts
 
16
 
Total Woman Gym and Spa
 
11
 
Palm Beach Sports Clubs
 
3
 
Christi’s Fitness
 
1
 
Around the Clock Fitness
 
6
 
LIV Fitness
 
2
 
New York Sports Clubs - Switzerland
 
3
 
 
 
186
 
We develop clusters of clubs to serve densely populated metropolitan regions and we service such populations by clustering clubs near the highest concentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban or suburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the active mature market. In each of our main regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities.
In 2019, we opened seven clubs, six of which were obtained through acquisition, and closed six clubs. In 2018, we acquired 25 clubs and constructed and opened one new club. In 2018, we also closed six clubs and transitioned one to a licensed location.
Over our 46-year history, since incorporating in 1973, we have developed and refined our club formats, which allows us to cost-effectively construct and efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 19,000 square feet, while our multi-recreational clubs average approximately 40,000 square feet. The aggregate average size of our clubs is approximately 26,000 square feet. Our clubs typically have an open fitness area to accommodate cardiovascular and strength-training equipment, as well as special purpose rooms for group fitness classes and other exercise programs. We seek to provide a broad array of high-quality exercise programs and equipment that are popular and effective, promoting a quality exercise experience for our members. When developing clubs, we carefully examine the potential membership base and the likely demand for supplemental offerings such as swimming, basketball, children’s programs, tennis or squash and, provided suitable real estate is available, we will add one or more of these offerings to our fitness-only format. For example, a multi-recreational club in a family market may include Sports Clubs for Kids programs, which can include swim lessons and sports camps for children.
Industry Overview
According to the most recent information released by the International Health, Racquet and Sports Club Association (“IHRSA”), the U.S. health club industry posted growth in revenue, memberships, and number of club locations. Revenue grew to $32.3 billion in 2018 from $30.0 billion in 2017, while membership increased to 62.4 million in 2018 from 60.9 million in 2017. The U.S. club count rose to 39,570 sites in 2018 from 38,477 sites in 2017. Research shows that about one out of five Americans belonged to at least one health club or studio. Since 2008, membership has grown by 37%, while the total number of club-goers has increased by 34%. The total number of health club visits has also increased, amounting to 6.1 billion visits in 2018, up from 4.3 billion in 2008.
According to the Centers for Disease Control and Prevention, state prevalence of obesity continued to remain high across the country in 2018, with no state with a prevalence of obesity less than 20%. In 2018, 48 states had a prevalence of obesity of 25% or more and 31 of these states had a prevalence of obesity 30% or more. As healthcare costs continue to rise in the U.S., some of the focus on combating obesity and other diseases is being directed at prevention. Both government and medical research has shown that exercise and other physical activity plays a critical role in preventing obesity and other health conditions, thereby reducing healthcare costs for treating obesity related sicknesses.
As the focus on exercise and overall healthy lifestyles continue to impact the health club industry, we believe that we are well positioned to benefit from these dynamics as a large operator with recognized brand names, leading regional market shares and an established operating history.

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Competitive Strengths
We believe the following competitive strengths are instrumental to our success:
Strong market position with leading brands. Based on number of clubs, we are one of the largest owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States. Our strong real estate presence in the New York, Boston, Washington, D.C., and Philadelphia regions enhances convenience to our members. We attribute our positions in these markets in part to the strength of our localized owner and operator brand names, which foster recognition as a local network of quality fitness clubs. Over the last two years, we have expanded into California, Florida and Puerto Rico through acquisitions of existing or established brands.
Regional clustering strategy provides significant benefits to members and corporations. By operating a network of clubs in a concentrated geographic area, the value of our memberships is enhanced by our ability to offer members access to multiple clubs in our network, which provides the convenience of having fitness clubs near a member’s workplace and home. This is also a benefit to our corporate members, as many corporations have employees that will take advantage of multiple gym locations. Approximately half of our members currently have memberships that allow them to use multiple clubs, and because these memberships offer enhanced privileges and greater convenience, they typically generate higher monthly dues than our single club memberships in each respective region. Regional clustering also allows us to provide special facilities to all of our members within a local area, such as swimming pools and squash, tennis and basketball courts, without offering them at every location. In the year ended December 31, 2019, approximately 25% of all club usage was by members visiting clubs other than their home clubs.
A leveraged operating model designed for operational efficiencies. As of December 31, 2019, we owned and operated 186 fitness clubs under various brand names, primarily located in the United States, making us one of the leading owners and operators of fitness clubs in the country. Our portfolio of distinct brands across our regions, combined with our size and scale which allows for strategic and advantageous partnerships with third-party vendors and suppliers, gives us a competitive advantage in the fitness market. We believe that our model enables us to scale more rapidly than our competitors. We have greater resources, which allows us to react to changes in pricing, marketing, and trends in the industry more quickly or effectively than fitness club operators. We may secure better terms from vendors and devote more resources to technology infrastructure, fulfillment and marketing. We also focus our growth in areas we believe allow us to continue to gain efficiencies through leveraging our fixed costs. We believe we can improve financial performance by continuing to reduce expenses through operational efficiencies, leveraging technology and improving labor planning. In addition, we seek to grow our membership revenues in existing clubs through membership growth, optimizing dues and member retention. We also intend to grow our ancillary and other non-membership revenues through a continued focus on increasing the additional value-added services that we provide to our members.
Expertise in site selection. We believe that our expertise in site selection for potential acquisitions and new clubs provides an advantage over our competitors given the complex real estate markets in the metropolitan areas in which we operate and the relative scarcity of suitable sites. Before opening or acquiring a new club, we undertake a process involving financial modeling, site selection and negotiation of lease and acquisition terms to ensure that a potential location meets our criteria for a model club. We believe that there are barriers to entry, particularly, in our metropolitan areas, including restrictive zoning laws, lengthy permit processes and a shortage of appropriate real estate, which could discourage any large competitor from attempting to open a chain of clubs in these markets. We believe that potential new entrants would need to establish or acquire a large number of clubs in a market to compete effectively with us. These barriers of entry are significant in our metropolitan regions; however, they are not as challenging in our surrounding suburban locations.
Business Strategy
In the long-term, we seek to maximize our net member growth, revenues, earnings and cash flows using the following strategies:
Growth through acquisitions. We plan to continue to expand our club base through selective acquisitions. This is an important element of our corporate strategy as it strengthens our competitive position and expands and enhances the services that we can offer to members. In 2019, we acquired six clubs and constructed and opened one new club. We continuously look to acquire selective locations to continue our expansion of club offerings, including clubs outside of our current regions. In the event we build and/or acquire additional clubs, the club expansion is expected to be funded with cash on hand or through internally generated cash flows. We may also consider certain acquisitions other than health clubs to diversify the business while enhancing shareholder value.
Grow membership revenues. We seek to grow our membership revenues in existing clubs through driving membership growth, optimizing dues and member retention. We believe our offerings are compelling because we include group exercise

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classes, top of the line equipment, pools and courts in the price of certain memberships, when available. We will continue to consider and make pricing adjustments in order to increase revenue while also driving membership growth.
Grow ancillary and other non-membership revenues. We intend to grow our ancillary and other non-membership revenues through a continued focus on increasing the additional value-added services that we provide to our members. We offer a multi-session personal training membership product and fee-based Small Group Training classes to generate additional revenue in most of our clubs. In addition, we offer Sports Clubs for Kids programs and spa services at select clubs.
Optimization of our clubs. We remain committed to optimizing our existing club base, including club closures when appropriate. We expect these profit margin initiatives will enable us to improve in club level economics across our portfolio, and to offset the competitive pressure in the geographic regions in which we compete.
Retain members by focusing on the member experience. Our Company’s mission is “Bring the best out of every body.” By building and nurturing a strong consumer centric culture, we are able to provide a clear road map for how we serve our members and deliver a superior experience. We tailor the hours of each club to the needs of the specific member demographic utilizing each club and offer a variety of ancillary services, including personal training, group classes, Small Group Training programs, Sports Clubs for Kids programs and spa services. We offer a variety of different sports facilities in our clubs; modern, varied and well-maintained exercise and fitness equipment; and an assortment of additional amenities including access to babysitting. Through hiring, developing and training a qualified and diverse team that is passionate about fitness and health; maintaining and enhancing our programs and services; continually increasing our attention to individual member needs; and investing in our digital ecosystem, we expect to demonstrate our commitment to increase the quality of the member experience, and thereby increase net membership. To better measure the member experience, we utilize social media to help analyze the areas we can improve upon as well as the areas in which the members are satisfied overall.
Provide fitness experiences and services. We help educate our members to best practices in their pursuit of fitness, wellness and healthy lifestyles and each of our clubs has an array of cardiovascular machines, resistance training equipment, free weights and functional training zones. We have technicians who service and maintain our equipment on a timely basis. In addition, we have personal viewing television screens on most pieces of cardiovascular equipment which accommodate individual preferences and viewing, and many cardio machines now include embedded technology that offers both entertainment and tracking features that record workout results and communicate with many mobile technologies. Most clubs have between one and three studios used for exercise classes, including at least one large studio used for most group exercise classes, a cycling studio and a mind and body studio used for yoga and Pilates classes. We further offer a large variety of group fitness classes at each club and these classes are accessible to all members. The volume and variety of activities at each club allow each member to enjoy the club, whether customizing their own workout or participating in group activities and classes. In addition, we have a functional training zone within most of our clubs that feature an array of innovative equipment designed to maximize the member’s workout. The functional training zones include a variety of functional training equipment, such as Total Body Resistance Exercise (“TRX” brand) suspension training frame, kettlebells, battle ropes and power sleds. Our functional training zones are open to members for free self-guided workouts, personal training sessions and fee-based programs.
Marketing
Our in-house marketing team is responsible for brand positioning, brand strategy, lead generation, sales support and product innovation for the Company and all of its subsidiaries. The primary objective is to ensure that our brands seize market share and opportunities through well-defined and coordinated go-to-market strategies. We are organized to enable close collaboration between our marketing, sales and operations staff, which helps to align efforts around operational objectives and new product development. We seek to inspire brand experiences and in doing so, drive sustainable and quality growth, while building a strong reputation and loyalty with both existing members and future members. In order to have credible and authentic connections to create such desirability with our audience, we utilize a market segmentation strategy. A marketing segmentation strategy divides our target market into subgroups, whereby consumers in each of these subgroups share one or more characteristics. Using this knowledge, we develop specific plans, including personalized and mass marketing, to reach these targeted customers effectively. We seek to identify and understand consumers’ individual motivations and goals in an effort to create meaningful products, services and experiences that build a lasting impression and brand loyalty.
Sales
We sell our memberships primarily through three channels: direct sales at the club level; through corporate and group sales; and through our websites. Through our corporate and group sales approach we concentrate on building long-term relationships with local and regional companies, organizations and other large groups.
We sell individual memberships online for our standard membership types and the websites enable us to sell memberships for pre-established corporate and group programs. The websites also allow our members to give us direct feedback about our

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service levels and enables prospective members to sign up for a free one-day pass, free class trial or purchase a variety of short term guest passes. The online sales channel offers a high degree of convenience for customers who know and trust our brand and do not require up-front interaction with a membership sales consultant to make their decision. The websites also provide information about the respective club locations, program offerings, exercise class schedules and sales promotions.
Memberships
We offer various types of memberships, including single club access and variations of multiple club access. At certain locations, we also offer memberships that include both gym access and spa services. We also recently added an Elite membership option that includes Flywheel classes.
The membership prices are dependent on club location and whether the member joins under a “month-to-month” or “commit” contract. Under the commit contract, new members commit to a one-year membership, generally at a lower monthly rate than a month-to-month membership. A member may cancel a commit membership at any time for a fee. When the commit contract period is over, they retain membership as a month-to-month member until they choose to cancel. As of December 31, 2019, approximately 86% of our total members were on a month-to-month basis.
In joining a club, a new member signs a membership agreement that typically obligates the member to pay fees (“Joining Fees”) including a one-time initiation fee and the first annual fee. The annual fee is also charged on each anniversary of the enrollment date, however not considered a joining fee after the first payment. As of December 31, 2019, approximately 99% of our members pay their membership dues through monthly electronic fund transfers (“EFT”), with EFT membership revenue constituting approximately 75% of total consolidated revenue for the year ended December 31, 2019.
Usage
Our total club usage, based on the number of member visits, was approximately 29 million and 30 million member visits for the years ended December 31, 2019 and 2018, respectively. In the year ended December 31, 2019, approximately 25% of total usage or club visits was to members’ non-home clubs, indicating that our members take advantage of our network of clubs. Our membership plans allow for club members to elect to pay a per visit fee to use clubs that are not defined in their membership plan.
Non-Membership Revenue
The table below presents non-membership revenue (in thousands) components as a percentage of total revenue for the years ended December 31, 2017 through 2019.
 
