Town Sports International Holdings, Inc.
Annual Report 2018

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-KþAnnual Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018¨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: 001-36803Town 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 Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þIndicate 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 þIndicate 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 preceding12 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, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. ¨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 growthcompany. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer ¨ Accelerated filer þNon-accelerated filer ¨(Do not check if smaller reporting company) 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 financialaccounting 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 þThe aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2018 (the last business day of the registrant’s most recentlycompleted second fiscal quarter) was approximately $211.9 million (computed by reference to the last reported sale price on The Nasdaq National Market on that date). The registrantdoes not have any non-voting common stock outstanding.As of February 22, 2019, there were 27,923,569 shares of Common Stock of the Registrant outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for the 2019 Annual Meeting of Stockholders, to be filed not later than April 30, 2019 are incorporated by reference intoItems 10, 11, 12, 13 and 14 of Part III of this Form 10-K.Table of ContentsTABLE OF CONTENTS PART I Item 1.Business1Item 1A.Risk Factors10Item 1B.Unresolved Staff Comments22Item 2.Properties22Item 3.Legal Proceedings27Item 4.Mine Safety Disclosures27 PART II Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities28Item 6.Selected Financial Data28Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations29Item 7A.Quantitative and Qualitative Disclosures About Market Risk40Item 8.Financial Statements and Supplementary Data40Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure40Item 9A.Controls and Procedures40Item 9B.Other Information41 PART III Item 10.Directors, Executive Officers and Corporate Governance42Item 11.Executive Compensation42Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters42Item 13.Certain Relationships and Related Transactions, and Director Independence42Item 14.Principal Accountant Fees and Services42 PART IV Item 15.Exhibits And Financial Statements43SIGNATURES44INDEX TO FINANCIAL STATEMENTSF-1Exhibit Index Item 16.Form 10-K Summary Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC.PART IFORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking” statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including, without limitation, statements regarding future financial results and performance, potential sales revenue, potentialclub closures, results of cost savings initiatives, legal contingencies and tax benefits and contingencies, future declarations and payments of dividends, andthe existence of adverse litigation and other risks, uncertainties and factors set forth under Item 1A., entitled “Risk Factors,” of this Annual Report and in ourother reports and documents filed with the Securities and Exchange Commission (“SEC”). You can identify these forward-looking statements by the use ofwords 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 risksand uncertainties, many of which are outside our control, including, among others, the level of market demand for our services, economic conditionsaffecting our business, the success of our pricing model, the geographic concentration of our clubs, competitive pressure, the ability to achieve reductions inoperating costs and to continue to integrate acquisitions, outsourcing of certain aspects of our business, environmental matters, the application of federal andstate tax laws and regulations, any security and privacy breaches involving customer data, the levels and terms of the Company’s indebtedness, and otherspecific factors discussed herein and in other SEC filings made by us. We believe that all forward-looking statements are based on reasonable assumptionswhen made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipatedresults or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the datewhen made, and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results may differ materiallyfrom anticipated results or outcomes discussed in any forward-looking statement.Item 1. BusinessIn this Annual Report, unless otherwise stated or the context otherwise indicates, references to “the Company,” “we,” “our,” “TSI Holdings” and similarreferences refer to Town Sports International Holdings, Inc. and its subsidiaries. References to “TSI LLC” refer to Town Sports International, LLC, and “TSIGroup” refer to Town Sports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company. The Company is a diversified holdingcompany that owns g subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI LLC, hasbeen 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 ofthe United States (“U.S.”). TSI Group was formed in 2017 to invest in public and private equities and real estate. TSI Holdings’ corporate structure providesflexibility to make investments across a broad spectrum of industries in order to create long-term value for stockholders.1Table of ContentsGeneralBased on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the UnitedStates and one of the largest fitness club owners and operators in the United States. Our 185 fitness clubs (“clubs”) collectively served approximately 627,000members as of December 31, 2018. Our clubs operate under the various brand names below and are primarily located in the United States of America.Brand CountNew York Sports Clubs 98 Boston Sports Clubs 33 Washington Sports Clubs 10 Philadelphia Sports Clubs 5 Lucille Roberts 16 TMPL 2 Total Woman Gym and Spa 12 Palm Beach Sports Clubs 3 Christi’s Fitness 1 LIV Fitness 2 New York Sports Clubs - Switzerland 3 185 We develop clusters of clubs to serve densely populated metropolitan regions and we service such populations by clustering clubs near the highestconcentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban orsuburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the activemature market. In each of our main regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets ofthe region and then branching out from these urban centers to suburbs and neighboring communities.In 2018, we acquired 25 clubs and constructed and opened one club. In 2017, we acquired 18 clubs and constructed and opened two clubs.Over our 45-year history, since incorporating in 1973, we have developed and refined our club formats, which allows us to cost-effectively constructand efficiently operate our fitness clubs in the different real estate environments in which we operate. Our fitness-only clubs average approximately 18,000square feet, while our multi-recreational clubs average approximately 40,000 square feet. The aggregate average size of our clubs is approximately 25,000square feet. Our clubs typically have an open fitness area to accommodate cardiovascular and strength-training equipment, as well as special purpose roomsfor group fitness classes and other exercise programs. We seek to provide a broad array of high-quality exercise programs and equipment that are popular andeffective, promoting a quality exercise experience for our members. When developing clubs, we carefully examine the potential membership base and thelikely 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 forKids programs, which can include swim lessons and sports camps for children.Industry OverviewAccording to the most recent information released by the International Health, Racquet and Sports Club Association (“IHRSA”), the U.S. health clubindustry posted growth in revenue, memberships, and number of club locations. Revenue grew to $30.0 billion in 2017 from $27.6 billion in 2016, whilemembership increased to 60.9 million in 2017 from 57.2 million in 2016. The U.S. club count rose to 38,477 sites in 2017 from 36,540 sites in 2016.Research shows that more than one out of five Americans belonged to at least one U.S. health club or studio. Since 2008, membership has grown by 33.6%,while the total number of club-goers has increased by 31.5%. The total number of health club visits has also increased, amounting to 5.9 billion visits in2017, 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 2017, with nostate with a prevalence of obesity less than 20%. In 2017, 48 states had a prevalence of obesity of 25% or more and 29 of these states had a prevalence ofobesity 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 atprevention. Both government and medical2Table of Contentsresearch has shown that exercise and other physical activity plays a critical role in preventing obesity and other health conditions, thereby reducinghealthcare 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 benefitfrom these dynamics as a large operator with recognized brand names, leading regional market shares and an established operating history.Competitive StrengthsWe 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 Northeastand Mid-Atlantic regions of the U.S. Our strong real estate presence in the New York, Boston, Washington, D.C., and Philadelphia regions enhancesconvenience to our members. We attribute our positions in these markets in part to the strength of our localized owner and operator brand names, which fosterrecognition as a local network of quality fitness clubs.Regional clustering strategy provides significant benefits to members and corporations. By operating a network of clubs in a concentrated geographicarea, the value of our memberships is enhanced by our ability to offer members access to multiple clubs in our network, which provides the convenience ofhaving fitness clubs near a member’s workplace and home. This is also a benefit to our corporate members, as many corporations have employees that willtake advantage of multiple gym locations. Approximately 37% of our members currently have memberships that allow them to use multiple clubs, andbecause these memberships offer enhanced privileges and greater convenience, they typically generate higher monthly dues than our single clubmemberships in each respective region. Regional clustering also allows us to provide special facilities to all of our members within a local area, such asswimming pools and squash, tennis and basketball courts, without offering them at every location. In the year ended December 31, 2018, approximately 25%of all club usage was by members visiting clubs other than their home clubs.A leveraged operating model designed for operational efficiencies. We are one of the leading owners and operators of fitness clubs in the UnitedStates. As of December 31, 2018, we owned and operated 185 fitness clubs under various brand names, primarily located in the United States of America. Ourportfolio of distinct brands across these regions, combined with our size and scale which allows for strategic and advantageous partnerships with our third-party vendors and suppliers throughout the organization, gives us a competitive advantage in the fitness market. We believe that our model enables us toscale more rapidly than our competitors. We have greater financial and other resources, which allows us to react to changes in pricing, marketing, and trendsin the industry more quickly or effectively than other smaller size companies. We may secure better terms from vendors and devote more resources totechnology infrastructure, fulfillment and marketing. We also focus our growth in areas we believe allow us to continue to gain efficiencies throughleveraging our fixed costs. We believe we can improve financial performance by continuing to reduce expenses through operational efficiencies, leveragingtechnology and improving labor planning.Expertise in site selection. We believe that our expertise in site selection for potential acquisitions and new clubs provides an advantage over ourcompetitors given the complex real estate markets in the metropolitan areas in which we operate and the relative scarcity of suitable sites. Before opening oracquiring a new club, we undertake a process involving financial modeling, site selection and negotiation of lease and acquisition terms to ensure that apotential location meets our criteria for a model club. We believe that there are barriers to entry, particularly, in our metropolitan areas, including restrictivezoning laws, lengthy permit processes and a shortage of appropriate real estate, which could discourage any large competitor from attempting to open a chainof 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 competeeffectively with us. These barriers of entry are significant in our metropolitan regions; however, they are not as challenging in our surrounding suburbanlocations.Business StrategyIn 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 ourcorporate strategy as it strengthens our competitive position and expands and enhances the services that we can offer to members. In 2018, we acquired 25clubs and constructed and opened one new club. We expect to continue to acquire selective clubs to continue our expansion of club offerings, includingclubs outside of our current regions. In the event we build and acquire additional new clubs, the club expansion is expected to be funded with cash on handor through3Table of Contentsinternally generated cash flows. We may also consider certain acquisitions other than health clubs to diversify the business while enhancing shareholdervalue.Grow membership revenues. We seek to grow our membership revenues in existing clubs through driving membership growth and optimizing dues andmember retention. We believe our offerings are compelling because we include group exercise classes, top of the line equipment, pools and courts in the priceof certain memberships, when available. We will continue to consider and make pricing adjustments in order to increase revenue while also drivingmembership growth.Grow ancillary and other non-membership revenues. We intend to grow our ancillary and other non-membership revenues through a continued focuson 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 servicesat select clubs.Optimization of our clubs. We remain committed to optimizing our existing club base, including club closures when appropriate. We expect these profitmargin initiatives will enable us to improve in club level economics across our portfolio, and to offset the competitive pressure in the geographic regions inwhich 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 astrong 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 hoursof each club to the needs of the specific member demographic utilizing each club and offer a variety of ancillary services, including personal training, groupclasses, 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 toincrease the quality of the member experience, and thereby increase net membership. To better measure the member experience, we utilize social media tohelp 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 andeach of our clubs has an array of cardiovascular machines, resistance training equipment, free weights and functional training zones. We have technicianswho service and maintain our equipment on a timely basis. In addition, we have personal viewing television screens on most pieces of cardiovascularequipment which accommodate individual preferences and viewing, and many cardio machines now include embedded technology that offers bothentertainment and tracking features that record workout results and communicate with many mobile technologies. Most clubs have between one and threestudios 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 usedfor 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 volumeand variety of activities at each club allow each member to enjoy the club, whether customizing their own workout or participating in group activities andclasses. In addition, we have a functional training zone within most of our clubs that feature an array of innovative equipment designed to maximize themember’s workout. The functional training zones include a variety of functional training equipment, such as Total Body Resistance Exercise (“TRX” brand)suspension training frame, Kettle Bells, 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.MarketingOur in-house marketing team is responsible for brand positioning, brand strategy, lead generation, sales support and product innovation for theCompany and all of its subsidiaries. The primary objective is to ensure that our brands seize market share and opportunities through well-defined andcoordinated go-to-market strategies. We are organized to enable close collaboration between our marketing, sales and operations staff, which helps to alignefforts around operational objectives and new product development. We seek to inspire brand experiences and in doing so, drive sustainable and qualitygrowth, while building a strong reputation and loyalty with both existing members and future members. In order to have credible and authentic connectionsto create such desirability with our audience, we utilize a market segmentation strategy. A marketing segmentation strategy divides our target market intosubgroups, whereby consumers in each of these subgroups share one or more characteristics. Using this knowledge, we develop specific plans, includingpersonalized and mass marketing, to reach these targeted customers effectively. We seek to identify and understand consumers’ individual motivations andgoals in an effort to create meaningful products, services and experiences that build a lasting impression and brand loyalty.4Table of ContentsSalesWe 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 andother large groups.We also sell individual memberships online for our standard membership types and the websites enable us to sell memberships for pre-establishedcorporate and group programs. The websites also allow our members to give us direct feedback about our service levels and enables prospective members tosign 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 conveniencefor customers who know and trust our brand and do not require up-front interaction with a membership sales consultant to make their decision. In addition,selling online significantly reduces our cost of sale. The websites also provide information about the respective club locations, program offerings, exerciseclass schedules and sales promotions. Job seekers can also begin the employment application process through the respective websites and investors canaccess financial information and resources.MembershipsWe offer various types of memberships, including single club access and variations of multiple club access. At certain locations, we also offermemberships that include both gym access and spa services.The membership prices are dependent on club location and whether the member joins under a “month-to-month” or “commit” contract. Under thecommit contract, new members commit to a one-year membership, generally at a lower monthly rate than a month-to-month membership. A member maycancel 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 theychoose to cancel. As of December 31, 2018, approximately 87% 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-timeinitiation 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 afterthe first payment. As of December 31, 2018, 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, 2018.UsageOur total club usage, based on the number of member visits, was approximately 30 million member visits during a year. In the year ended December 31,2018, 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 RevenueThe