For the Years Ended December 31,
 
2019
 
%
 
2018
 
%
 
2017
 
%
Total revenue
$
466,760

 
100.0
%
 
$
443,094

 
100.0
%
 
$
403,042

 
100.0
%
Non-Membership Revenue:
 
 
 
 
 
 
 
 
 
 
 
Personal training revenue
76,763

 
16.4
%
 
73,458

 
16.5
%
 
69,735

 
17.3
%
Other ancillary club revenue(1)
24,393

 
5.2
%
 
23,293

 
5.3
%
 
17,197

 
4.3
%
Fees and Other revenue(2)
6,426

 
1.4
%
 
5,737

 
1.3
%
 
5,876

 
1.4
%
Total non-membership revenue
$
107,582

 
23.0
%
 
$
102,488

 
23.1
%
 
$
92,808

 
23.0
%
 
(1)
Other ancillary club revenue primarily consists of Sports Clubs for Kids, Small Group Training, racquet sports and spa.
(2)
Fees and other revenue primarily consists of rental income, marketing revenue, management fees and laundry service fees.
Club Format and Locations
Our clubs are generally located in middle- or upper-income residential, commercial, urban and suburban neighborhoods within major metropolitan areas that are capable of supporting the development of a cluster of clubs. Our clubs typically have high visibility and are easily accessible. In the New York, Boston, Washington, D.C. and Philadelphia metropolitan regions, we have created clusters of clubs in urban areas and their commuter suburban areas aligned with our operating strategy of offering our target members the convenience of multiple locations close to where they live and work, reciprocal use privileges, and standardized facilities and services.
Approximately 67% of our existing clubs are fitness-only and 33% are multi-recreational. Our fitness-only clubs generally range in size from 10,000 to 25,000 square feet and average approximately 19,000 square feet. Our multi-recreational clubs

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generally range in size from 20,000 to 65,000 square feet, with one club being approximately 200,000 square feet. The average multi-recreational club size is approximately 40,000 square feet.
Our existing club base consists of clubs which we have developed and constructed as well as clubs we have acquired. Over the past three years from January 1, 2017 to December 31, 2019, we opened or acquired 53 clubs, closed or relocated 17 clubs, and transitioned one club to a licensed location. Currently, 93 of our clubs, or approximately 50% of our existing club base, were from acquisitions of privately owned single and multi-club businesses. In the year ended December 31, 2019, we opened or acquired seven clubs and closed six clubs. In 2018, we opened or acquired 26 clubs, closed six clubs and transitioned one to a licensed location.
Our facilities include a mix of both leased and owned cardiovascular and strength equipment from some of the best manufacturers. At many locations, additional amenities are also offered, including swimming pools, racquet and basketball courts, functional training zones and babysitting services. Personal training services are offered for an additional charge. Our fee-based programs offered at many of our clubs, include personal training, Small Group Training, children’s programs, and summer camps for kids.
Our clubs also feature personal entertainment units. The units are typically mounted on or near individual pieces of cardiovascular equipment and are equipped with a flat-panel color screen for television viewing. We believe our members prefer the flexibility to view and listen to the programs of their choice during their cardiovascular workout. Recently, most manufacturers are including embedded screens on their newest cardio fitness equipment which offer enhancements to both on-demand entertainment along with workout data tracking and connectivity to most mobile technologies.
Club Services and Operations
Our clubs are structured to provide an enhanced member experience through effective execution of our operating plan. Our club and support team members are the key to delivering a valued member experience and our operations are organized to maximize their overall effectiveness. Our club operations include the following:
Management. We believe that our success is largely dependent on the selection and development of our team members. Our management structure is designed to strike the right balance between consistent execution of operational excellence and nurturing a leader’s capacity for entrepreneurial decision making. Our learning and development system allows for all club positions to receive training on the key elements of their role as well as development training for growth. We believe a critical component to our growth is our ability to leverage internally-developed management talent.
Functional Support. Functional teams provide technical expertise and support designed to drive the member experience and revenue growth in specific areas of our clubs’ services, including sales and marketing, fitness and ancillary programming, learning and development, as well as facility management and member service.
Driving excellence in fitness and ancillary programming is critical to our success. Members receive an introductory session with a fitness manager or a personal trainer who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment session includes a workout evaluation, cardio, strength and endurance testing, and movement screening. Members who elect to receive personal training can benefit from one-on-one coaching and guidance, with refreshed programs that evolve as the members achieve their fitness goals. The personal training membership product provides members with a certified personal trainer who works with the member to create an individualized goal-based program. Our fitness teams are trained to provide superior fitness solutions to address member needs. We believe the qualifications of the personal training staff help to ensure that members receive a consistent level of quality service throughout our clubs and that our personal training programs provide valuable guidance to our members as well as a significant source of incremental revenue for us. We believe that members who participate in personal training programs typically have a longer membership life.
Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors teach a variety of classes, including dance, cycling, strength conditioning, boxing, yoga and Pilates. Instructors report through local club management and are further supported by regional managers responsible for ensuring consistency in class content, scheduling, training and instruction. We also provide Small Group Training offerings, which are fee-based programs that have smaller groups, and provide more focused, and typically more advanced classes.
In addition to group exercise, we offer a variety of ancillary programming for children under our Sports Clubs for Kids brand. As of December 31, 2019, Sports Clubs for Kids was being offered in certain club locations throughout our regions. Our Sports Clubs for Kids programming positions our multi-recreational clubs as family clubs, which we believe provides us with a competitive advantage. Depending upon the facilities available at a location, Sports Clubs for Kids programming can include traditional youth offerings such as day camps, sports camps, swim lessons, hockey and soccer leagues, gymnastics, dance, and birthday parties. It also can include non-competitive “learn-to-play” sports programs.

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Our facilities and equipment management teams are dedicated to ensuring our clubs and fitness equipment are operating at the highest standard of performance for our members. Local teams are deployed to provide on-site support to clubs as needed.
Our club support and member services groups act as a coordinating point for all departments, supporting excellence in program execution and ensuring consistency of policies and procedures across the entire organization that support the member experience.
Centralized Information Systems
We recognize the value of enhancing and extending the uses of information technology (“IT”) in virtually every area of our business. Our IT strategy is aligned to support our business strategy and operating plans. We maintain an ongoing comprehensive program to monitor, replace or upgrade key technology services and infrastructure.
All of our clubs use a third-party hosted management system to process memberships, bill members, process point of sales transactions, and track member usage of the clubs. In addition, the management system tracks and analyzes key operating measurements such as membership statistics, cancellations, cross-club utilization, member tenure, and demographic profiles.
We continue to create a more customizable and efficient experience for members through updated digital tools, which included an enhanced website and mobile application. These digital tools enable feature membership sign up, club location search, class schedules and booking, training information, custom profiles for group fitness instructors and trainers. In addition, members are able to customize their group fitness experience based on fitness goals and preferences through a personalized search feature. We continue to enhance the digital tools accessibility to increase our online presence and member engagement.
Our back-office computer systems are comprised of a variety of technologies designed to assist in the management and analysis of our revenues, costs and key operational metrics, as well as support the daily operations of our clubs and corporate offices. These systems include an on premise financial system, a third-party hosted data warehouse, a third-party hosted telephone system and call center software to manage and track member service experiences.
We regularly implement cost effective technology solutions to accommodate growth, provide network redundancy, secure operating practices, better manage telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical architecture, including business continuity and recovery. Improvements in the IT infrastructure will continue to be made in the future in order to better serve our business needs. In 2020, we expect to upgrade the network infrastructure, bandwidth, and club Wi-Fi at our current clubs.
Intellectual Property
We have registered various trademarks and service marks with the U.S. Patent and Trademark Office, including, NEW YORK SPORTS CLUBS and NYSC, WASHINGTON SPORTS CLUBS and WSC, BOSTON SPORTS CLUBS and BSC, PHILADELPHIA SPORTS CLUBS and PSC, LUCILLE ROBERTS, TMPL, SPORTS CLUBS FOR KIDS, COMPANIESGETFIT.COM, MASTER CLASS, LATITUDE SPORTS CLUBS, AROUND THE CLOCK, TOTAL WOMEN GYM AND SPA, CHRISTI’S FITNESS, LIV FITNESS CLUBS, WESTBORO TENNIS & SWIM CLUB and PALM BEACH SPORTS CLUBS. We continue to register other trademarks and service marks. We believe that our rights to these properties are adequately protected.
Competition
The fitness club industry is highly competitive and continues to become more competitive. In each of the regions in which we operate, we compete with other fitness clubs, physical fitness and recreational facilities.
We consider the following groups to be our primary competitors in the health and fitness industry:
commercial, multi-recreational and fitness-only chains;
private studios and other boutique fitness offerings;
the YMCA and similar non-profit organizations;
physical fitness and recreational facilities established by local governments, hospitals and businesses;
exercise and small fitness clubs; racquet, tennis and other athletic clubs;
amenity gyms in apartments, condominiums and offices;

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weight-reducing salons;
country clubs; 
university fitness centers;
the home-use fitness equipment industry; and
online fitness coaching.
The principal methods of competition include pricing and ease of payment, required level of members’ contractual commitment, level and quality of services, age of facility and equipment, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to access to transportation and pedestrian traffic.
We consider our traditional service offerings to be in the mid-tier of the value/service proposition and designed to appeal to a large portion of the population who utilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to grow in our regions over the last few years. These clubs have attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs.
We also face competition from club operators offering comparable or higher pricing with higher levels of service. Larger outer-suburban family fitness centers, in areas where suitable real estate is more likely to be available, also compete effectively against our suburban formats. Additionally, we face competition from the rising popularity and demand for private studios offering niche boutique experiences.
There can be no assurance that we will be able to compete effectively in the future in the regions in which we operate. Competitors, who may include companies that are larger and have greater resources than us, may enter these regions to our detriment. These competitive conditions may result in increased price competition and limit our ability to attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularly large multi-facility operators that are able to compete for attractive acquisition candidates and/or newly constructed club locations. This increased competition could increase our costs associated with expansion through both acquisitions and for real estate availability for newly constructed club locations.
We believe that our market leadership, experience and operating efficiencies enable us to provide the consumer with a superior product in terms of convenience, quality service and affordability. We believe that there are barriers to entry in our metropolitan areas, including restrictive zoning laws, lengthy permit processes and a shortage of appropriate real estate, which could discourage any large competitor from attempting to open a chain of clubs in these regions. However, such a competitor could enter these regions more easily through one, or a series of, acquisitions. These barriers of entry are significant in our four metropolitan regions; however, they are less challenging in our surrounding suburban locations.
Seasonality of Business
Seasonal trends have a limited effect on our overall business. Generally, we experience greater membership through increased sales at the beginning of each year and experience an increased rate of membership attrition during the summer months. In addition, during the summer months, we experience a slight increase in operating expenses due to our outdoor pool and summer camp operations, generally matched by seasonal revenue recognition from season pool memberships and camp revenue.
Government Regulation
Our operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs are located, including general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that prescribe certain forms and provisions of membership contracts and that govern the advertising, sale, financing and collection of such memberships as well as state and local health regulations.
Statutes and regulations affecting the fitness industry have been enacted in jurisdictions in which we conduct business and other states into which we may expand in the future have adopted or may adopt similar legislation. Typically, these statutes and regulations prescribe certain forms and provisions of membership contracts, afford members the right to cancel the contract within a specified time period after signing or in certain circumstances, such as for medical reasons or relocation to a certain distance from the nearest club, require an escrow of funds received from pre-opening sales or the posting of a bond or proof of financial responsibility and may establish maximum prices for membership contracts and limitations on the term of contracts. The specific procedures and reasons for cancellation vary due to differing laws in the respective jurisdictions, but in each instance, the canceling member is entitled to a refund of unused prepaid amounts. We are also subject to numerous other types

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of federal and state regulations governing the sale of memberships. These laws and regulations are subject to varying interpretations by a number of state and federal enforcement agencies and courts. We maintain internal review procedures to comply with these requirements and believe that our activities are in substantial compliance with all applicable statutes, rules and decisions.
We primarily accept payments for our memberships through EFT from credit cards, and, therefore, we are subject to both federal and state legislation and certification requirements, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislation requiring gyms and health clubs to offer non-automatic renewal membership option at all times and/or limit the duration for which gym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements, if any, and compliance with these laws, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health club statutes provide harsh penalties for violations, including membership contracts being void or voidable.
Additionally, the collection, maintenance, use, disclosure and disposal of individually identifiable data by our businesses are regulated at the federal, state and provincial levels as well as by certain financial industry groups, such as the Payment Card Industry Organization and the National Automated Clearing House Association. Federal, state and financial industry groups may also consider from time to time new privacy and security requirements that may apply to our businesses and may impose further restrictions on our collection, disclosure and use of individually identifiable information that are housed in one or more of our databases.
The tax treatment of membership dues varies by state. Some states in which we operate require sales tax to be collected on membership dues and personal training sessions. Several other states in which we operate have proposed similar tax legislation. These taxes have the effect of increasing the payments by our members, which could impede our ability to attract new members or induce members to cancel their membership.
Changes in any statutes, rules or regulations could have a material adverse effect on our financial condition and results of operations.
Employees
On December 31, 2019, we had approximately 9,200 employees, approximately 1,900 of whom were employed full-time. We are not a party to any collective bargaining agreement with our employees. We operate with an open door policy and encourage a culture of openness, innovation and inclusiveness that creates a high level of work accountability. We have good relations with our employees and are proud to offer them a great work environment with opportunities for growth and development.
Available Information
We make available through our web site at https://www.townsportsinternational.com in the “Investor Relations — SEC Filings” section, free of charge, all reports and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains a website for the foregoing information at http://www.sec.gov. Occasionally, we may use our web site as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at https://www.townsportsinternational.com. In addition, you may automatically receive email alerts and other information about the Company by enrolling through the “Email Alerts” section at https://www.townsportsinternational.com.
The foregoing information regarding our website and its content is for convenience only. The content of our website is not deemed to be incorporated by reference into this report nor should it be deemed to have been filed with the SEC.

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Item 1A.     Risk Factors
Investors should carefully consider the risks described below and all other information in this Annual Report. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business and operations. If any of the following risks actually occur, our business, financial condition, cash flows or results of operations could be materially adversely affected.
Risks Related to Our Business
We have suffered a major interruption in the operation of our business as a result of emergency shutdowns of our clubs mandated by state and local governments across the United States in response to the outbreak of COVID-19. Mandatory closures and other related effects of the COVID-19 pandemic may cause a material adverse effect to our business.
On March 16, 2020, we were mandated to close approximately 95% of our clubs pursuant to the exercise of emergency executive authority invoked by state and local governments in order to combat the spread of the COVID-19 pandemic. Our Florida clubs continue to operate, however it is likely they will eventually be mandated to close as well. We informed all non-executive employees working at clubs which have been ordered to close that their employment with the Company had been terminated with immediate effect. The full extent and duration of such closures and their impacts over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19 and the extent and effectiveness of containment actions taken.
The COVID-19 pandemic appears likely to cause significant economic harm across the United States, and the negative economic conditions that result may reduce consumer demand in our industry. We may experience a material loss of customers, revenue and market share as a result of the suspension of our operations. We expect to experience a significant increase in membership terminations during this time, and we may be unable to recover these customers. Our ancillary revenue is derived primarily from the operation of our clubs and will also be negatively impacted by club closures. Consumer habits may also be altered in the medium to long term by restrictions on movement which may increase the prevalence of home, amenity or virtual gym arrangements that compete with our clubs. Negative economic conditions, a decrease in our revenue and consequent longer term trends harmful to our business may all exert pressure on our Company during the pendency of emergency restrictions on our operations and beyond.
We cannot predict with certainty when we may be permitted to re-open our locations and we may face significant obstacles to re-opening our clubs. Our need to hire, train and retain new staff may delay re-opening of our temporarily closed locations and inhibit profitability. The suspension of operations mandated in response to COVID-19 and the consequent loss of revenue and cash flow during this period may make it difficult for us to obtain capital necessary to fund the re-opening and maintenance of our clubs.
We have taken some immediate steps to reduce operating costs and to conserve cash. We informed all non-executive employees working at clubs which have been ordered to close that their employment with us was terminated with immediate effect. On March 13, 2020, we borrowed $12.5 million from our 2013 Revolving Credit Facility and we continue to actively manage our cash flow on a daily basis. Additionally, we are undertaking conversations with landlords to discuss rent relief during this period, which may not be successful.
These recent events further contribute to conditions that raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. Under the terms of the 2013 Term Loan Facility, this is considered an event of default which allows the lenders to call the debt in advance of maturity.
We are dependent on our Chief Executive Officer. In addition, the loss of key personnel and/or failure to attract and retain highly qualified personnel could make it more difficult for us to develop our business and enhance our financial performance.
We are dependent on the continued services of our senior management team, including our Chief Executive Officer, Patrick Walsh. We believe the loss of Mr. Walsh could have a material adverse effect on us and our financial performance. Currently, we do not have any long-term employment agreements with our executive officers, and we may not be able to attract and retain sufficient qualified personnel to meet our business needs.
Our future profitability is not assured.
Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the foreseeable future, if at all. If our revenues decrease in a given period, we may be unable to reduce operating expenses as a significant part of our operating expenses are fixed, which could materially and adversely affect our