table below presents non-membership revenue (in thousands) components as a percentage of total revenue for the years ended December 31, 2016through 2018. For the Years Ended December 31, 2018 % 2017 % 2016 %Total revenue$443,094 100.0% $403,042 100.0% $396,921 100.0%Non-Membership Revenue: Personal training revenue73,458 16.5% 69,735 17.3% 66,487 16.8%Other ancillary club revenue(1)23,293 5.3% 17,197 4.3% 19,642 4.9%Fees and Other revenue(2)5,737 1.3% 5,876 1.4% 6,361 1.6%Total non-membership revenue$102,488 23.1% $92,808 23.0% $92,490 23.3% (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 LocationsOur clubs are generally located in middle- or upper-income residential, commercial, urban and suburban neighborhoods within major metropolitanareas that are capable of supporting the development of a cluster of clubs. Our clubs typically have5Table of Contentshigh visibility and are easily accessible. In the New York metropolitan, Boston, Washington, D.C. and Philadelphia regions, we have created clusters of clubsin urban areas and their commuter suburban areas aligned with our operating strategy of offering our target members the convenience of multiple locationsclose to where they live and work, reciprocal use privileges, and standardized facilities and services.Approximately 68% of our existing clubs are fitness-only and 32% are multi-recreational. Our fitness-only clubs generally range in size from 15,000 to25,000 square feet and average approximately 18,000 square feet. Our multi-recreational clubs generally range in size from 20,000 to 65,000 square feet, withone 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 fromJanuary 1, 2016 to December 31, 2018, we constructed six new clubs, acquired 43 clubs, closed or relocated 16 clubs, and transitioned one club to a licensedlocation. Currently, 89 of our clubs, or approximately 48% of our existing club base, were from acquisitions of privately owned single and multi-clubbusinesses. In the year ended December 31, 2018, we acquired 25 clubs, opened one new club, closed six clubs, and transitioned one club to a licensedlocation, ending the year with 185 total clubs under operation. This compares to the acquisition of 18 clubs, construction and opening of two clubs, andfive club closures during the year ended December 31, 2017. In both 2018 and 2017, we also upgraded certain existing clubs and plan to continue to do so in2019. 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. Personaltraining 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 areequipped 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 choiceduring their cardiovascular workout. Recently most manufacturers are including embedded screens on their newest cardio fitness equipment which offerenhancements to both on-demand entertainment along with workout data tracking and connectivity to most mobile technologies.Club Services and OperationsOur clubs are structured to provide an enhanced member experience through effective execution of our operating plan. Our club and support teammembers are the key to delivering a valued member experience and our operations are organized to maximize their overall effectiveness. Our club operationsinclude the following:Management. We believe that our success is largely dependent on the selection and development of our team members. Our management structure isdesigned to strike the right balance between consistent execution of operational excellence and nurturing a leader’s capacity for entrepreneurial decisionmaking. Our learning and development system allows for all club positions to receive training on the key elements of their role as well as developmenttraining 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 inspecific areas of our clubs’ services, including sales and marketing, fitness and ancillary programming, learning and development, as well as facilitymanagement 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 apersonal trainer who helps to develop a customized routine that supports the member’s fitness goals. This initial assessment session includes a workoutevaluation, cardio, strength and endurance testing, and movement screening. Members who elect to receive personal training can benefit from one-on-onecoaching and guidance, with refreshed programs that evolve as the members achieve their fitness goals. The personal training membership product providesmembers with a certified personal trainer who works with the member to create an individualized goal-based program. Our fitness teams are trained to providesuperior fitness solutions to address member needs. We believe the qualifications of the personal training staff help to ensure that members receive aconsistent level of quality service throughout our clubs and that our personal training programs provide valuable guidance to our members as well as asignificant source of incremental revenue for us. We believe that members who participate in personal training programs typically have a longer membershiplife.Our commitment to providing a quality exercise experience to our members also includes group exercise programming. Our instructors teach a varietyof classes, including dance, cycling, strength conditioning, boxing, yoga, and Pilates classes. Instructors report through local club management and arefurther supported by regional managers responsible for ensuring6Table of Contentsconsistency in class content, scheduling, training and instruction. We also provide Small Group Training offerings, which are fee-based programs that havesmaller 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, 2018,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, SportsClubs 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.Our facilities and equipment management teams are dedicated to ensuring our clubs and fitness equipment are operating at the highest standard ofperformance 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 ensuringconsistency of policies and procedures across the entire organization that support the member experience.Centralized Information SystemsWe recognize the value of enhancing and extending the uses of information technology (“IT”) in virtually every area of our business. Our IT strategy isaligned to support our business strategy and operating plans. We maintain an ongoing comprehensive program to monitor, replace or upgrade keytechnology 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 trackmember 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 demographics profiles.We continue to create a more customizable and efficient experience for members through updated digital tools, which included an enhanced websiteand 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 andpreferences through a personalized search feature. We continue to enhance the digital tools accessibility to increase our online presence and memberengagement.Our back-office computer systems are comprised of a variety of technologies designed to assist in the management and analysis of our revenues, costsand 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, bettermanage 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 businessneeds.Intellectual PropertyWe have registered various trademarks and service marks with the U.S. Patent and Trademark Office, including, NEW YORK SPORTS CLUBS andNYSC, WASHINGTON SPORTS CLUBS and WSC, BOSTON SPORTS CLUBS and BSC, PHILADELPHIA SPORTS CLUBS and PSC, LUCILLEROBERTS, TMPL, SPORTS CLUBS FOR KIDS, COMPANIESGETFIT.COM, MASTER CLASS, LATITUDE SPORTS CLUBS, TOTAL WOMENGYM AND SPA, CHRISTI’S FITNESS, LIV FITNESS CLUBS, WESTBORO TENNIS & SWIM CLUB and PALM BEACH SPORTS CLUBS. Wecontinue to register other trademarks and service marks. We believe that our rights to these properties are adequately protected.7Table of ContentsCompetitionThe fitness club industry is highly competitive and continues to become more competitive. In each of the regions in which we operate, we competewith 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;•weight-reducing salons;•country clubs; •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 ofservices, age of facility and equipment, training and quality of supervisory staff, size and layout of facility and convenience of location with respect to accessto 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 thepopulation who utilize fitness facilities. The number of competitor clubs that offer lower pricing and a lower level of service have continued to grow in ourregions 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 fitnesscenters, in areas where suitable real estate is more likely to be available, also compete effectively against our suburban formats. Additionally, we facecompetition 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 includecompanies that are larger and have greater resources than us, may enter these regions to our detriment. These competitive conditions may result in increasedprice competition and limit our ability to attract new members and attract and retain qualified personnel. Additionally, consolidation in the fitness clubindustry could result in increased competition among participants, particularly large multi-facility operators that are able to compete for attractiveacquisition candidates and/or newly constructed club locations. This increased competition could increase our costs associated with expansion through bothacquisitions 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 ofconvenience, quality service and affordability. We believe that there are barriers to entry in our metropolitan areas, including restrictive zoning laws, lengthypermit processes and a shortage of appropriate real estate, which could discourage any large competitor from attempting to open a chain of clubs in theseregions. However, such a competitor could enter these regions more easily through one, or a series of, acquisitions. These barriers of entry are significant inour four metropolitan regions; however, they are less challenging in our surrounding suburban locations.Seasonality of BusinessSeasonal trends have a limited effect on our overall business. Generally, we experience greater membership through increased sales at the beginning ofeach year and experience an increased rate of membership attrition during the summer months. In addition, during the summer months, we experience a slightincrease in operating expenses due to our outdoor pool and summer camp operations, generally matched by seasonal revenue recognition from season poolmemberships and camp revenue.8Table of ContentsGovernment RegulationOur operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs arelocated, including general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes thatprescribe certain forms and provisions of membership contracts and that govern the advertising, sale, financing and collection of such memberships as well asstate 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 wemay expand in the future have adopted or may adopt similar legislation. Typically, these statutes and regulations prescribe certain forms and provisions ofmembership contracts, afford members the right to cancel the contract within a specified time period after signing or in certain circumstances, such as formedical 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 bondor proof of financial responsibility and may establish maximum prices for membership contracts and limitations on the term of contracts. The specificprocedures and reasons for cancellation vary due to differing laws in the respective jurisdictions, but in each instance, the canceling member is entitled to arefund of unused prepaid amounts. We are also subject to numerous other types of federal and state regulations governing the sale of memberships. Theselaws and regulations are subject to varying interpretations by a number of state and federal enforcement agencies and courts. We maintain internal reviewprocedures 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 legislationand certification requirements, including the Electronic Funds Transfer Act. Some states, such as New York, have passed or have considered legislationrequiring gyms and health clubs to offer non-automatic renewal membership option at all times and/or limit the duration for which gym memberships canauto-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 thecompletion 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 suchhealth 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 AutomatedClearing House Association. Federal, state and financial industry groups may also consider from time to time new privacy and security requirements that mayapply to our businesses and may impose further restrictions on our collection, disclosure and use of individually identifiable information that are housed inone 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 andpersonal training sessions. Several others states in which we operate have proposed similar tax legislation. These taxes have the effect of increasing thepayments 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.EmployeesOn December 31, 2018, we had approximately 7,700 employees, of whom approximately 1,800 were employed full-time. We are not a party to anycollective bargaining agreement with our employees. We operate with an open door policy and encourage a culture of openness, innovation andinclusiveness that creates a high level of work accountability. We have good relations with our employees and are proud to offer them a great workenvironment with opportunities for growth and development.Available InformationWe 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. Occasionally, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on andaccessible at https://www.townsportsinternational.com. In addition, you may automatically receive email alerts9Table of Contentsand 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 incorporatedby reference into this report nor should it be deemed to have been filed with the SEC.Item 1A. Risk FactorsInvestors should carefully consider the risks described below and all other information in this Annual Report. The risks and uncertainties describedbelow 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 impairour business and operations. If any of the following risks actually occur, our business, financial condition, cash flows or results of operations could bematerially adversely affected.Risks Related to Our BusinessWe are dependent on our Chief Executive Officer. In addition, the loss of key personnel and/or failure to attract and retain highly qualified personnelcould 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 lossof Mr. Walsh could have a material adverse effect on us and our financial performance. Currently, we do not have any long-term employment agreements withour 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 foreseeablefuture, 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 arefixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for thatperiod 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 ofour 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 ancillarysales. 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 increasingour membership, including a decline in our ability to deliver quality service at a competitive cost, the age and condition of our clubs and equipment, thepresence 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 membershiprates 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 inthe future could lead to significant pressures and declines in economic growth, including reduced consumer spending. In a depressed economic and consumerenvironment, consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or assetvalues, which could have a material negative effect on the demand for our services and products and such decline in demand may continue as the economycontinues to struggle and disposable income declines. Other factors that could influence demand include increases in fuel and other energy costs, conditionsin the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factorsaffecting consumer spending behavior. As a result of these factors, membership levels might not be adequate to maintain our operations at current levels orpermit 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 reductionstrategies, to curtail or cancel club membership benefits provided to their respective employees. Any reductions in corporate memberships may lead tomembership 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.10Table of ContentsThe 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 competewith other fitness clubs, private studios, physical fitness and recreational facilities established by local governments, hospitals and businesses for theiremployees, 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 regionsin 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 retainqualified personnel. Additionally, consolidation in the fitness club industry could result in increased competition among participants, particularly largemulti-facility operators that are able to compete for attractive acquisition candidates or newly constructed club locations, thereby increasing costs associatedwith 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, andmay 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-onlymodels.We also face competition from the increased popularity and demand for private studios offering group exercise classes. The prevalence of these smallerstudios may compete against our own studio type offerings, such as cycling, Yoga and Pilates, as consumers may opt to use these competing studios to fulfilltheir 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.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 largelyon the success of our marketing efforts and our ability to provide a consistent, high-quality member experience. Our reputation could be jeopardized if we failto 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 adverselyimpacted 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 ofconsumer confidence for any of these reasons may result in fewer memberships sold or renewed, which in turn could materially and adversely affect ourresults 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 compelledto take additional actions which may not be successful in mitigating such effects.We continue to experience revenue pressure as the fitness industry continues to be highly competitive in the geographic regions in which we compete.We continue to strategize on improving our financial results and focus on increasing membership in existing clubs to increase revenue. We may consideradditional actions within our control, including certain acquisitions, licensing arrangements, the closure of unprofitable clubs upon lease expiration and thesale of certain assets. Our ability to continue to meet our obligations is dependent on our ability to generate positive cash flow from a combination ofinitiatives, including those mentioned above. Failure to continue to successfully implement these initiatives could have a material adverse effect on ourliquidity and our operations, and we would need to implement alternative plans that could include additional asset sales, additional reductions in operatingcosts, additional reductions in working capital, debt restructurings and the deferral ofcapital expenditures. There can be no assurance that such alternatives would be available to us or that we would be successful in their implementation.11Table of ContentsLow consumer confidence levels, increased competition and decreased spending could negatively impact our financial position and result in club closuresand fixed asset and goodwill impairments.In the years ended December 31, 2018 and 2017, we closed six and five clubs, respectively. In the year ended December 31, 2018 and 2017, werecognized fixed asset impairment charges of $2.1 million and $6.5 million, respectively, at underperforming clubs. Some of our club closures andimpairments were due, in large part, to the economic and consumer environment, and increased competition in areas in which our clubs operate. If theeconomic and consumer environment were to deteriorate or not improve or if we are unable to improve the overall competitive position of our clubs, ouroperating performance may experience declines and we may need to recognize additional impairments of our fixed assets and goodwill and may becompelled to close additional clubs. In addition, we cannot ensure that we will be able to replace any of the revenue lost from these closed clubs from ourother club operations. We will continue to monitor the results and changes in expectations of these clubs closely to determine if additional fixed asset orgoodwill impairment charges will be necessary.Our geographic concentration heightens our exposure to adverse regional developments.As of December 31, 2018, we owned and operated 185 clubs under various brand names, primarily located in the United States of America. Ourgeographic concentration in the Northeast and Mid-Atlantic regions and, in particular, the New York metropolitan area, heightens our exposure to adversedevelopments in these areas, including those related to economic and demographic changes in these regions, competition, severe weather, potential terroristthreats or other unforeseen events.