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business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for that period and subsequent periods.
We may be unable to attract and retain members, which could have a negative effect on our business.
The performance of our clubs is highly dependent on our ability to attract and retain members, and we may not be successful in these efforts. Most of our members hold month-to-month memberships and accordingly, most members can cancel their club membership at any time without penalty. In addition, we experience attrition and must continually engage existing members and attract new members in order to maintain our membership levels and ancillary sales. There are numerous factors that have in the past and could in the future lead to a decline in membership levels or that could prevent us from increasing our membership, including a decline in our ability to deliver quality service at a competitive cost, the age and condition of our clubs and equipment, the presence of direct and indirect competition in the areas in which the clubs are located, the public’s interest in fitness clubs and general economic conditions. In order to increase membership levels, we may from time to time offer lower membership rates and initiation fees. Any decrease in our average membership rates or reductions in initiation fees may adversely impact our results of operations.
Negative economic conditions, including increased unemployment levels and decreased consumer confidence, have in the past contributed to and in the future could lead to significant pressures and declines in economic growth, including reduced consumer spending. In a depressed economic and consumer environment, consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our services and products and such decline in demand may continue as the economy continues to struggle and disposable income declines. Other factors that could influence demand include increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. As a result of these factors, membership levels might not be adequate to maintain our operations at current levels or permit the expansion of our operations.
In addition, to the extent our corporate clients are adversely affected by negative economic conditions, they may decide, as part of expense reduction strategies, to curtail or cancel club membership benefits provided to their respective employees. Any reductions in corporate memberships may lead to membership cancellations as we cannot assure that employees of corporate customers will choose to continue their memberships without employer subsidies. A decline in membership levels may have a material adverse effect on our business, financial condition, results of operations and cash flows.
The level of competition in the fitness club industry could negatively impact our revenue growth and profitability.
The fitness club industry is highly competitive and continues to become more competitive. In each of the regions in which we operate, we compete with other fitness clubs, private studios, physical fitness and recreational facilities established by local governments, hospitals and businesses for their employees, amenity and condominium clubs, the YMCA and similar organizations and, to a certain extent, with racquet and tennis and other athletic clubs, country clubs, weight reducing salons and the home-use fitness equipment industry. We might not be able to compete effectively in the future in the regions in which we operate. Competitors include companies that are larger and have greater resources than us and also may enter these regions to our detriment. These competitive conditions may limit our ability to increase dues without a material loss in membership, attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularly large multi-facility operators that are able to compete for attractive acquisition candidates or newly constructed club locations, thereby increasing costs associated with expansion through both acquisitions and lease negotiation and real estate availability for newly constructed club locations.
The number of competitor clubs that offer lower pricing and a lower level of service continue to grow in our regions. These clubs have attracted, and may continue to attract, members away from both our fitness-only clubs and our multi-recreational clubs, particularly in the current consumer environment. Furthermore, smaller and less expensive weight loss facilities present a competitive alternative for consumers.
We also face competition from competitors offering comparable or higher pricing with higher levels of service or offerings. Larger outer-suburban, multi-recreational family fitness centers, in areas where suitable real estate is more likely to be available, also compete against our suburban, fitness-only models.
We also face competition from the increased popularity and demand for private studios offering group exercise classes. The prevalence of these smaller studios may compete against our own studio type offerings, such as cycling, yoga and Pilates, as consumers may opt to use these competing studios to fulfill their fitness needs.
In addition, large competitors could enter the urban regions in which we operate to open a chain of clubs in these regions through one, or a series of, acquisitions.

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The success of our business depends on our ability to retain the value of our brands.
Our ability to maintain our brand image and reputation is integral to our business. Maintaining, promoting and growing our brands will depend largely on the success of our marketing efforts and our ability to provide a consistent, high-quality member experience. Our reputation could be jeopardized if we fail to maintain high standards for member experiences, fail to maintain high ethical, social, and environmental standards for all of our operations and activities, or we fail to appropriately respond to concerns associated with any of the foregoing or any other concerns from our members. We could be adversely impacted if we fail to achieve any of these objectives or if the reputation or image of any of our brands is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us, or by us, could damage our reputation and brand image. Damage to our reputation or loss of consumer confidence for any of these reasons may result in fewer memberships sold or renewed, which in turn could materially and adversely affect our results of operations and financial condition.
We continue to experience revenue pressure, which may adversely affect our results or operations and cash flow from operations and we may be compelled to take additional actions which may not be successful in mitigating such effects.
We continue to experience revenue pressure as the fitness industry is highly competitive in the areas in which we operate. We continue to strategize on improving our financial results and focus on increasing membership to increase revenue. We may consider additional actions within our control, including certain acquisitions, licensing arrangements, the closure of unprofitable clubs upon lease expiration and the sale of certain assets.
Our ability to continue to meet our obligations is dependent on our ability to generate positive cash flow from a combination of initiatives, including those mentioned above. It is also important for us to generate positive comparable club revenue. Failure to successfully implement these initiatives could have a material adverse effect on our liquidity and operations, and we would need to implement alternative plans that could include additional asset sales, additional reductions in operating costs, additional reductions in working capital, the deferral of capital expenditures and debt restructuring. There can be no assurance that such alternatives would be available to us or that we would be successful in their implementation.
Low consumer confidence levels, increased competition and decreased spending could negatively impact our financial position and result in club closures and fixed asset and goodwill impairments.
In the years ended December 31, 2019 and 2018, we recognized fixed asset impairment charges of $7.2 million and $2.1 million, respectively, at underperforming clubs and closed six clubs each of these years. Some of our club closures and impairments were due, in large part, to the economic and consumer environment, and increased competition in areas in which our clubs operate. If the economic and consumer environment were to deteriorate or not improve or if we are unable to improve the overall competitive position of our clubs, our operating performance may experience declines and we may need to recognize additional impairments of our fixed assets, operating lease right-of-use assets and goodwill, and may be compelled to close additional clubs. In addition, we cannot ensure that we will be able to replace the revenue lost from closed clubs with other club operations. We will continue to monitor the results and changes in expectations of these clubs closely to determine if additional fixed asset or goodwill impairment charges will be necessary.
Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagious diseases, or threats of terrorist attacks may adversely affect our business, operating results and financial condition.
Our business and operations could be materially and adversely affected by severe weather or outbreaks of pandemic or contagious diseases, threats of terrorist attacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by a widespread regional, national or global health pandemic. A widespread health pandemic or perception of a health pandemic (such as the COVID-19 or Ebola), whether or not traced to one of our clubs, may cause members and prospective members to avoid public gathering places or otherwise change their behaviors and impact our ability to staff our clubs. Outbreaks of disease, such as influenza, could reduce traffic in our clubs. Any of these events would negatively impact our business. In addition, any negative publicity relating to these and other health-related matters may affect members’ perceptions of our clubs, reduce member and prospective member visits to our clubs and negatively impact demand for our club offerings.
For example, in the year ended December 31, 2012, as a result of flooding and power outages caused by Hurricane Sandy, 131 clubs were closed on October 29, 2012, with one club that closed permanently, 16 clubs that remained closed for over a week and one club that was closed for over a year and reopened in December 2013. We cannot predict the impact that any future severe weather events will have on our ability to avoid wide-spread or prolonged club closures. Any such events affecting the areas in which we operate might result in a material adverse effect on our business, financial condition, cash flows and results of operations in the future.

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Further, terrorist attacks, such as the bombings that occurred in Boston, Massachusetts on April 15, 2013 at finish line of the Boston Marathon and the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect our markets, our operating results or the market on which our common stock trades. Our geographic concentration in the major cities in the Northeast and Mid-Atlantic regions of the United States and, in particular, the New York City and Washington, D.C. areas, heightens our exposure to any such future terrorist attacks, which may adversely affect our clubs and result in a decrease in our revenues. The potential near-term and long-term effect these attacks may have for our members, the markets for our services and the market for our common stock are uncertain; however, their occurrence can be expected to further negatively affect the U.S. economy generally and specifically the regional markets in which we operate. The consequences of any terrorist attacks or any armed conflicts are unpredictable; and we may not be able to foresee events that could have an adverse effect on our business.
Our dependence on a limited number of suppliers for equipment and certain products and services could result in disruptions to our business and could adversely affect our revenues and gross profit.
Equipment and certain products and services used in our clubs, including our exercise equipment and point-of-sale software and hardware, are sourced from third-party suppliers. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate our business efficiently and consistently meet our business requirements. The ability of these third-party suppliers to successfully provide reliable and high-quality services is subject to technical and operational uncertainties that are beyond our control, including, for our overseas suppliers, vessel availability and port delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing clubs and open new clubs on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers encounter financial hardships unrelated to the demand for our equipment or other products or services, we may not be able to identify or enter into agreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would be time consuming and expensive and may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity of equipment we require to open new and refurbish existing clubs, our suppliers encounter difficulties meeting our demands for products or services, our websites experience delays or become impaired due to errors in the third-party technology or there is a deficiency, lack or poor quality of products or services provided, our ability to serve our members and grow our brand would be interrupted. If any of these events occur, it could have a material adverse effect on our business and operating results.
Our trademarks and trade names may be infringed, misappropriated or challenged by others.
We believe our brand names and related intellectual property are important to our business. We seek to protect our trademarks, trade names and other intellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could cause membership levels to decline and make it more difficult to attract new members.
Use of social media may adversely impact our reputation or subject us to fines or other penalties.
There has been a substantial increase in the use of social media platforms, including blogs, social media websites and other forms of internet-based communication, which allow individuals’ access to a broad audience of consumers and other interested persons. Negative commentary about us may be posted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available information about health clubs and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our clubs, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our clubs. Social media platforms may be used to attack us, our information security systems and our reputation, including through use of spam, spyware, ransomware, phishing and social engineering, viruses, worms, malware, distributed denial of service attacks, password attacks, “Man in the Middle” attacks, cybersquatting, impersonation of employees or officers, abuse of comments and message boards, fake reviews, doxing, swatting, and illegal mobile applications that infringe our property rights. The inappropriate use of social media vehicles could lead to litigation or result in negative publicity that could damage our reputation.
We also use social medial platforms as marketing tools. For example, we maintain Facebook, Instagram and Twitter accounts. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.

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If we fail to comply with applicable privacy, security, and data laws, regulations and standards, our business could be materially and adversely affected.
We use electronic mail (“email”), text messages and phone calls to market our services to potential members and as a means of communicating with our existing members. The laws and regulations governing the use of telephonic communication, including but not limited to emails, text messages and phone calls, for commercial purposes continue to evolve. Because messaging and phone calls are important to our business, if we are unable to successfully deliver messages or make phone calls to existing members and potential members, if there are legal restrictions on delivering these messages to consumers, or if consumers do not or cannot receive our messages or phone calls, our revenues and profitability could be adversely affected. If new laws or regulations are adopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to call or send email or text messages to our members or potential members, we may not be able to communicate with them in a cost-effective manner and it may limit our ability to utilize such forms of communication. In addition to legal restrictions on the use of emails, text messages and phone calls for commercial purposes, service providers and others attempt to block the transmission of unsolicited messages, commonly known as “spam.” Many service providers have relationships with organizations whose purpose it is to detect and notify the service providers of entities that the organization believes is sending unsolicited messages. If a service provider identifies messaging from us as “spam” as a result of reports from these organizations or otherwise, we could be placed on a restricted list that will block our messages to members or potential members. If we are restricted or unable to communicate through emails, text messages or phone calls with our members and potential members as a result of legislation, regulation, blockage or otherwise, our business, operating results and financial condition could be adversely effected.

If we are unable to anticipate and satisfy consumer preferences and shifting views of health and fitness, our business may be adversely affected.
Our success depends on our ability to anticipate and satisfy consumer preferences relating to health and fitness. Our business is and all of our services are subject to changing consumer preferences that cannot be predicted with certainty. Developments or shifts in research or public opinion on the types of health and fitness services we provide could negatively impact the business or consumers’ preferences for health and fitness services could shift rapidly to different types of health and fitness centers; and we may be unable to anticipate and respond to shifts in consumer preferences. It is also possible that competitors could introduce new products and services that negatively impact consumer preference for our business model. Failure to predict and respond to changes in public opinion, public research and consumer preferences could adversely impact our business.
If we are unable to identify and acquire suitable sites for new clubs, our revenue growth rate and profits may be negatively impacted.
To successfully expand our business over the long term, we must identify and acquire sites at acceptable costs that meet our site selection criteria. In addition to finding sites with the right geographical, demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in the region. We face competition from other health and fitness center operators for sites that meet our criteria and as a result, we may lose those sites or we could be forced to pay higher prices for those sites. If we are unable to identify and acquire sites for new clubs on attractive terms, our revenue, growth rate and profits may be negatively impacted. Additionally, if our analysis of the suitability of a site is incorrect, we may not be able to recover our capital investment in developing and building a new club.
Acquisitions could result in operating difficulties, dilution, and other consequences that may adversely impact our business and results of operations.
Part of our key strategy is to grow through acquisitions. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. There can be no assurance that we will continue to be able to successfully integrate these acquisitions into our existing business without substantial costs, delays or other operational or financial difficulties. The areas where we face risks include:
diversion of management time and focus from operating our business to acquisition integration challenges;
difficulties in the transition of acquired members onto our systems timely;
difficulties in accounting for acquired companies that remain under management contracts relating to accounting for operating results and vendor and payroll information;
challenges related to the compliance with local laws when acquiring into new jurisdictions;