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 onOctober 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 andreopened in December 2013. We cannot predict the impact that any future severe weather events will have on our ability to avoid wide-spread or prolongedclub closures. Any such events affecting the areas in which we operate might result in a material adverse effect on our business, financial condition, cashflows and results of operations in the future.Any condition that causes people to refrain, or prevents people, from visiting our clubs, such as severe weather, outbreaks of pandemic or contagiousdiseases, 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 ofterrorist attacks or other conditions that cause people to refrain, or prevent people, from visiting our clubs. Our business could be severely impacted by awidespread regional, national or global health epidemic. A widespread health epidemic or perception of a health epidemic (such as Ebola), whether or nottraced to one of our clubs, may cause members and prospective members to avoid public gathering places or otherwise change their behaviors and impact ourability 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 andprospective member visits to our clubs and negatively impact demand for our club offerings.Further, terrorist attacks, such as the attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and other acts of violence orwar may affect our markets, our operating results or the market on which our common stock trades. Our geographic concentration in the major cities in theNortheast and Mid-Atlantic regions and, in particular, the New York City and Washington, D.C. areas, heightens our exposure to any such future terroristattacks, 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 forour members, the markets for our services and the market for our common stock are uncertain; however, their occurrence can be expected to further negativelyaffect the U.S. economy generally and specifically the regional markets in which we operate. The consequences of any terrorist attacks or any armed conflictsare 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 couldadversely 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 sourcedfrom third-party suppliers. Although we believe that adequate substitutes are currently available, we depend on these third-party suppliers to operate ourbusiness 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 andport delays or congestion. Any disruption to our suppliers’ operations could impact our supply chain and our ability to service our existing clubs and opennew clubs on time or at all and thereby generate revenue. If we lose such suppliers or our suppliers12Table of Contentsencounter financial hardships unrelated to the demand for our equipment or other products or services, we may not be able to identify or enter intoagreements with alternative suppliers on a timely basis on acceptable terms, if at all. Transitioning to new suppliers would be time consuming and expensiveand may result in interruptions in our operations. If we should encounter delays or difficulties in securing the quantity of equipment we require to open newand refurbish existing clubs, our suppliers encounter difficulties meeting our demands for products or services, our websites experience delays or becomeimpaired 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 ourmembers 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 otherintellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectualproperty rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputationcould 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-basedcommunication, which allow individuals’ access to a broad audience of consumers and other interested persons. Negative commentary about us may beposted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available informationabout health clubs and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate withoutaffording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collectiveaction against our clubs, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well asphysical damage to our clubs.We also use social medial platforms as marketing tools. For example, we maintain Facebook, Instagram and Twitter accounts. As laws and regulationsrapidly 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 applicablelaws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject usto fines or other penalties.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 ourexisting members. The laws and regulations governing the use of telephonic communication, including but not limited to emails, text messages and phonecalls, for commercial purposes continue to evolve. Because messaging and phone calls are important to our business, if we are unable to successfully delivermessages or make phone calls to existing members and potential members, if there are legal restrictions on delivering these messages to consumers, or ifconsumers do not or cannot receive our messages or phone calls, our revenues and profitability could be adversely affected. If new laws or regulations areadopted, or existing laws and regulations are interpreted, to impose additional restrictions on our ability to call or send email or text messages to our membersor 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 ofcommunication. In addition to legal restrictions on the use of emails, text messages and phone calls for commercial purposes, service providers and othersattempt to block the transmission of unsolicited messages, commonly known as “spam.” Many service providers have relationships with organizations whosepurpose it is to detect and notify the service providers of entities that the organization believes is sending unsolicited messages. If a service provideridentifies 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 ourmessages to members or potential members. If we are restricted or unable to communicate through emails, text messages or phone calls with our members andpotential members as a result of legislation, regulation, blockage or otherwise, our business, operating results and financial condition could be adverselyeffected.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. Inaddition to finding sites with the right geographical, demographic and other measures we employ in our selection process, we also need to evaluate thepenetration of our competitors in the region. We face competition from13Table of Contentsother 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 forthose 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 newclub.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 potentialstrategic transactions. There can be no assurance that we will continue to be able to successfully integrate these acquisitions into our existing businesswithout 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 vendorand payroll information;•challenges related to the compliance with local laws when acquiring into new jurisdictions;•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 marketingfunctions;•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, includingcontingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business andfinancial 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 thefactors mentioned above or otherwise, our business, financial condition or results of operations may be adversely affected. In addition, failure to integratesuccessfully or realize the anticipated business opportunities and growth prospects from our acquisitions, could result in unanticipated expenses and lossesand 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 willoccur, or the extent to which they actually will be achieved.We have, and will continue to have, significant lease obligations. We are subject to risks associated with leasing substantial amounts of space, includingfuture 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, 2019 through December 31, 2023, we have leases for27 club locations that are due to expire without any renewal options, six of which expire in 2019, and 69 club locations that are due to expire with renewaloptions. For leases with renewal options, several of them provide for our unilateral option to renew for additional rental periods at specific rental rates (forexample, 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 tonegotiate 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 maydepend on other factors that