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the acquired businesses failing to provide, or delays in realizing, the benefits originally anticipated;
integration of the acquired company's accounting, human resource, and other administrative systems, and coordination of sales and marketing functions;
challenges related to the lack of experience in operating in the geographical regions of the acquired business;
unanticipated contract or regulatory issues and the assumption of, and exposure to, unknown or contingent liabilities of the acquired businesses.
We anticipate that any future acquisitions we pursue as part of our business strategy may be financed through a combination of cash on hand, operating cash flow and availability under our existing credit facility. If new debt is added to current debt levels, or if we incur other liabilities, including contingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business and financial performance, which could materially adversely affect our financial condition and operations.
If an acquisition is not successfully completed or integrated into our existing operations or does not result in the benefits we expect, as a result of the factors mentioned above or otherwise, our business, financial condition or results of operations may be adversely affected. In addition, failure to integrate successfully or realize the anticipated business opportunities and growth prospects from our acquisitions could result in unanticipated expenses and losses and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing operations. Accordingly, in connection with any acquisition, there can be no assurance as to whether or when any benefits or cost synergies we hope to achieve will occur, or the extent to which they actually will be achieved.
We have significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs and the need to generate significant cash flow to meet our lease obligations.
We have, and will continue to have, significant lease obligations. We lease substantially all of our fitness club locations pursuant to long-term leases (generally 15 to 20 years, plus option periods).  During the next five years, or the period from January 1, 2020 through December 31, 2024, we have leases for 26 club locations that are due to expire without any renewal options, three of which expire in 2020, and 9 club locations that are due to expire with renewal options. For leases with renewal options, several of them provide for our unilateral option to renew for additional rental periods at specific rental rates (for example, based on the consumer price index or stated renewal terms already set in the leases) or based on the fair market rate at the location.  Our ability to negotiate favorable terms on an expiring lease or to negotiate favorable terms on leases with renewal options, or conversely for a suitable alternate location, could depend on conditions in the real estate market, competition for desirable properties and our relationships with current and prospective landlords or may depend on other factors that are not within our control. Any or all of these factors and conditions could negatively impact our revenue, growth and profitability.
In addition to future minimum lease payments, some of our club leases provide for additional rental payments based on a percentage of net sales, or “percentage rent,” if sales at the respective clubs exceed specified levels, as well as the payment of common area maintenance charges, real property insurance, and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions.
We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flow required to satisfy our obligations under the leases increases our vulnerability to adverse changes in general economic, industry, and competitive conditions, and could limit our ability to fund working capital, incur indebtedness, and make capital expenditures or other investments in our business.
If an existing or future club is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for clubs that we close could materially adversely affect us.
We may experience prolonged periods of losses in our recently opened clubs and when we open new clubs in existing regions our comparable club revenue growth and our operating margins may be negatively impacted.
Upon opening a club, we typically experience an initial period of club operating losses. The sale of memberships typically generates insufficient revenue for the club to initially generate positive cash flow. As a result, a new club typically generates an operating loss in its first full year of operations and substantially lower margins in its second full year of operations than a club

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opened for more than 24 months. These operating losses and lower margins will negatively impact our future results of operations. This negative impact will be increased by the initial expensing of pre-opening costs, which include legal and other costs associated with lease negotiations and permitting and zoning requirements, as well as depreciation and amortization expenses, which will further negatively impact our results of operations. We may, at our discretion, accelerate or expand our plans to open new clubs, which may adversely affect results from operations.
We currently operate clubs throughout the Northeast and Mid-Atlantic regions of the United States, Florida, California, Puerto Rico and Switzerland. In the case of existing regions, our experience has been that opening new clubs may attract some memberships away from other clubs already operated by us in those regions and diminish their revenues. In addition, as a result of new club openings in existing regions and because older clubs will represent an increasing proportion of our club base over time, our mature club revenue increases may be lower in future periods than in the past.
Another result of opening new clubs is that our club operating margins may be lower than they have been historically while the clubs build a membership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly opened clubs to affect our club operating margins at these new clubs.
We are subject to government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations.
Our operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs are located, including, but not limited to the following:
general rules and regulations of the Federal Trade Commission;
rules and regulations of state and local consumer protection agencies;
state statutes that prescribe certain forms and provisions of membership contracts
state statutes that govern the advertising, sale, financing and collection of memberships;
federal and state laws and regulations governing privacy and security of information; and
state and local health regulations
Any changes in such laws or regulations could have a material adverse effect on our financial condition and results of operations.
We could be subject to claims related to health or safety risks at our clubs.
Use of our clubs poses some potential health or safety risks to members or guests through physical exertion and use of our services and facilities, including exercise equipment. Claims might be asserted against us for injury suffered by, or death of members or guests while exercising at a club. We might not be able to successfully defend such claims. As a result, we might not be able to maintain our general liability insurance on acceptable terms in the future or maintain a level of insurance that would provide adequate coverage against potential claims.
Depending upon the outcome, these matters may have a material effect on our consolidated financial position, results of operations and cash flows.
We may be exposed to other litigation from time to time that can have significant adverse effects upon us.
In the ordinary course of conducting our business, we are exposed to litigation from time to time that can have significant adverse effects upon our consolidated financial position, results of operations and cash flows. At any given time there may be one or more civil actions initiated against us, including the matters disclosed under “Legal Proceedings” in this Annual Report. If one or more of these pending lawsuits, or any lawsuits in the future are adjudicated in a manner adverse to our interests, or if a settlement of any lawsuit requires us to pay a significant amount, the result could have an adverse impact on our consolidated financial position, results of operations and cash flows. In addition, any litigation, regardless of the outcome, may distract our management from the operation of our business.
Security and privacy breaches may expose us to liability and cause us to lose customers.
Federal and state law requires us to safeguard our customers’ financial information, including credit card information. Although we have established security procedures and protocol, including credit card industry compliance procedures, to protect against identity theft and the theft of our customers’ financial information, our security and testing measures may not

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prevent security breaches and breaches of our customers’ privacy may occur, which could harm our business. For example, a significant number of our users provide us with credit card and other confidential information and authorize us to bill their credit card accounts directly for our products and services. Typically, we rely on encryption and authentication technology licensed from third parties to enhance transmission security of confidential information. Techniques used to obtain unauthorized access or to sabotage systems change frequently and are constantly evolving. These techniques and other advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a compromise or breach of the technology used by us or one of our vendors to protect customer data. We may be unable to anticipate these techniques or to implement adequate preventive or reactive measures. Several recent, highly publicized data security breaches at other companies have heightened consumer awareness of this issue. Further, a significant number of states require the customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that material security breaches be reported.
Any compromise of our security or that of our third party vendors or noncompliance with privacy or other laws or requirements could harm our reputation, cause our members to lose confidence in us, or harm our financial condition and, therefore, our business. In addition, a party who is able to circumvent our security measures or exploit inadequacies in our security measures or that of our third party vendors, could, among other effects, misappropriate proprietary information, cause interruptions in our operations or expose members to computer viruses or other disruptions. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Actual or perceived vulnerabilities may lead to claims against us. To the extent the measures taken by us or our third party vendors prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our reputation.
Changes in legislation or requirements related to electronic fund transfer, or our failure to comply with existing or future regulations, may adversely impact our business.
We primarily accept payments for our memberships through EFT from members’ bank accounts and, therefore, we are subject to federal, state and provincial legislation and certification requirements governing EFT, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislation requiring gyms and health clubs to offer a prepaid membership option at all times and/or limit the duration for which gym memberships can auto-renew through EFT payments, if at all. Our business relies heavily on the fact that our memberships continue on a month-to-month basis after the completion of any initial term requirements, and compliance with these laws and regulations and similar requirements may be onerous and expensive. In addition, variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. States that have such health club statutes provide harsh penalties for violations, including membership contracts being void or voidable. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages and civil liability and may result in the loss of our ability to accept EFT payments, which would have a material adverse effect on our business, results of operations and financial condition. In addition, any such costs, which may arise in the future as a result of changes to the legislation and regulations or in their interpretation, could individually or in the aggregate cause us to change or limit our business practice, which may make our business model less attractive to our members.
We are subject to a number of risks related to ACH, credit card and debit card payments we accept.
We accept payments through automated clearing house (“ACH”), credit card and debit card transactions. For ACH, credit card and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our memberships, which could cause us to lose members or suffer an increase in our operating expenses, either of which could harm our operating results.
If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards, debit cards or bank accounts on a timely basis or at all, we could lose membership revenue, which would harm our operating results.
If we fail to adequately control fraudulent ACH, credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card would significantly impair our ability to operate our business.

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Regulatory changes in the terms of credit and debit card usage, including any existing or future regulatory requirements, could have an adverse effect on our business.
Our business relies heavily on the use of credit and debit cards in sales transactions. Regulatory changes to existing rules or future regulatory requirements affecting the use of credit and debit cards or the fees charged could impact the consumer and financial institutions that provide card services. This may lead to an adverse impact on our business if the regulatory changes result in unfavorable terms to either the consumer or the banking institutions.
Disruptions and failures involving our information systems could cause customer dissatisfaction and adversely affect our billing and other administrative functions.
The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information system to process new memberships, bill members, check-in members and track and analyze sales and membership statistics, the frequency and timing of member workouts, cross-club utilization, member life, value-added services and demographic profiles by member. This system also assists us in evaluating staffing needs and program offerings. We believe that, without investing in enhancements, this system would have reached the end of its life cycle. Correcting any disruptions or failures that affect our proprietary system could be difficult, time-consuming and expensive because we would need to use contracted consultants familiar with our system.
Any failure of our current system could also cause us to lose members and adversely affect our business and results of operations. Our members may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect our billing and other administrative functions could have an adverse effect on our operating results.
Infrastructure changes are being undertaken to accommodate our growth, provide network redundancy, better manage telecommunications and data costs, increase efficiencies in operations and improve management of all components of our technical architecture. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, acts of terrorism and similar events could damage our systems. In addition, computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose members, damage our reputation, and adversely affect our business and results of operations.
Our growth or changes in the industry could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.
Future expansion or changes in the industry will place increased demands on our administrative, operational, financial and other resources. Any failure to manage such growth or changes effectively could seriously harm our business. To be successful, we will need to continue to improve management information systems and our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and expensive, increase management responsibilities and divert management attention.
Outsourcing certain aspects of our business could result in disruption and increased costs.
We have outsourced certain aspects of our business to third party vendors that subject us to risks, including disruptions in our business and increased costs. For example, we have engaged third parties to host and manage certain aspects of our data center, information and technology infrastructure and electronic pay solutions. Accordingly, we are subject to the risks associated with the vendor's ability to provide these services to meet our needs. If the cost of these services is more than expected, if the vendor is not able to handle the volume of activity or perform the quality of service that we expect, if we or the vendor are unable to adequately protect our data and information is lost, if our ability to deliver our services is interrupted, or if our third party vendors face financial or other difficulties, then our business and results of operations may be negatively impacted.
Our cash and cash equivalents are concentrated in a small number of banks.
Our cash and cash equivalents are held, primarily, in a small number of commercial banks. These deposits are not collateralized. In the event these banks become insolvent, we would be unable to recover most of our cash and cash equivalents deposited at the banks. Cash and cash equivalents held in one commercial bank as of December 31, 2019 totaled $8.8 million. During 2019, in any one month, the amount held in one commercial bank has been as high as approximately $28.1 million.

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We may incur rising costs related to construction of new clubs and maintaining our existing clubs. If we are not able to pass these cost increases through to our members, our returns may be adversely affected.
Our clubs require significant upfront investment. If our investment is higher than we had planned, we may need to outperform our operational plan to achieve our targeted return. We cannot assure that we can offset cost increases by increasing our membership dues and other fees and improving profitability through cost efficiencies.
We may be required to remit unclaimed property to states for unused, expired personal training sessions.
We recognize revenue from personal training sessions as the services are performed (i.e., when the session occurs). Unused personal training sessions expire after a set, disclosed period of time after purchase (except in California and Florida) and are not refundable or redeemable by the member for cash. For six of the jurisdictions in which we operate, we have concluded, based on opinions from outside counsel, that monies paid to us for unused and expired personal training membership sessions were not escheatable. For the remaining jurisdictions in which we operate, we have likewise concluded that the monies paid to us for unused personal training sessions were not escheatable, regardless of whether they expire. However, we have not yet obtained opinions from outside counsel for these jurisdictions. It is possible however, that one or more of these jurisdictions may not agree with our position and may claim that we must remit all or a portion of these amounts to such jurisdiction. As of December 31, 2019, we had approximately $12.8 million of unused and expired personal training sessions that had not been recognized as revenue and was recorded as deferred revenue, approximately $11.0 million of which related to the State of New York.
We may have exposure to additional tax liabilities.
From time to time, we are under audit by federal, state, and local tax authorities and we may be liable for additional tax obligations and may incur additional costs in defending any claims that may arise. The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2017), and New York City (2006 through 2014). In particular, we disagree with the assessment dated November 30, 2017, from the New York State related to tax years 2006 through 2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We have appealed the assessment with the New York State Division of Tax Appeals for these tax years.  In a letter dated December 27, 2019, we were notified of an adjustment for an amount of approximately $2.7 million, inclusive of approximately $840,000 in interest for tax years 2010 through 2014.  Also, in a letter dated August 16, 2019, the New York State has also opened the audit period for years 2015-2017. We disagree with the proposed assessment and have consented to extend such assessment period through December 31, 2020.
We are also under examination in New York City (2006 through 2014).  New York City Department of Finance has proposed an audit change notice to the Company dated May 2, 2018, for the tax years ended December 31, 2006 through December 31, 2009 for proposed general corporation tax liability in the amount of $8.9 million, inclusive of $4.1 million in interest. In a letter dated January 18, 2019, New York City Department of Finance has issued a proposed general tax liability of $5.6 million, inclusive of $1.6 million in interest for audit periods 2010 to 2014. We disagreed with the proposed assessment and consented to extend such assessment period through December 31, 2020.
We have not recorded a tax reserve related to these proposed assessments. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possible changes to unrecognized tax benefits within the next 12 months cannot be made.
Risks Related to Our Leverage and Our Indebtedness
Substantial doubt exists as to our ability to continue as a going concern.    
The consolidated financial statements included herein have been prepared on a going concern basis, which assumes that we will continue to operate in the normal course of business. Our debt under the 2013 Term Loan Facility, of which $177.8 million was outstanding as of December 31, 2019, is due on November 15, 2020. Our cash balance as of December 31, 2019 was $18.8 million and thus we do not have adequate sources of cash to repay our debt. This raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern will depend upon our ability to refinance our debt prior to its maturity. There can be no assurance that we will be able to refinance our debt, or if we are able to refinance our debt, that such financing will be on terms favorable to us. The substantial doubt about our ability to continue as a going concern may negatively affect the price of our common stock and the grade of our credit rating, have an adverse impact on our relationship with third parties with whom we do business, including our members, vendors, landlords and employees, and make it challenging for us to issue additional debt to the extent needed.

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Further impacting our ability to continue as a going concern is the closure of approximately 95% of our clubs due to the COVID-19 pandemic and the related impact on our results of operations and cash flow, which is described further in the risk factors addressing Risks Related to our Business.
We may be negatively affected by economic conditions in the U.S. and key international markets.
We must maintain liquidity to fund our working capital, service our outstanding indebtedness and finance investment opportunities. Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue new business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash and cash equivalents and borrowings under our 2013 Revolving Loan Facility. If our current resources do not satisfy our liquidity requirements, we may have to seek additional financing.
Economic conditions, both domestic and foreign, may affect our financial performance. Prevailing economic conditions, including unemployment levels, inflation, availability of credit, energy costs and other macro-economic factors, as well as uncertainty about future economic conditions, adversely affect consumer spending and, consequently, our business and results of operations.
Our leverage may impair our financial condition, and we may incur significant additional debt.
We currently have a substantial amount of debt. As of December 31, 2019, the principal amount of debt outstanding under our 2013 Term Loan Facility was $177.8 million. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2019, we also had outstanding letters of credit of $2.4 million under the 2013 Revolving Credit Facility and an additional $2.2 million of outstanding letters of credit not associated with the 2013 Revolving Credit Facility. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2019 was $12.6 million, with borrowings under such facility subject to the conditions applicable to borrowings under our 2013 Senior Credit Facility, which conditions we may or may not be able to satisfy at the time of borrowing. This substantial amount of debt could have significant consequences, including:
making it more difficult to satisfy our obligations, including with respect to our outstanding indebtedness;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other general corporate requirements;
requiring a substantial portion of our cash flow from operations for the payment of interest on our debt, which is variable on our 2013 Revolving Loan Facility and on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing our ability to use our cash flow to fund working capital, capital expenditures and acquisitions of new clubs and general corporate requirements;
increasing our vulnerability to interest rate fluctuations in connection with borrowings under our 2013 Senior Credit Facility at variable interest rates;
limiting our ability to refinance our existing indebtedness on favorable terms before the expiration of the current 2013 Term Loan Facility, or at all; and
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.
If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they currently face could intensify.
The current debt under the 2013 Senior Credit Facility has a floating interest rate and an increase in interest rates may negatively impact our financial results.
Interest rates applicable to our debt are expected to fluctuate based on economic and market factors that are beyond our control. Any significant increase in market interest rates, and in particular the short-term Eurodollar rates, would result in a significant increase in interest expense on our debt, which could negatively impact our net income and cash flows.

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Credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt.
Future disruption and volatility in credit market conditions could have a material adverse impact on our ability to refinance debt when it comes due on terms similar to our current credit facilities, or to draw upon existing lines of credit or incur additional debt if needed as a result of unanticipated downturns in the markets for our products and services, which may require us or our subsidiaries to seek other funding sources to meet our cash requirements. We cannot be certain that alternative sources of financing would be available in the future on terms and conditions that are acceptable.
Our outstanding indebtedness and the inability to renew or refinance our 2013 Senior Credit Facility could materially adversely affect our financial condition and our ability to operate our business.
We will need to refinance our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing debt or refinance our existing debt at all. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities, which could adversely affect our ability to refinance existing debt or raise additional capital. These risks could impair our liquidity and would likely have a material adverse effect on our businesses, financial condition and results of operations.
Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have sufficient assets to settle our indebtedness.
Our 2013 Senior Credit Facility and the agreements related thereto contain, among other things, covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities and that may impact our ability and the ability of our restricted subsidiaries to:
incur debt;
pay dividends or make distributions;
purchase or redeem stock;
make investments and extend credit;
engage in transactions with affiliates;
engage in sale-leaseback transactions;
consummate certain asset sales or club acquisitions;
effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and
create liens on our assets.
The terms of the 2013 Senior Credit Facility, as amended, provide for a financial covenant in the situation where the total utilization of the revolving loan commitments exceeds 20%, or $3.0 million, of the aggregate amount of those commitments. In such event, TSI LLC is required to maintain a total leverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.00:1.00. As of December 31, 2019, TSI LLC had outstanding letters of credit of $2.4 million and a total leverage ratio that was below 4.00:1.00. Other than these outstanding letters of credit, TSI LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. On March 13, 2020, we borrowed $12.5 million from the 2013 Revolving Loan Facility. We expect the total leverage ratio to be greater than 4.00:1.00 for the 12 months ending March 31, 2020.
Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet this and other covenants under the 2013 Senior Credit Facility which could cause a default under the 2013 Senior Credit Facility. If an event of default under the 2013 Senior Credit Facility occurs, the lenders could elect to terminate any and all outstanding undrawn commitments to lend and declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If any such event should occur, we might not have sufficient assets to pay our indebtedness and meet our other obligations, which would have a material adverse effect on our business, financial condition and results of operations.

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Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected.
Our business requires significant levels of capital to finance the development of additional sites for new clubs and the construction of our clubs. If cash from available sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equity securities, existing stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to execute our current growth plans, take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results.
Risks Related to Our Common Stock
The stock ownership of certain large stockholders will likely limit your ability to influence corporate matters.
As of March 16, 2020, the Company had two stockholders (including Patrick Walsh, the Chief Executive Officer and Chairman of our board of directors) which, together with each such stockholder's affiliates, beneficially owned 29.6% and 14.2% of our outstanding common stock, respectively, based on public filings made by such stockholders. Each of these stockholders may vote their stock with respect to certain matters, including any determinations with respect to mergers or other business combinations, the acquisition of assets for stock consideration or disposition of all or substantially all of our assets, and the issuance of any additional common stock or other equity securities, in a manner which may not be viewed as beneficial by other stockholders.
Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.
In recent years, the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in the market’s expectations about our operating results;
success of competitors;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or our industry in general;
operating and stock price performance of other companies that investors deem comparable to us;
our ability to market new and enhanced services on a timely basis;
changes in laws and regulations affecting our business;
our ability to meet compliance requirements;
commencement of, or involvement in, litigation involving us;
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; any major change in our board of directors or management;
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and

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general economic and political conditions such as recessions, interest rates, fuel prices, and acts of war or terrorism.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Investor percentage ownership in us may be diluted by future issuances of capital stock, which could reduce investor influence over matters on which stockholders vote.
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
Item 1B.    Unresolved Staff Comments
None
Item 2.    Properties
We own our 1000 Sunrise Highway location in Massapequa, New York, which houses one of our clubs and a retail tenant. This property was acquired in November 2017. In Florida, we own both the 1250 Old Dixie Highway location and 4540 Donald Ross Road location, which were acquired in January 2018 and August 2018, respectively. These properties each house one of our clubs.
We lease the remainder of our fitness clubs pursuant to long-term leases (generally 15 to 20 years, plus option periods). In the next five years, or the period from January 1, 2020 through December 31, 2024, we have leases for 26 club locations that are due to expire without any renewal options, three of which are due to expire in 2020, and 9 club locations that are due to expire with renewal options. Renewal options include terms for rental increases based on the consumer price index, fair market rates or stated renewal terms already set in the lease agreements.
We lease office space in Jupiter, Florida and New York City, both used for administrative and general corporate purposes. We lease approximately 82,000 square feet in Elmsford, NY, for the operation of a centralized laundry facility for the New York Sports Clubs offering towel service, and for construction and equipment storage. This space also serves as corporate office space. Total square footage related to the laundry facility is 42,000 and total square footage related to the corporate office and warehouse space is 40,000.


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The following table provides information regarding our club locations:
Region
Count
New York Sports Clubs:
 
New York
78
New Jersey
18
Connecticut
3
Total New York Sports Clubs
99
Boston Sports Clubs:
 
Massachusetts
30
Rhode Island
1
Total Boston Sports Clubs
31
Washington Sports Clubs:
 
Washington, D.C.
6
Maryland
3
Total Washington Sports Clubs
9
Philadelphia Sports Clubs:
 
Philadelphia
5
Lucille Roberts:
 
New York
14
New Jersey
2
Total Lucille Roberts
16
Total Woman Gym and Spa:
 
California
11
Palm Beach Sports Clubs:
 
Florida
3
Christi’s Fitness
 
Florida
1
Around the Clock Fitness:
 
Florida
6
LIV Fitness:
 
Puerto Rico
2
New York Sports Clubs - Switzerland:
 
Switzerland
3
Total clubs
186
Item 3.    Legal Proceedings
On February 7, 2007, in an action styled White Plains Plaza Realty, LLC v. TSI LLC et al., the landlord of one of TSI LLC’s former health and fitness clubs filed a lawsuit in the Appellate Division, Second Department of the Supreme Court of the State of New York against it and two of its health club subsidiaries alleging, among other things, breach of lease in connection with the decision to close the club located in a building owned by the plaintiff and leased to a subsidiary of TSI LLC, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI LLC. Following a determination of an initial award, which TSI LLC and the tenant have paid in full, the landlord appealed the trial court’s award of damages, and on August 29, 2011, an additional award (amounting to approximately $900,000) (the “Additional Award”), was entered against the tenant, which has recorded a liability. Separately, TSI LLC is party to an agreement with a third-party developer, which by its terms provides indemnification for the full amount of any liability of any nature arising out of the lease described above, including attorneys’ fees incurred to enforce the indemnity. As a result, the developer reimbursed TSI LLC and the tenant the amount of the initial award in installments over time and also agreed to be responsible for the payment of the Additional Award, and the tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currently litigating the payment of the Additional Award and judgment was entered against the developer on June 5, 2013, in the amount of approximately $1.0 million, plus interest, which judgment was upheld by the appellate court on April

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29, 2015. TSI LLC does not believe it is probable that TSI LLC will be required to pay for any amount of the Additional Award.
In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims, investigations and proceedings incidental to the ordinary course of business, including personal injury, landlord tenant disputes, construction matters, employee and member relations (a number of which purport to represent a class and one of which was brought by the Washington, D.C. Attorney General’s Office and the New York City Department of Consumer Affairs). The results of litigation are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. The results of these other lawsuits, claims and proceedings cannot be predicted with certainty. The Company establishes accruals for loss contingencies when it has determined that a loss is probable and that the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. We currently believe that the ultimate outcome of such lawsuits, claims and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.
Item 4.    Mine Safety Disclosures
Not applicable.

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PART II
Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock currently trades on The NASDAQ Global Market, under the symbol CLUB.
Holders
As of March 16, 2020, there were approximately 123 holders of record of our common stock. There are additional holders who are not “holders of record” but who beneficially own stock through nominee holders such as brokers and benefit plan trustees.
Dividends Policy
The Company did not declare any dividends in 2019 and 2018.
The board of directors does not currently intend to declare dividends. The declaration and payment of dividends to holders of our common stock by us, if any, are subject to the discretion of our board of directors. Our board of directors will take into account such matters as general economic and business conditions, our strategic plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and our subsidiaries and such other factors as our board of directors may consider relevant.
The existing credit agreement of TSI LLC restricts the ability of our subsidiaries to pay cash distributions to TSI Holdings in order for TSI Holdings to pay cash dividends except (a) in an amount, when combined with certain prepayments of indebtedness, of up to $35.0 million, subject to pro forma compliance with a total leverage ratio, as defined, and no default or event of default existing or continuing under the credit agreement, and (b) an additional amount based on excess cash flow, such additional amounts subject to pro forma compliance with a total leverage ratio, as defined, and no default or event of default existing or continuing under the credit agreement.
Issuer Purchases of Equity Securities
We did not purchase any equity securities during the fourth quarter ended December 31, 2019.
Recent Sales of Unregistered Securities
We did not sell any securities during the year ended December 31, 2019 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), other than as previously reported in a Current Report on Form 8-K.
Item 6.    Selected Financial Data
Not applicable.


26


Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with the “Selected Consolidated Financial and Other Data” section of this Annual Report and our consolidated financial statements and the related notes appearing at the end of this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under the headings “Risk Factors,” “Business” and “Forward-Looking Statements” contained in Item 1A, Item 1, and Part I, respectively, of this Annual Report.
Overview
Based on the number of clubs, we are one of the leading owners and operators of fitness clubs in the United States, particularly in the Northeast and Mid-Atlantic regions. As of December 31, 2019, we owned and operated 186 fitness clubs (“clubs”) and collectively served approximately 605,000 members under various brand names, primarily located in the United States.
Brand
 
Count
New York Sports Clubs
 
99
 
Boston Sports Clubs
 
31
 
Washington Sports Clubs
 
9
 
Philadelphia Sports Clubs
 
5
 
Lucille Roberts
 
16
 
Total Woman Gym and Spa
 
11
 
Palm Beach Sports Clubs
 
3
 
Christi’s Fitness
 
1
 
Around the Clock Fitness
 
6
 
LIV Fitness
 
2
 
New York Sports Clubs - Switzerland
 
3
 
 
 
186
 
We develop clusters of clubs to serve densely populated metropolitan regions and we service such populations by clustering clubs near the highest concentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban or suburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the active mature market. In each of our main regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and neighboring communities.
In 2019, we opened seven clubs, six of which were obtained through acquisition, and closed six clubs. In 2018, we acquired 25 clubs and constructed and opened one new club. In 2018, we also closed six clubs and transitioned one to a licensed location.
In January 2020, we entered into an agreement (the “Agreement”) to acquire substantially all of the assets of the Flywheel Sports, Inc. studio business (“Flywheel”). This acquisition was subject to various closing conditions. As consideration for the acquisition, we were planning to issue a promissory note to the Sellers in the principal amount of $25.0 million (the “Seller Note”).
In connection with this potential acquisition, in January 2020, we entered into a commitment letter (the “Commitment Letter”) pursuant to which Kennedy Lewis Investment Management, LLC (“KLIM”) committed to provide, subject to the terms and conditions set forth in the Commitment Letter, a second lien secured term loan in an aggregate principal amount of $50.0 million (the “Second Lien Facility”), $25.0 million of which would have been funded by KLIM in cash (the “Cash Commitment”) and $25.0 million of which would have been represented by a conversion of the Seller Note. The proceeds of the Cash Commitment were going to be used, in part, to repay our existing indebtedness. The Second Lien Facility was subject to the consummation of the acquisition and other customary closing conditions.
In February 2020, the Agreement was amended to extend the parties’ right to terminate the Agreement to May 1, 2020. Due to the COVID-19 pandemic and other factors, the Company is evaluating its options as it relates to this acquisition.