are not within our control. Any or all of these factors and conditions could negatively impact our revenue, growth andprofitability.14Table of ContentsIn 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 propertyinsurance, 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 tofund these expenses, we may not be able to service our lease expenses, which could materially harm our business. Furthermore, the significant cash flowrequired 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 theapplicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellationclause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leaseson 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 revenuegrowth 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 insufficientrevenue 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 andsubstantially lower margins in its second full year of operations than a club opened for more than 24 months. These operating losses and lower margins willnegatively impact our future results of operations. This negative impact will be increased by the initial expensing of pre-opening costs, which include legaland other costs associated with lease negotiations and permitting and zoning requirements, as well as depreciation and amortization expenses, which willfurther negatively impact our results of operations. We may, at our discretion, accelerate or expand our plans to open new clubs, which may adversely affectresults from operations.We currently operate clubs throughout the Northeast, Mid-Atlantic, Florida, California, and Puerto Rico regions of the United States. In the case ofexisting regions, our experience has been that opening new clubs may attract some memberships away from other clubs already operated by us in thoseregions and diminish their revenues. In addition, as a result of new club openings in existing regions and because older clubs will represent an increasingproportion 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 amembership base. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly opened clubs to affect ourclub 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 ofoperations.Our operations and business practices are subject to federal, state and local government regulation in the various jurisdictions in which our clubs arelocated, 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 regulationsAny changes in such laws or regulations could have a material adverse effect on our financial condition and results of operations.15Table of ContentsWe 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 mightnot 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 futureor 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 ourconsolidated financial position, results of operations and cash flows. At any given time there may be one or more civil actions initiated against us, includingthe matters disclosed under “Legal Proceedings” in this Annual Report. If one or more of these pending lawsuits, or any lawsuits in the future are adjudicatedin 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 ourconsolidated financial position, results of operations and cash flows. In addition, any litigation, regardless of the outcome, may distract our management fromthe 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 establishedsecurity 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 prevent security breaches and breaches of our customers’ privacy may occur, which couldharm our business. For example, a significant number of our users provide us with credit card and other confidential information and authorize us to bill theircredit card accounts directly for our products and services. Typically, we rely on encryption and authentication technology licensed from third parties toenhance transmission security of confidential information. Techniques used to obtain unauthorized access or to sabotage systems change frequently and areconstantly evolving. These techniques and other advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility securityor 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 unableto anticipate these techniques or to implement adequate preventive or reactive measures. Several recent, highly publicized data security breaches at othercompanies have heightened consumer awareness of this issue. Further, a significant number of states require the customers be notified if a security breachresults 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 ourreputation, cause our members to lose confidence in us, or harm our financial condition and, therefore, our business. In addition, a party who is able tocircumvent 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 berequired to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Actual or perceivedvulnerabilities 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 maybecome 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 adverselyimpact our business.We primarily accept payments for our memberships through EFT from members’ bank accounts and, therefore, we are subject to federal, state andprovincial legislation and certification requirements governing EFT, including the Electronic Funds Transfer Act. Some states, such as New York, havepassed or have considered legislation requiring gyms and health clubs to offer a prepaid membership option at all times and/or limit the duration for whichgym 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 onerousand 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 tocomply fully with these rules or requirements may16Table of Contentssubject us to fines, higher transaction fees, penalties, damages and civil liability and may result in the loss of our ability to accept EFT payments, whichwould have a material adverse effect on our business, results of operations and financial condition. In addition, any such costs, which may arise in the futureas 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 ourbusiness 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 ourmemberships, 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 onour 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 atimely 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 oursecurity measures and significantly higher ACH, credit card and debit card related costs, each of which could adversely affect our business, financialcondition and results of operations. The termination of our ability to process payments through ACH transactions or on any major credit or debit card wouldsignificantly impair our ability to operate our business.Regulatory changes in the terms of credit and debit card usage, including any existing or future regulatory requirements, could have an adverse effect onour business.Our business relies heavily on the use of credit and debit cards in sales transactions. Regulatory changes to existing rules or future regulatoryrequirements 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 administrativefunctions.The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information system toprocess new memberships, bill members, check-in members and track and analyze sales and membership statistics, the frequency and timing of memberworkouts, cross-club utilization, member life, value-added services and demographic profiles by member. This system also assists us in evaluating staffingneeds and program offerings. We believe that, without investing in enhancements, this system would have reached the end of its life cycle. Correcting anydisruptions or failures that affect our proprietary system could be difficult, time-consuming and expensive because we would need to use contractedconsultants 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 maybecome dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect ourbilling 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 datacosts, 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 orother similar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts ordelays 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 adverselyimpact our business.Future expansion or changes in the industry will place increased demands on our administrative, operational, financial and other resources. Any failureto manage such growth or changes effectively could seriously harm our business. To be17Table of Contentssuccessful, we will need to continue to improve management information systems and our operating, administrative, financial and accounting systems andcontrols. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales andoperations 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 increasedcosts. For example, we have engaged third parties to host and manage certain aspects of our data center, information and technology infrastructure andelectronic 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 ofthese 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 thevendor 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 facefinancial 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 thesebanks 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 onecommercial bank as of December 31, 2018 totaled $24.6 million. During 2018, in any one month, the amount held in one commercial bank has been as highas approximately $45.9 million.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 ableto 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 cashfrom available sources is insufficient or unavailable due to restrictive credit markets, or if cash is used for unanticipated needs, we may require additionalcapital 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 orprivileges 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 currentgrowth plans, take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could havean adverse effect on our business plans and operating results.