27


Revenue and Operating Expenses
We have two principal sources of revenue:
Membership revenue: Our largest sources of revenue are dues inclusive of monthly membership fees, annual maintenance fees, and initiation and processing fees paid by our members. In addition, we collect usage fees on a per visit basis for non-passport members using non-home clubs. These dues and fees comprised 77.0% of our total revenue for the year ended December 31, 2019. We recognize revenue from membership dues in the month when the services are rendered. We recognize revenue from initiation and processing fees over the estimated average membership life and annual fees over a twelve month period.
Ancillary club revenue: For the year ended December 31, 2019, we generated 16.4% of our revenue from personal training and 5.2% of our revenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports and Small Group Training programs. We continue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and our fee-based Small Group Training programs.
We also receive revenue (approximately 1.4% of our total revenue for the year ended December 31, 2019) from the rental of space in our facilities to operators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and sponsorships, provide laundry services to third parties, and generate management fees from certain club facilities that we do not wholly-own. We refer to these revenues as Fees and other revenue.
Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In both the years ended December 31, 2019 and 2018, our monthly average attrition rate was 4.1%.
Our operating expenses are comprised of both fixed and variable costs. Fixed costs include club and supervisory and other salary and related expenses, occupancy costs, including most elements of rent, utilities, housekeeping and contracted maintenance expenses, as well as depreciation. Variable costs are primarily related to payroll associated with ancillary club revenue, membership sales compensation, advertising, certain facility repairs and club supplies.
General and administrative expenses include costs relating to our centralized support functions, such as accounting, insurance, information and communication systems, acquisition related costs, purchasing, member relations, legal and consulting fees, and real estate development expenses. Payroll and related expenses are included in a separate line item on the consolidated statement of operations and are not included in general and administrative expenses. Approximately $9.9 million and $7.9 million, or 36% and 32%, of general and administrative expenses relate directly to club operations in the year ended December 31, 2019 and 2018, respectively, including general liability insurance, phone and data lines, computer maintenance, business licenses, office and sales supplies, recruiting and training.
As clubs mature and increase their membership base, fixed costs are typically spread over an increasing revenue base and operating margins tend to improve. Conversely, when our membership base declines, our operating margins are negatively impacted. At acquired clubs, operating margins may initially decline due to costs related to the acquisition and time to implement and integrate into our process.
Our primary capital expenditures relate to routine improvements at our clubs, the construction or acquisition of new club facilities and the upgrade and renovation of our existing clubs. The construction and equipment costs vary based on the costs of construction labor, as well as the planned service offerings and size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for which we are currently budgeting approximately 1% of projected annual revenue. In this regard, facility remodeling is also considered where appropriate. As of December 31, 2019, our consolidated operating results included five majority owned clubs of which we have control. In addition, we partly-owned two clubs, one of which operated under a different brand name, with ownership percentages of 45% and 20%, respectively, for which we applied the equity method of accounting. We also owned one licensed club and provided management services at one location in which we did not have an equity interest.
Operating (loss) income is impacted by certain charges and benefits which can fluctuate year to year. In 2019 and 2018, operating (loss) income was impacted by fixed asset impairment charges of $7.2 million and $2.1 million, respectively, related to underperforming clubs.

28


 
 
Year Ended December 31,
 
 
2019
 
2018
 
 
($ amounts in thousands)
Operating (loss) income
 
$
(6,451
)
 
$
12,519

(Decrease) increase over prior period
 
> (100)%

 
80.5
 %
Net (loss) income attributable to Town Sports International Holdings, Inc. and subsidiaries
 
$
(18,558
)
 
$
77

Decrease over prior period
 
> (100)%

 
(98.2
)%
Cash flows provided by operating activities
 
$
30,585

 
$
64,094

(Decrease) increase over prior period
 
(52.3
)%
 
> 100 %

Historical Club Count
 
 
Year Ended December 31,
 
 
2019
 
2018
Clubs included in consolidated operating results:
 
 
 
 
Clubs operated at beginning of period
 
183

 
164

Acquired clubs
 
6

 
25

New clubs opened
 
1

 
1

Club converted to licensed club (3)
 

 
(1
)
Clubs closed
 
(6
)
 
(6
)
Clubs operated at end of period
 
184

 
183

Club included in equity investment at end of period (1)
 
1

 
1

Licensed club operated at end of period (3)
 
1

 
1

Total clubs operated at end of period(1)(2)
 
186

 
185


(1)
Excludes one 20% owned club that operated under a different brand name in our Washington, D.C. region.
(2)
Excludes locations that were managed by us in which we did not have an equity interest. As of December 31, 2019, we had one remaining managed location.
(3)
Represents one club that transitioned to a licensed location in the first quarter of 2018 and bears the “Washington Sports Clubs” brand name.
Comparable Club Revenue
We define comparable club revenue as revenue at those clubs that were operated by us for over 12 months (“comparable clubs”) and comparable club revenue increase (decrease) as revenue for the 13th month and thereafter as applicable as compared to the same period of the prior year.
Key determinants of comparable club revenue increases shown in the table below are new memberships, member retention rates, pricing and ancillary revenue increases.
 
 
Comparable Club Revenue Increase (Decrease)
 
 
Quarter
 
Full-Year
2019
 
 
 
 
First Quarter
 
(1.8
)%
 
 
Second Quarter
 
(3.4
)%
 
 
Third Quarter
 
(2.9
)%
 
 
Fourth Quarter
 
(1.2
)%
 
(2.3
)%
2018
 
 
 
 
First Quarter
 
1.7
 %
 
 
Second Quarter
 
1.8
 %
 
 
Third Quarter
 
1.5
 %
 
 
Fourth Quarter
 
1.1
 %
 
1.6
 %
The comparable club revenue decrease in full-year 2019 was primarily due to a decrease in member count and personal training revenue, partially offset by higher average dues per membership. The comparable club revenue increase in full-year

29


2018 was primarily due to higher average dues per membership, increased annual fees and personal training revenue partially offset by a decrease in member count and other ancillary club revenue, particularly our Sports Clubs for Kids programs.
Consolidated Results of Operations
The following table sets forth certain operating data as a percentage of revenue for the periods indicated:
 
Year Ended December 31,
 
 
2019
 
2018
 
Revenues
100.0
 %
 
100.0
 %
 
Operating expenses:
 
 
 
 
Payroll and related
38.8

 
38.0

 
Club operating
46.9

 
44.5

 
General and administrative
6.0

 
5.7

 
Depreciation and amortization
8.2

 
8.5

 
Impairment of fixed assets
1.5

 
0.5

 
 
101.4

 
97.2

 
Operating (loss) income
(1.4
)
 
2.8

 
Interest expense, net
2.8

 
3.0

 
Equity in the earnings of investees
(0.1
)
 
(0.1
)
 
Loss before provision (benefit) for corporate income taxes
(4.1
)
 
(0.1
)
 
Provision (benefit) for corporate income taxes

 
(0.1
)
 
Net loss including non-controlling interests
(4.1
)
 

 
Less: net loss attributable to non-controlling interests
(0.1
)
 

 
Net loss attributable to Town Sports International Holdings, Inc. and subsidiaries
(4.0
)%
 
 %
 
Year ended December 31, 2019 compared to year ended December 31, 2018
Revenue
Revenue (in thousands) was comprised of the following for the periods indicated:
 
Year Ended December 31,
 
 
 
2019
 
2018
 
 
 
Revenue
 
% Revenue
 
Revenue
 
% Revenue
 
% Variance
Membership dues
$
358,019

 
76.7
%
 
$
339,397

 
76.6
%
 
5.5
 %
Initiation and processing fees
1,159

 
0.3
%
 
1,209

 
0.3
%
 
(4.1
)%
Membership revenue
359,178

 
77.0
%
 
340,606

 
76.9
%
 
5.5
 %
Personal training revenue
76,763

 
16.4
%
 
73,458

 
16.5
%
 
4.5
 %
Other ancillary club revenue (1)
24,393

 
5.2
%
 
23,293

 
5.3
%
 
4.7
 %
Ancillary club revenue
101,156

 
21.6
%
 
96,751

 
21.8
%
 
4.6
 %
Fees and other revenue (2)
6,426

 
1.4
%
 
5,737

 
1.3
%
 
12.0
 %
Total revenue
$
466,760

 
100.0
%
 
$
443,094

 
100.0
%
 
5.3
 %
(1) Other ancillary club revenue primarily consisted of Sports Clubs for Kids, Small Group Training, racquet sports and spa.
(2) Fees and other revenue primarily consisted of rental income, marketing revenue, management fees and laundry service fees.
Revenue increased $23.7 million, or 5.3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. Revenue at clubs opened or acquired in the last 24 months (“new clubs”) increased approximately $39.4 million. These increases were partially offset by a $7.0 million decrease in revenue at clubs closed in the last 24 months and an $8.7 million decrease at clubs operating longer than 24 months.
Membership dues revenue increased $18.6 million, or 5.5%, in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily reflecting a $28.6 million increase from our new clubs. This increase was partially offset by a decrease in revenue of $5.2 million due to the impact of club closures and a decrease in revenue of $4.7 million due to net member decline at clubs operating longer than 24 months.

30


Personal training revenue increased $3.3 million, or 4.5%, in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the favorable impact from our new clubs, partially offset by a decline in personal training at clubs operating longer than 24 months and the impact of club closures.
Other ancillary club revenue increased $1.1 million, or 4.7%, in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the favorable impact from our new clubs, partially offset by decreased revenue from our Sports Clubs for Kids and small group training programs.
Operating Expenses
Operating expenses (in thousands) were comprised of the following for the periods indicated:
 
 
Year Ended December 31,
 
 
 
 
 
 
2019
 
2018
 
$ Variance
 
% Variance
Payroll and related
 
$
180,945

 
$
168,315

 
$
12,630

 
7.5
%
Club operating
 
219,065

 
197,689

 
21,376

 
10.8
%
General and administrative
 
27,813

 
25,047

 
2,766

 
11.0
%
Depreciation and amortization
 
38,199

 
37,442

 
757

 
2.0
%
Impairment of fixed assets
 
7,189

 
2,082

 
5,107

 
245.3
%
Total operating expenses
 
$
473,211

 
$
430,575

 
$
42,636

 
9.9
%
Operating expenses increased due to the following factors:
Payroll and related. Payroll and related expenses for the year ended December 31, 2019 increased $12.6 million, or 7.5%, compared to the year ended December 31, 2018, primarily reflecting the impact from our new clubs of approximately $15.6 million. We were also subject to compliance with minimum wage increases of approximately $3.3 million. These increases were partially offset by the impact of club closures of $2.9 million, a decrease in personal training payroll expenses related to lower personal training revenue at clubs operating longer than 24 months of $1.2 million, decreased overhead expenses and other savings initiatives.
Club operating. Club operating expenses increased $21.4 million or 10.8% in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily reflecting the impacts of both newly opened and closed clubs. The increase from the new clubs was $18.0 million, including $11.9 million for rent and occupancy expenses, $2.7 million for utilities, $888,000 for general club maintenance expenses and $820,000 for repair and maintenance expenses. This is offset by the decrease at closed clubs of $5.5 million, including $4.3 million for rent and occupancy expenses and $486,000 in utilities expense.
At comparable club locations, rent and occupancy expenses increased $4.9 million due to rent escalations and the impact of the adoption of the new lease standard (Accounting Standards Codification Topic 842), marketing expenses increased $2.5 million, general club maintenance expenses increased $1.7 million, and repair and maintenance expenses increased $1.5 million. Partially offsetting these increases was a decline of $2.4 million in utilities expenses primarily due to certain utility adjustments and lower rates as compared to prior year.
General and administrative. General and administrative expense increased $2.8 million, or 11.0%, in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily reflecting the impact from the new clubs of approximately $1.9 million, increased general liability insurance reserves of $1.5 million and increased legal fees of $1.1 million, partially offset by decreases in acquisition related expenses of $2.6 million.
Depreciation and amortization. In the year ended December 31, 2019 compared to the year ended December 31, 2018, depreciation and amortization expense increased $757,000, or 2.0%, primarily due to the depreciation and amortization of assets at our new clubs, partially offset by a decrease at our mature clubs.
Impairment of fixed assets. Due to triggering events, we recorded impairment charges of $7.2 million and $2.1 million at underperforming clubs in the years ended December 31, 2019 and 2018, respectively.
Provision (Benefit) for Corporate Income Taxes
We recorded an income tax provision of $212,000 and an income tax benefit of $357,000 during the year ended December 31, 2019 and 2018, respectively, reflecting an effective income tax rate of (1)% for the December 31, 2019 and 74%

31


for the year ended December 31, 2018. Separate from the impact of valuation allowance, our effective tax rate was 17% and (41)% for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, we have a net deferred tax liability of $0 as there is a full valuation allowance recorded against the U.S. net deferred tax assets.
In assessing the realizability of deferred tax assets, we evaluate whether it is more likely than not (more than 50%) that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed reduces the deferred tax assets to the amount expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carry forwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We recorded valuation allowances in the amounts of $44.6 million and $39.8 million as of December 31, 2019 and 2018, respectively.
Deferred tax liabilities associated with goodwill generally cannot be used as a source of taxable income to realize deferred tax assets with a definitive loss carry forward period. In recording the valuation allowance, we do not amortize goodwill for book purposes but do amortize goodwill that has tax basis for tax purposes. The deferred tax liability remaining after full valuation allowance at December 31, 2017 related to the tax effect of differences between book and tax basis of intangible assets not expected to reverse during our net operating loss carry forward period. Following the Tax Legislation, the federal net operating losses generated after December 31, 2017 can be carried forward indefinitely and we have considered its deferred tax liabilities related to indefinite lived intangibles as a source of taxable income against its indefinite lived net operating losses.
From time to time, we are under audit by federal, state, and local tax authorities and we may be liable for additional tax obligations and may incur additional costs in defending any claims that may arise. The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2017), and New York City (2006 through 2014). In particular, we disagree with the assessment dated November 30, 2017, from the New York State related to tax years 2006 through 2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We have appealed the assessment with the New York State Division of Tax Appeals for these tax years.  In a letter dated December 27, 2019, we were notified of an adjustment for an amount of approximately $2.7 million, inclusive of approximately $840,000 in interest for tax years 2010 through 2014.  Also, in a letter dated August 16, 2019, the New York State has also opened the audit period for years 2015-2017. We disagree with the proposed assessment and have consented to extend such assessment period through December 31, 2020.
We are also under examination in New York City (2006 through 2014).  New York City Department of Finance has proposed an audit change notice to the Company dated May 2, 2018, for the tax years ended December 31, 2006 through December 31, 2009 for proposed general corporation tax liability in the amount of $8.9 million, inclusive of $4.1 million in interest. In a letter dated January 18, 2019, New York City Department of Finance has issued a proposed general tax liability of $5.6 million, inclusive of $1.6 million in interest for audit periods 2010 to 2014. We disagreed with the proposed assessment and consented to extend such assessment period through December 31, 2020.
We have not recorded a tax reserve related to these proposed assessments. It is difficult to predict the final outcome or timing of resolution of any particular matter regarding these examinations. An estimate of the reasonably possible changes to unrecognized tax benefits within the next 12 months cannot be made.
In March 2018, Commonwealth of Massachusetts began an audit of state tax filing of the Company for the Commonwealth of Massachusetts for the 12 month periods ended December 31, 2014, 2015 and 2016. The audit was closed with no changes during 2019.

32


Liquidity and Capital Resources
Our sources of liquidity are cash and cash equivalents, cash flows from operations and borrowings available under the 2013 Revolving Credit Facility. Our cash requirements relate primarily to working capital needed to operate and grow our business, including funding operating expenses and capital expenditures to refresh and/or renovate our clubs.
Our Term Loan Facility matures on November 15, 2020. As such, the outstanding principal of our 2013 Term Loan Facility of $177.8 million was classified as a current liability on our consolidated balance sheet as of December 31, 2019. We do not have sufficient sources of cash to satisfy this obligation on date of maturity. Additionally, our 2013 Revolving Credit Facility expires on August 15, 2020. We are currently working with prospective lenders to refinance the 2013 Credit Facility in advance of its maturity date, however, there can be no assurance that we will be able to refinance its debt, or if we are able to refinance our debt, that such financing will be on terms favorable to us. This raises substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
COVID-19 Pandemic: On March 16, 2020, we were mandated to close approximately 95% of our clubs pursuant to the exercise of emergency executive authority invoked by state and local governments in order to combat the spread of the COVID-19 pandemic. Our Florida clubs continue to operate, however it is likely they will eventually be mandated to close as well. The closure of our clubs will have a material adverse effect on revenue and cash flow. There is significant uncertainty as to when the clubs will be allowed to re-open and as such, we are likely to experience reduced customer demand, a significant increase in membership terminations and may be unable to recover these members or generate new ones.
We have taken some immediate steps to reduce operating costs and to conserve cash. We informed all non-executive employees working at clubs which have been ordered to close that their employment with us was terminated with immediate effect. On March 13, 2020, we borrowed $12.5 million from our 2013 Revolving Credit Facility and we continue to actively manage our cash flow on a daily basis. Additionally, we are undertaking conversations with landlords to discuss rent relief during this period, which may not be successful.
These recent events have had a material adverse effect on our results of operations, cash flows and liquidity and as a result, we expect material asset impairments during the quarter ending March 31, 2020, including goodwill in most if not all of our reporting units, club fixed assets, intangible assets and right-of-use assets.
Operating Activities. Net cash provided by operating activities decreased $33.5 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. Decreases in operating cash included the following:

Cash paid for occupancy increased $21.5 million mainly due to the impact from the new clubs, and timing differences of payments.
Cash paid for payroll increased $16.7 million mainly due to the impact from the new clubs, timing of bonus payments as well as an increase in minimum wages requirements.
Cash collected for tax refund decreased $13.6 million.

Offsetting increases in operating cash included the following:

Cash collected for membership dues increased $20.6 million, including increased recurring annual fees of $2.7 million.
Investing Activities. Net cash used in investing activities decreased $9.2 million in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the decrease in acquisition activity in 2019. Cash paid in connection with the acquisition of businesses, property and other assets, decreased $13.6 million in the 2019 period. This decrease was partially offset by increased capital expenditures, mainly for continued enhancements or upgrades to our existing clubs, and the remodeling of several clubs.
Financing Activities. Net cash used in financing activities for the year ended December 31, 2019 was $21.8 million compared to net cash provided by financing activities of $2.6 million for the year ended December 31, 2018. The increase in financing activities was primarily due to increased principal payments on the 2013 Term Loan Facility. We paid $18.1 million in principal payments in April 2019 associated with the $36.3 million excess cash flow for the year ended December 31, 2018. The increase was also due to increased principal payments on finance lease obligations of $923,000. Additionally, in the year ended December 31, 2018, financing activities consisted of $5.5 million in gross mortgage and related term note proceeds.



33


Consolidated Debt
As of December 31, 2019, our total principal amount of debt outstanding under our 2013 Term Loan Facility was $177.8 million. We paid $18.1 million in principal payments in April 2019 associated with the $36.3 million excess cash flow for year ended December 31, 2018, with the remaining debt balance maturing on November 15, 2020.
This substantial amount of debt could have significant consequences, including:
making it more difficult to satisfy our obligations, including with respect to our outstanding indebtedness;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions of new clubs and other general corporate requirements;
requiring a substantial portion of our cash flow from operations for the payment of interest on our debt, which is variable on our 2013 Revolving Loan Facility and on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing our ability to use our cash flow to fund working capital, capital expenditures and acquisitions of new clubs and general corporate requirements;
increasing our vulnerability to interest rate fluctuations in connection with borrowings under our 2013 Senior Credit Facility at variable interest rates;
limiting our ability to refinance our existing indebtedness on favorable terms before the expiration of the current 2013 Term Loan Facility, or at all; and
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.
We believe that we have, or will be able to generate, sufficient funds to finance our current operating plans through the next 12 months. Any material acceleration or expansion of our plans through newly constructed clubs or acquisitions (to the extent such acquisitions include cash payments) may require us to pursue additional sources of financing. There can be no assurance that such financing will be available, available on acceptable terms, or permitted under the 2013 Senior Credit Facility (as defined below).
2013 Senior Credit Facility
On November 15, 2013, TSI LLC, an indirect, wholly-owned subsidiary, entered into a $370.0 million senior secured credit facility (“2013 Senior Credit Facility”), pursuant to a credit agreement among TSI LLC, TSI Holdings II, LLC, a newly-formed, wholly-owned subsidiary of the Company (“Holdings II”), as a Guarantor, the lenders party thereto, Deutsche Bank AG, as administrative agent, and Keybank National Association, as syndication agent. The 2013 Senior Credit Facility consists of a $325.0 million term loan facility maturing on November 15, 2020 (“2013 Term Loan Facility”) and a $15.0 million revolving loan facility maturing on August 14, 2020 (“2013 Revolving Loan Facility”). Proceeds from the 2013 Term Loan Facility of $323.4 million were issued, net of an original issue discount ("OID") of 0.5%, or $1.6 million. The borrowings under the 2013 Senior Credit Facility are guaranteed and secured by assets and pledges of capital stock by Holdings II, TSI LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiaries of TSI LLC.
Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI LLC’s option, bear interest at either the administrative agent’s base rate plus 2.5% or a LIBOR rate adjusted for certain additional costs (the “Eurodollar Rate”) plus 3.5%, each as defined in the 2013 Senior Credit Facility. With respect to the outstanding term loans, the Eurodollar Rate has a floor of 1.00% and the base rate has a floor of 2.00%. Commencing with the last business day of the quarter ended March 31, 2014, TSI LLC is required to pay 0.25% of the principal amount of the term loans each quarter, which may be reduced by voluntary prepayments. As of December 31, 2019, TSI LLC had made a total of $20.1 million in principal payments on the 2013 Term Loan Facility, which included the required excess cash flow payment of $18.1 million in April 2019.
As of December 31, 2019, TSI LLC had outstanding letters of credit of $2.4 million under the 2013 Revolving Credit Facility and a total leverage ratio below 4.00:1.00. The Company also had $2.2 million million in outstanding letters of credit to secure certain lease obligations that were not associated with the 2013 Revolving Credit Facility. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2019 was $12.6 million, with borrowings under such facility subject to the conditions applicable to borrowings under the Company’s 2013 Senior Credit Facility, which conditions the Company may or may not be able to satisfy at the time of borrowing. In addition, the financial covenant described above, the 2013 Senior Credit

34


Facility contains certain affirmative and negative covenants, including those that may limit or restrict TSI LLC and Holdings II’s ability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; make investments; pay dividends and make payments to stockholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in each case, subject to certain qualifications and exceptions. The 2013 Senior Credit Facility also includes customary events of default (including non-compliance with the covenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate the commitments under the 2013 Revolving Loan Facility and declare all outstanding term loans and revolving loans immediately due and payable and enforce its rights as a secured creditor.
In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined therein, to be applied against outstanding 2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days after the fiscal year end. The applicable excess cash flow repayment percentage is applied to the excess cash flow when determining the excess cash flow payment. Earnings, changes in working capital and capital expenditure levels all impact the determination of any excess cash flow. The applicable excess cash flow repayment percentage is 50% when the total leverage ratio, as defined in the 2013 Senior Credit Facility, exceeds or is equal to 2.50:1.00; 25% when the total leverage ratio is greater than or equal to 2.00:1.00 but less than 2.50:1.00 and 0% when the total leverage ratio is less than 2.00:1.00. TSI LLC may pay dividends in the amount of cumulative retained excess cash flow to TSI Holdings as long as at the time the dividend is made, and immediately after, TSI LLC is in compliance on a pro forma basis with a total leverage ratio of less than 4.00:1.00. For the year ended December 31, 2018, the Company had $36.3 million of excess cash flow as defined in the 2013 Senior Credit Facility, resulting in a principal payment of $18.1 million paid in April 2019. In June 2019, TSI LLC paid a dividend of $16.0 million to TSI Holdings using the cumulative retained excess cash flow. The excess cash flow calculation performed as of December 31, 2019 did not result in any required payments.
As of December 31, 2019, the 2013 Term Loan Facility has a gross principal balance of $177.8 million and a balance of $176.5 million net of unamortized debt discount of $922,000 and unamortized debt issuance costs of $294,000. As of December 31, 2019, both the unamortized balance of debt issuance costs and unamortized debt discount are recorded as a contra-liability and netted with long-term debt on the accompanying consolidated balance sheet and are being amortized as interest expense using the effective interest method.
Mortgage and Term Loan
On August 3, 2018, TSI - Donald Ross Realty LLC, a subsidiary of TSI Group, entered into a mortgage note for $3.2 million with BankUnited, N.A. (the “Lender”). This mortgage note bears interest at a fixed rate of 5.36% and is payable in 120 monthly payments of principal and interest based on a 25 year amortization period. The first payment was due and paid on September 3, 2018. The entire principal balance of this mortgage note is due and payable in full on its maturity date of August 3, 2028. December 31,2019, this mortgage note had an outstanding principal balance of $3.1 million, net of principal payments of $82,000.
On April 24, 2018, Dixie Highway Realty, LLC, a subsidiary of TSI Group, entered into promissory notes for $1.9 million (the “Mortgage Note”) and $500,000 (the “Term Note”) with the Lender. The Mortgage Note bears interest at a fixed rate of 5.46% and is payable in 120 monthly payments of principal and interest based on a 25 year amortization period. The first payment was due and paid on May 24, 2018. The entire principal balance of the Mortgage Note is due and payable in full on its maturity date of April 24, 2028. 
The Term Note bears interest at a fixed rate of 5.30% and is payable in 60 payments of principal and interest. The first payment was due and paid on May 24, 2018 and the final payment will be due to the Lender on the maturity date of April 24, 2023 for all principal and accrued interest not yet paid. In connection with the above mortgage and term loan notes, TSI Group or TSI Holdings must maintain a minimum relationship liquidity balance with the Lender of $500,000 in the form of an operating account. As of December 31, 2019, the Mortgage Note and Term Note had an outstanding principal balance of $1.8 million and $349,000, respectively, reflecting net of principal payments of $61,000 for the Mortgage Note and $151,000 for the Term Note.
Recent Changes in or Recently Issued Accounting Standards
For details of applicable new accounting standards, please, see Note 3 — Recent Accounting Pronouncements to our consolidated financial statements in this Annual Report.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

35


of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangible assets, the estimate of our self-insurance reserves, and the valuations of deferred income tax, leases and business combinations.
Fixed and intangible assets. Fixed assets are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which are 30 years for building and improvements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computer software. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Payroll costs directly related to the construction or expansion of the Company’s locations are capitalized with leasehold improvements. Expenditures for maintenance and repairs are charged to operations as incurred. The cost and related accumulated depreciation of assets retired or sold, is removed from the respective accounts and any gain or loss is recognized in operations. The costs related to developing web applications, developing web pages and installing or enhancing developed applications on the web servers are capitalized and classified as computer software. Website hosting fees and maintenance costs are expensed as incurred.
Long-lived assets, including fixed assets and operating lease right of use assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that related carrying amounts may not be recoverable from undiscounted cash flows in accordance with the FASB guidance. The Company’s long-lived assets and liabilities are grouped at the individual club level, which is the lowest level for which there are identifiable cash flows. To the extent that estimated future undiscounted net cash flows attributable to the assets are less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and their fair values is recognized.
In the years ended December 31, 2019 and 2018, the Company tested underperforming clubs and recorded impairment charges of $7.2 million and $2.1 million, respectively, on leasehold improvements and furniture and fixtures at clubs that experienced decreased profitability and sales levels below expectations during these periods. Goodwill was allocated to reporting units that closely reflect the regions served by the Company: New York, Boston, Washington, D.C., Philadelphia, Florida, California, Puerto Rico and Switzerland. The Company has acquired several clubs in 2018 and the first half of 2019 and has recorded goodwill as applicable to the appropriate regions. For more information on these acquisitions, refer to Note 6 - Acquisitions. Goodwill for all acquisitions was recorded at fair value at the time of such acquisitions and may have changes to the balances up to one year after acquisition. As of December 31, 2019, the New York, Boston, California, Florida, Puerto Rico and Switzerland regions have a goodwill balance.
Goodwill. The Company’s annual goodwill impairment test as of August 1, 2019 was performed by comparing the fair value of the Company’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The estimated fair value was determined by using a combined income and market approach with equal weighting on each approach. The income approach was based on discounted future cash flows and required significant assumptions, including estimates regarding revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. Under the market approach, the Company utilized information regarding the Company, the Company’s industry as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value the Company’s reporting units. The August 1, 2019 annual impairment test supported the goodwill balance and as such, no impairment of goodwill was required. The goodwill carrying amounts associated with two of the Company’s reporting units, which had excess fair value over its carrying amount of less than 20% based on the results of our 2019 annual impairment assessment, were $12.7 million for Florida and $2.6 million for Puerto Rico as of the impairment test date.
Leases. The Company’s operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term. The Company’s lease liabilities represent the Company’s obligation to make lease payments arising from the lease. At the lease commencement date, the Company’s operating lease right-of-use assets and liabilities are recognized on the Consolidated Balance Sheets, based on the present value of the remaining lease payments over the lease term. In measuring the Company’s lease liabilities, the remaining lease payments are discounted to present value using a discount rate.
Business Combinations. In connection with an acquisition of a business, the Company records all assets acquired and liabilities assumed, if any, of the acquired business at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in making these fair value determinations.

36


Self-insurance reserves. We self-insure our health benefits for all U.S.-based employees and maintain stop loss coverage to limit our exposure. We also limit our exposure to casualty losses on insurance claims by maintaining liability coverage subject to specific and aggregate liability deductibles. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon a number of factors including sales estimates for each insurance year, claim amounts, claim settlements and number of claims, our historical loss experience and valuations provided by independent third-party consultants. To the extent that estimated self-insurance losses differ from actual losses realized, our insurance reserves could differ significantly and may result in either higher or lower insurance expense in future periods.
Deferred income taxes. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Significant weight is given to positive and negative evidence that is objectively verifiable.
Our deferred tax asset realization assessment considers future income which considers the execution of our business plans and other expectations about future outcomes and is based on certain assumptions. These assumptions require significant judgment about the forecast of future income and are consistent with the plans and estimates we are using to manage our business. When actual results do not meet our forecasted results or there are changes to future business results, such changes can lead to a change in judgment related to the realization of the deferred tax asset.
In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We maintain a valuation allowance in the amounts of $44.6 million and $39.8 million at December 31, 2019 and 2018, respectively. As the Company maintains a full valuation allowance against its outstanding net deferred tax assets, the change in net deferred tax assets due to the rate change was offset by a corresponding change in the valuation allowance.
Tax benefits are recognized for a tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in our tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit or a recognized tax position under examination could increase the tax provision and effective tax rate and may require the use of cash in the period of resolution. Interest and penalties recognized on the liability for unrecognized tax benefits is recorded as income tax expense.
Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had a material impact on our results of operations or financial condition. Should there be periods of high inflation in the future, our results of operations or financial condition would be exposed to the effects of inflation, such as higher rents for our leases under escalation terms based on the consumer price index and higher interest expense on the variable rate portion of our debt.
Off-Balance Sheet Arrangements
None.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8.    Financial Statements and Supplementary Data
Our Financial Statements appear following the signature page hereto, are incorporated herein by reference and are listed in the index appearing under Item 15.

37


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including the Chief Executive Officer and the interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired controls.
As of December 31, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined above. Based upon that evaluation, our Chief Executive Officer and interim Chief Financial Officer have concluded that, as of December 31, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our management’s assessment using those criteria, our management concluded that, as of December 31, 2019, we maintained effective internal control over financial reporting.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019, as stated in their attestation report included following the signature page hereto, included in Item 15.
Changes in Internal Control Over Financial Reporting: There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.    Other Information
None.

38


PART III
Item 10.    Directors, Executive Officers and Corporate Governance
The information required to be included by Item 10 of Form 10-K will be included in the Proxy Statement for the 2020 Annual Meeting of Stockholders and such information is incorporated by reference herein. The Proxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
Item 11.     Executive Compensation
The information with respect to executive compensation is incorporated herein by reference to the following section of the Proxy Statement: “Executive Compensation.”
The information with respect to compensation of directors is incorporated herein by reference to the following section of the Proxy Statement: “Corporate Governance and Board Matters — Directors’ Compensation for the 2019 Fiscal Year.”
Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information about securities authorized for issuance under equity compensation plans is incorporated herein by reference to the following section of the Proxy Statement: “Executive Compensation - Equity Compensation Plan Information.”
The information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the following section of the Proxy Statement: “Ownership of Securities.”
Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information with respect to certain relationships and related transactions and director independence is incorporated herein by reference to the following sections of the Proxy Statement: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters — Director Independence.”
Item 14.    Principal Accountant Fees and Services
The information with respect to principal accountant fees and services is incorporated herein by reference to the following section of the Proxy Statement: “Matters to be Considered at Annual Meeting — Proposal Two — Ratification of Independent Registered Public Accounting Firm.”

39


PART IV
Item 15.    Exhibits And Financial Statements
(a)    Financial Statements
(1)    Financial statements filed as part of this report:
 
(2)    Financial Statements Schedules:
The schedules have been omitted because they are not applicable or the required information has been included in the financial statements or notes thereto.
(3)    Exhibits. See Item 15(b) below.
(b)    Exhibits required by Item 601 of Regulation S-K
The information required by this item is incorporated herein by reference from the Index to Exhibits immediately following page F-36 of this Annual Report.

40


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 2020.
 
TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
 
 
By:
 
/s/    PATRICK WALSH
 
 
 
 
 
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
 
 
 
 
 
 
 
 
Signature
  
Title
 
Date
 
 
 
 
 
 
 
By:
 
/s/    PATRICK WALSH
 
Chairman and Chief Executive Officer
 
March 20, 2020
 
 
Patrick Walsh
 
(principal executive officer)
 
 
 
 
 
 
 
 
 
By:
 
/s/    HELEN VAN NESS
  
Interim Chief Financial Officer
 
March 20, 2020
 
 
Helen Van Ness
 
(principal financial and accounting officer)
 
 
 
 
 
 
 
 
 
By:
 
/s/    MARTIN J. ANNESE
  
Director
 
March 20, 2020
 
 
Martin J. Annese
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/    L. SPENCER WELLS
  
Director
 
March 20, 2020
 
 
L. Spencer Wells
 
 
 
 


41


INDEX TO FINANCIAL STATEMENTS
 

F-1


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Town Sports International Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Town Sports International Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit and cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a term loan facility maturing in November 2020 and management has determined that it does not have sufficient sources of cash to satisfy this obligation. In addition, as discussed in Note 1, the COVID-19 pandemic has had a material adverse effect on the Company’s results of operations, cash flows and liquidity. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


F-2


Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2020

We have served as the Company’s auditor since at least 1996. We have not been able to determine the specific year we began serving as auditor of the Company.


F-3



TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2019 and 2018
(All figures in thousands except share and per share data)
 
 
2019
 
2018
ASSETS



Current assets:



Cash and cash equivalents
$
18,808


$
48,088

Accounts receivable, net
2,980


3,050

Prepaid corporate income taxes
865


746

Prepaid expenses and other current assets
10,148


10,047

Total current assets
32,801


61,931

Fixed assets, net
146,884


157,677

Operating lease right-of-use assets, net
563,372

 

Goodwill
32,988


21,877

Intangible assets, net
8,220


9,439

Deferred membership costs
1,009


1,803

Other assets
9,004


8,727

Total assets
$
794,278


$
261,454

LIABILITIES AND STOCKHOLDERS’ DEFICIT



Current liabilities:



Current portion of long-term debt
$
178,433


$
21,080

Current portion of mortgage and term loan
197

 
314

Current portion of operating lease liabilities
74,279

 

Accounts payable
4,458


3,672

Accrued expenses
34,568


32,547

Accrued interest
27


34

Deferred revenue
36,047


37,459

Total current liabilities
328,009


95,106

Long-term debt
4,358


178,002

Long-term mortgage and term loan
5,039

 
5,113

Long-term operating lease liabilities
532,977

 

Deferred lease liabilities


44,374

Deferred revenue
89


258

Other liabilities
12,151


11,298

Total liabilities
882,623


334,151

Commitments and Contingencies (Note 15)



Stockholders’ deficit:



Preferred stock, $0.001 par value; no shares issued and outstanding at both December 31, 2019 and December 31, 2018





Common stock, $0.001 par value; issued and outstanding 29,425,557 and 27,192,154 shares at December 31, 2019 and 2018, respectively
26


25

Additional paid-in capital
1,919


(1,644
)
Accumulated other comprehensive income
1,909


1,841

Accumulated deficit
(91,770
)

(73,212
)
Total Town Sports International Holdings, Inc. and Subsidiaries stockholders’ deficit
(87,916
)

(72,990
)
Non-controlling interests
(429
)
 
293

Total stockholders’ deficit
(88,345
)
 
(72,697
)
Total liabilities and stockholders’ deficit
$
794,278


$
261,454

See notes to consolidated financial statements.

F-4


TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2019 and 2018
(All figures in thousands except share and per share data)
 

2019

2018
Revenues:



Club operations
$
460,334


$
437,357

Fees and other
6,426


5,737

 
466,760


443,094

Operating Expenses:



Payroll and related
180,945


168,315

Club operating
219,065


197,689

General and administrative
27,813


25,047

Depreciation and amortization
38,199


37,442

Impairment of fixed assets
7,189

 
2,082

 
473,211


430,575

Operating (loss) income
(6,451
)

12,519

Interest expense
12,982


13,478

Interest income
(65
)

(133
)
Equity in the earnings of investees
(299
)
 
(344
)
Loss before provision (benefit) for corporate income taxes
(19,069
)

(482
)
Provision (benefit) for corporate income taxes
212


(357
)
Net loss including non-controlling interests
(19,281
)

(125
)
Less: net loss attributable to non-controlling interests
(723
)
 
(202
)
Net (loss) income attributable to Town Sports International Holdings, Inc. and subsidiaries
$
(18,558
)
 
$
77

Loss per share:



Basic
$
(0.70
)

$

Diluted
$
(0.70
)

$

Weighted average number of shares used in calculating loss per share:



Basic
26,596,923


25,858,494

Diluted
26,596,923


26,252,137













See notes to consolidated financial statements.

F-5


TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2019 and 2018
(All figures in thousands)
 
 
2019
 
2018
Net loss including non-controlling interests
$
(19,281
)
 
$
(125
)
Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments, net of tax of $0 for the years ended in December 31, 2019 and 2018
68

 
530

Interest rate swap, net of tax of $0, for the years ended in December 31, 2019 and 2018

 
110

Total other comprehensive income, net of tax
68

 
640

Total comprehensive (loss) income including non-controlling interests
(19,213
)
 
515

Less: comprehensive loss attributable to non-controlling interests
(723
)
 
(202
)
Total comprehensive (loss) income attributable to Town Sports International Holdings, Inc. and subsidiaries
$
(18,490
)
 
$
717



See notes to consolidated financial statements.

F-6


TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended December 31, 2019 and 2018
(All figures in thousands except share and per share data)
 
Common Stock
($.001 par)
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
(Deficit)
 
Total Town Sports International and Subsidiaries Stockholders’
(Deficit) Equity
 
Non-controlling interests
 
Total
Stockholders’
(Deficit) 
Equity
 
Shares
 
Amount  
 
 
Balance at December 31, 2017
27,149,135

 
$
25

 
$
(4,290
)
 
$
1,201

 
$
(74,893
)
 
$
(77,957
)
 
$

 
$
(77,957
)
Stock option exercises
13,110

 

 
30

 

 

 
30

 

 
30

Common stock grants
52,460

 

 
320

 

 

 
320

 

 
320

Restricted stock grants
13,115

 

 

 

 

 

 

 

Shares issued under Employee Stock Purchase Plan
8,643

 

 
21

 

 

 
21

 

 
21

Forfeiture of restricted stock
(44,309
)
 

 

 

 

 

 

 

Stock-based compensation

 

 
2,275

 

 

 
2,275

 

 
2,275

Net income (loss)

 

 

 

 
77

 
77

 
(202
)
 
(125
)
Other increases from non-controlling interests

 

 

 

 

 

 
495

 
495

Cumulative effect of change in accounting principle

 

 

 

 
1,604

 
1,604

 

 
1,604

Derivative financial instruments

 

 

 
110

 

 
110

 

 
110

Foreign currency translation adjustment

 

 

 
530

 

 
530

 

 
530

Balance at December 31, 2018
27,192,154

 
25

 
(1,644
)
 
1,841

 
(73,212
)
 
(72,990
)
 
293

 
(72,697
)
Stock option exercises
3,810

 
1

 
4

 

 

 
5

 
1

 
6

Common stock grants
53,692

 

 
320

 

 

 
320

 

 
320

Restricted stock grants
2,181,113

 

 

 

 

 

 

 

Shares issued under Employee Stock Purchase Plan
33,789

 

 
24

 

 

 
24

 

 
24

Forfeiture of restricted stock
(39,001
)
 

 

 

 

 

 

 

Stock-based compensation

 

 
3,215

 

 

 
3,215

 

 
3,215

Net loss

 

 

 

 
(18,558
)
 
(18,558
)
 
(723
)
 
(19,281
)
Foreign currency translation adjustment

 

 

 
68

 

 
68

 

 
68

Balance at December 31, 2019
29,425,557

 
$
26

 
$
1,919

 
$
1,909

 
$
(91,770
)
 
$
(87,916
)
 
$
(429
)
 
$
(88,345
)


See notes to consolidated financial statements.

F-7


TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2019 and 2018
(All figures in thousands)

2019

2018
Cash flows from operating activities:



Net loss including non-controlling interests
$
(19,281
)
 
$
(125
)
Adjustments to reconcile net loss including non-controlling interests to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,199

 
37,442

Impairment of fixed assets
7,189

 
2,082

Amortization of debt discount
1,014

 
976

Amortization of debt issuance costs
445

 
580

Noncash rental expense (income)
454

 
(3,324
)
Share-based compensation expense
3,559

 
2,616

Net change in deferred taxes

 
(166
)
Net change in certain operating assets and liabilities
(2,793
)
 
25,626

Decrease (increase) in deferred membership costs
794

 
(844
)
Landlord contributions to tenant improvements
51

 
800

Increase (decrease) in insurance reserves
1,312

 
(61
)
Other
(358
)
 
(1,508
)
Total adjustments
49,866

 
64,219

Net cash provided by operating activities
30,585

 
64,094

Cash flows from investing activities:
 
 
 
Capital expenditures
(16,183
)
 
(11,887
)
Acquisition of businesses
(21,667
)
 
(31,277
)
Acquisition of assets

 
(3,989
)
Other

 
135

Net cash used in investing activities
(37,850
)
 
(47,018
)
Cash flows from financing activities:
 
 
 
Principal payments on 2013 Term Loan Facility
(20,076
)
 
(2,083
)
Proceeds from borrowings on Revolving Loan Facility
9,500

 

Repayments of Revolving Loan Facility
(9,500
)
 

Principal payments on finance lease obligations
(1,506
)
 
(583
)
Proceeds from mortgage and term loan

 
5,530

Principal payments on mortgage and term loan
(191
)
 
(103
)
Debt issuance costs

 
(186
)
Cash dividends paid

 
(2
)
Proceeds from stock option exercises
5

 
30

Net cash (used in) provided by financing activities
(21,768
)
 
2,603

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(25
)
 
61

Net (decrease) increase in cash, cash equivalents and restricted cash
(29,058
)
 
19,740

Cash, cash equivalents and restricted cash beginning of period
50,061

 
30,321

Cash, cash equivalents and restricted cash end of period
$
21,003

 
$
50,061

Summary of the change in certain operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
$
61

 
$
(834
)
Decrease in prepaid expenses and other current assets
876

 
8,851

(Decrease) increase in accounts payable, accrued expenses and accrued interest
(25
)
 
7,330

Change in prepaid corporate income taxes and corporate income taxes payable
(38
)
 
12,898

Decrease in deferred revenue
(3,667
)
 
(2,619
)
Net change in certain working capital components
$
(2,793
)
 
$
25,626




F-8


The following is a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
 
December 31, 2019
 
December 31, 2018
Cash and cash equivalents
$
18,808

 
$
48,088

Restricted cash included in other assets(a)
2,195

 
1,973

Total cash, cash equivalents and restricted cash
$
21,003

 
$
50,061

(a) Restricted cash associated with certain letters of credit to secure lease related obligations.


See notes to consolidated financial statements.

F-9


TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
(In thousands except share and per share data)
1.    Basis of Presentation
Town Sports International Holdings, Inc. (the “Company” or “TSI Holdings”) is a diversified holding company with subsidiaries engaged in a number of business and investment activities.  References to “TSI LLC” refer to Town Sports International, LLC, and references to “TSI Group” refer to Town Sports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company.
As of December 31, 2019, the Company owned and operated 186 fitness clubs (“clubs”) under various brand names, primarily located in the United States of America (“United States”, “U.S.”).
Certain reclassifications were made to the reported amounts in the consolidated balance sheet as of December 31, 2018 to conform to the presentation as of December 31, 2019.