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 toour 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 toachieve our targeted return. We cannot assure that we can offset cost increases by increasing our membership dues and other fees and improving profitabilitythrough 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 is trained). Unused personal training sessionsexpire 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. Wehad collected approximately $12.4 million and $12.5 million for unused and expired personal training sessions that had not been recognized as revenue andwas recorded as deferred revenue as of December 31, 2018 and 2017, respectively. For six of the jurisdictions in which we operate, we have concluded, basedon opinions from outside counsel, that monies paid to the company for unused and expired personal training sessions were not escheatable. For the remainingjurisdictions in which we operate, we have likewise concluded that the monies paid to the company for unused personal training sessions were notescheatable, regardless of whether they expire. However, we have not yet obtained opinions from outside counsel for these jurisdictions. It is possiblehowever, 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 suchjurisdiction. This could have a material adverse effect on our cash flows. The State of New York has informed us that it is considering whether we are requiredto remit the amount received by the Company for unused, expired personal training sessions to the State of New York as unclaimed property.18Table of ContentsWe may have exposure to additional tax liabilities.From time to time, we are under audit by federal and local tax authorities and we may be liable for additional tax obligations and may incur additionalcosts in defending any claims that may arise. For example, as of December 31, 2018, certain of our state and local tax returns from years 2006 through 2014were being examined by certain state and local jurisdictions and it is difficult to predict the final outcome or timing of resolution of any particular matterregarding these examinations. In particular, we disagree with the proposed assessment dated December 12, 2016 from the State of New York and attended aconciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at theconference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State of New York arevised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. The Company hasappealed the assessment with the New York State Division of Tax Appeals. On November 17, 2017, we were notified that the State of New York proposed anadjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive of approximately $757,000 in interest. In November 2018, wemet with the Department officials for the assessment related to 2010 to 2014. The meeting ended with the company disagreeing with the proposed assessmentfor the years in audit. Subsequently, in a letter dated February 4, 2019, the interest amount is revised to $1.2 million.The Company is also under examination in New York City (2006 through 2014). New York City Department of Finance has proposed an audit changenotice to the Company dated May 2, 2018, for the tax years ended December 31, 2006 through December 31, 2009 for proposed general corporation taxliability in the amount of $4.8 million plus $4.1 million in interest. In a letter dated January 18, 2019, NYC Department of finance has issued a proposedgeneral tax liability of $5.6 million, inclusive of $1.6 million in interest for audit periods 2010 to 2014.We currently are in the process of appealing the assessment with the New York State Division of Tax Appeals. We have not recorded a tax reserverelated to the proposed assessments. It is difficult to predict the ultimate outcome of this or any other tax examination and the result of any such taxexamination could have a material adverse effect on our results of operations and financial condition.Risks Related to Our Leverage and Our IndebtednessOn November 15, 2013, TSI LLC entered into a $370.0 million senior secured credit facility (“2013 Senior Credit Facility”). The 2013 Senior CreditFacility consists of a $325.0 million term loan facility (“2013 Term Loan Facility”), and a $45.0 million revolving loan facility (“2013 Revolving LoanFacility”). On November 8, 2018, the 2013 Senior Credit Facility was amended, which modified the revolving loan facility amount to $15.0 million from$45.0 million. The 2013 Term Loan Facility matures on November 15, 2020, and the amended 2013 Revolving Loan Facility matures on August 14, 2020.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 sufficientliquidity, 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 arefunds generated from operating activities, available cash and cash equivalents and borrowings under our 2013 Revolving Loan Facility. If our currentresources 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 unemploymentlevels, inflation, availability of credit, energy costs and other macro-economic factors, as well as uncertainty about future economic conditions, adverselyaffect 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, 2018, the principal amount of debt outstanding under our 2013 Term Loan Facilitywas $197.8 million. The 2013 Term Loan Facility expires on November 15, 2020. In addition, as of December 31, 2018, under the 2013 Revolving LoanFacility there were no outstanding borrowings and outstanding letters of credit issued associated with this revolving loan facility totaled $2.2 million, whichif still outstanding, will likely need to be funded by our cash upon the expiration of the 2013 Revolving Loan Facility on August 14, 2020. The Companyalso had $2.0 million in outstanding letters of credit issued that were not associated with the 2013 Revolving Credit Facility to secure certain lease relatedobligations. The unutilized portion of the 2013 Revolving Loan Facility as of December 31, 2018 was $12.8 million, with borrowings under such facilitysubject 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 timeof borrowing. Our substantial debt could have important consequences, including:19Table of Contents•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 generalcorporate 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 RevolvingLoan Facility and on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing our ability to use ourcash 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 interestrates;•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 financialresults.Interest rates applicable to our debt are expected to fluctuate based on economic and market factors that are beyond our control. Any significantincrease in market interest rates, and in particular the short-term Eurodollar rates, would result in a significant increase in interest expense on our debt, whichcould negatively impact our net income and cash flows.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 onterms 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 inthe 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 becertain 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 financialcondition 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 anyrefinancing 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 otherfactors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness wouldincrease. 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 the Company's liquidity and wouldlikely 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 settleour indebtedness.Our 2013 Senior Credit Facility and the agreements related thereto contain, among other things, covenants that may restrict our ability to finance futureoperations 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;20Table of Contents•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 revolvingloan commitments exceeds 20%, or $3.0 million, of the aggregate amount of those commitments. In such event, TSI LLC is required to maintain a totalleverage ratio, as defined in the 2013 Senior Credit Facility, of no greater than 4.00:1.00. As of December 31, 2018, TSI LLC had outstanding letters of creditof $2.2 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 utilizedon the 2013 Revolving Loan Facility.Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet certain financial ratios underthe 2013 Senior Credit Facility. We may be unable to meet those tests and the lenders may decide not to waive any failure to meet those tests. A failure tosatisfy these tests could cause a default under the 2013 Senior Credit Facility. If an event of default under the 2013 Senior Credit Facility occurs, the lenderscould elect to terminate any and all outstanding undrawn commitments to lend and declare all amounts outstanding thereunder, together with accruedinterest, 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 otherobligations, which would have a material adverse effect on our business, financial condition and results of operations.Risks Related to Our Common StockThe stock ownership of certain large stockholders will likely limit your ability to influence corporate matters.As of February 22, 2019, the Company had two stockholders (including Patrick Walsh, the Chief Executive Officer and Chairman of our board ofdirectors) which, together with each such stockholder's affiliates, beneficially owned 11.0% and 30.4% of our outstanding common stock, respectively, basedon public filings made by such stockholders. Each of these stockholders may vote their stock with respect to certain matters, including any determinationswith 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 tobe similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, includingdecreases 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 towide 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;21Table of Contents•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 ofdirectors or management;•sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such salescould occur; and•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 oflitigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments tosatisfy 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 whichstockholders 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 ofcommon stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock orvoting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likelyresult 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 investmentunless 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 theforeseeable 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, amongother things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deemrelevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiariesincur, 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 aprice greater than that which you paid for it.Item 1B. Unresolved Staff CommentsNoneItem 2. PropertiesWe own our 1000 Sunrise Highway location in Massapequa, New York, which houses one of our clubs and a retail tenant. This property was acquired inNovember 2017. In Florida, we own both the 1250 Old Dixie Highway location and 4540 Donald Ross Road location, which were acquired in January 2018and 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 theperiod from January 1, 2019 through December 31, 2023, we have leases for 27 club locations that are due to expire without any renewal options, six ofwhich are due to expire in 2019, and 69 club locations that are due to expire with renewal options. Renewal options include terms for rental increases basedon 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 approximately82,000 square feet in Elmsford, NY, for the operation of a centralized laundry facility for the New York Sports Clubs offering towel service, and forconstruction and equipment storage. This space also serves as corporate office22Table of Contentsspace. 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.The following table provides information regarding our club locations:Location Address Date Opened or Management AssumedNew York Sports Clubs:Manhattan, NY 61 West 62nd Street July 1983Manhattan, NY 1601 Broadway September 1991Manhattan, NY 349 East 76th Street April 1994Manhattan, NY 248 West 80th Street May 1994Manhattan, NY 502 Park Avenue February 1995Manhattan, NY 303 Park Avenue South December 1995Manhattan, NY 1635 Third Avenue October 1996Manhattan, NY 575 Lexington Avenue November 1996Manhattan, NY 278 Eighth Avenue December 1996Manhattan, NY 200 Madison Avenue February 1997Manhattan, NY 633 Third Avenue April 1998Manhattan, NY 217 Broadway March 1999Manhattan, NY 23 West 73rd Street April 1999Manhattan, NY 1372 Broadway October 1999Manhattan, NY 300 West 125th Street May 2000Manhattan, NY 128 Eighth Avenue December 2000Manhattan, NY 2527 Broadway August 2001Manhattan, NY 3 Park Avenue August 2001Manhattan, NY 10 Irving Place November 2001Manhattan, NY 230 West 41st Street November 2001Manhattan, NY 1221 Avenue of the Americas January 2002Manhattan, NY 200 Park Avenue December 2002Manhattan, NY 232 Mercer Street September 2004Manhattan, NY 225 Varick Street August 2006Manhattan, NY 885 Second Avenue February 2007Manhattan, NY 301 West 145th Street October 2007Manhattan, NY 1400 5th Avenue December 2007Manhattan, NY 75 West End Avenue April 2013Manhattan, NY 555 Sixth Avenue September 2014Manhattan, NY 28-30 Avenue A March 2015Manhattan, NY 30 Broad Street March 2015Manhattan, NY 1231 Third Avenue February 2017Manhattan, NY 4 Astor Place May 2017Manhattan, NY 139 West 32nd Street September 2018Manhattan, NY 1915 3rd Avenue September 2018Bronx, NY 1601 Bronxdale Avenue November 2007Brooklyn, NY 110 Boerum Place October 1985Brooklyn, NY 1736 Shore Parkway June 1998Brooklyn, NY 179 Remsen Street May 2001Brooklyn, NY 324 Ninth Street August 2003Brooklyn, NY 1630 E 15th Street August 2007Brooklyn, NY 7118 Third Avenue May 2004Brooklyn, NY 439 86th Street April 2008Brooklyn, NY 147 Greenpoint Avenue June 2014Queens, NY 69-33 Austin Street April 1997Queens, NY 153-67 A Cross Island Parkway June 199823Table of ContentsLocation Address Date Opened or Management AssumedQueens, NY 2856-2861 Steinway Street February 2004Queens, NY 8000 Cooper Avenue March 2007Queens, NY 99-01 Queens Boulevard June 2007Queens, NY 39-01 Queens Boulevard December 2007Staten Island, NY 300 West Service Road June 1998Scarsdale, NY 696 White Plains Road October 1995Mamaroneck, NY 124 Palmer Avenue January 1997Croton-on-Hudson, NY 420 South Riverside Drive January 1998Larchmont, NY 15 Madison Avenue December 1998Great Neck, NY 15 Barstow Road July 1989East Meadow, NY 625 Merrick Avenue January 1999Commack, NY 6136 Jericho Turnpike January 1999Massapequa, NY 1000 Sunrise Highway November 2017Oceanside, NY 2909 Lincoln Avenue May 1999Long Beach, NY 265 East Park Avenue July 1999Garden City, NY 833 Franklin Avenue May 2000Huntington, NY 350 New York Avenue February 2001Syosset, NY 49 Ira Road March 2001West Nyack, NY 3656 Palisades Center Drive February 2002Woodmere, NY 158 Irving Street March 2002Hartsdale, NY 208 E. Hartsdale Avenue September 2004Somers, NY Somers Commons, 80 Route 6 February 2005White Plains, NY 4 City Center September 2005Hawthorne, NY 24 Saw Mill River Road January 2006Dobbs Ferry, NY 50 Livingstone Avenue June 2008Smithtown, NY 5 Browns Road December 2007Carmel, NY 1880 Route 6 July 2007Hicksville, NY 100 Duffy Avenue November 2008New Rochelle, NY Trump Plaza, Huguenot Street March 2008Deer Park, NY 455 Commack Avenue March 2009Garnerville, NY 20 W. Ramapo Road October 2011Stamford, CT 106 Commerce Road January 1998Greenwich, CT 6 Liberty Way May 1999West Hartford, CT 65 Memorial Road November 2007Princeton, NJ 301 North Harrison Street May 1997Matawan, NJ 450 Route 34 April 1998Marlboro, NJ 34 Route 9 North April 1998Ramsey, NJ 1100 Route 17 North June 1998Springfield, NJ 215 Morris Avenue August 1998Hoboken, NJ 59 Newark Street October 1998Jersey City, NJ 147 Two Harborside Financial Center June 2002Newark, NJ 1 Gateway Center October 2002Ridgewood, NJ 129 S. Broad Street June 2003Westwood, NJ 35 Jefferson Avenue June 2004Livingston, NJ 39 W. North Field Road February 2005Hoboken, NJ 210 14th Street December 2006Englewood, NJ 34-36 South Dean Street December 2006Clifton, NJ 202 Main Avenue March 2007Montclair, NJ 56 Church Street January 2008Butler, NJ 1481 Route 23 January 200924Table of ContentsLocation Address Date Opened or Management AssumedEast Brunswick, NJ 300 State Route 18 March 2009Bayonne, NJ 550 Route 440 North December 2011Lucille Roberts:Manhattan, NY 50 East 42nd Street September 2017Manhattan, NY 1387 Nicholas Avenue September 2017Bronx, NY 2449 Morris Avenue September 2017Brooklyn, NY 430 89th Street September 2017Brooklyn, NY 925 Kings Highway September 2017Brooklyn, NY 1950 Ralph Avenue September 2017Queens, NY 32-62 Steinway Street September 2017Queens, NY 135-39 38th Avenue September 2017Queens, NY 70-20 Austin Street September 2017Commack, NY 6534 Jericho Turnpike September 2017Bay Shore, NY 1850 Sunrise Highway September 2017Holbrook, NY 5801 Sunrise Highway September 2017Rockville Centre, NY 298 Sunrise Highway September 2017Valley Stream, NY 225 West Merrick Road September 2017Clifton, NJ 1075 Bloomfield Avenue September 2017Jersey City, NJ 338 Central Avenue September 2017TMPL:Manhattan, NY 355 West 49th Street December 2017Manhattan, NY 125 Seventh Avenue South December 2018Boston Sports Clubs:Boston, MA 1 Bulfinch Place August 1998Boston, MA 201 Brookline Avenue June 2000Boston, MA 361 Newbury Street November 2001Boston, MA 350 Washington Street February 2002Boston, MA 505 Boylston Street January 2006Boston, MA 560 Harrison Avenue February 2006Boston, MA 695 Atlantic Avenue October 2006Boston, MA One Beacon Street May 2013Boston, MA 800 Boylston Street May 2013Boston, MA 100 Summer Street May 2013Boston, MA 540 Gallivan Road October 2014Boston, MA 95 Washington Street November 2014Boston, MA 699 Boylston Street June 2015Allston, MA 15 Gorham Street July 1997Wellesley, MA 140 Great Plain Avenue July 2000Lynnfield, MA 425 Walnut Street July 2000Lexington, MA 475 Bedford Avenue July 2000Cambridge, MA 625 Massachusetts Avenue January 2001West Newton, MA 1359 Washington Street November 2001Waltham, MA 840 Winter Street November 2002Watertown, MA 311 Arsenal Street January 2006Newton, MA 135 Wells Avenue August 2006Somerville, MA 1 Davis Square December 2007Medford, MA 70 Station Landing December 2007Westborough, MA 1500 Union Street September 2008Westborough, MA 35 Chauncy Street January 2018Woburn, MA 300 Presidential Way December 2008Wayland, MA Wayland Town Center November 201425Table of ContentsLocation Address Date Opened or Management AssumedProvidence, RI 131 Pittman Street December 2008Haverhill, MA 3 Ferry Street December 2018Methuen, MA 116 Pleasant Valley Street December 2018Peabody, MA 194 Newbury Street December 2018Salisbury, MA 191 Elm Street December 2018Washington Sports Clubs:Washington, D.C. 1835 Connecticut Avenue, N.W January 1990Washington, D.C. 2251 Wisconsin Avenue, N.W May 1994Washington, D.C. 1211 Connecticut Avenue, N.W July 2000Washington, D.C. 783 Seventh Street, N.W October 2004Washington, D.C. 3222 M Street, N.W February 2005Washington, D.C. 14th Street, N.W June 2008North Bethesda, MD 10400 Old Georgetown Road June 1998Silver Spring, MD 8506 Fenton Street November 2005Bethesda, MD 6800 Wisconsin Avenue November 2007Clarendon, VA 2700 Clarendon Boulevard November 2001Philadelphia Sports Clubs:Philadelphia, PA 220 South 5th Street January 1999Philadelphia, PA 2000 Hamilton Street July 1999Chalfont, PA One Highpoint Drive January 2000Philadelphia, PA 1735 Market Street October 2000Radnor, PA 555 East Lancaster Avenue December 2006Total Woman Gym and Spa:Alameda, CA 2247 S Shore Center April 2018San Jose, CA 950 El Paseo de Saratoga April 2018Glendale, CA 601 N Brand Boulevard April 2018Irvine, CA 14280 Culver Drive April 2018Laguna Hills, CA 23541 Calle De La Louisa April 2018Northridge, CA 19456 Nordhoff Street April 2018Placentia, CA 860 N Rose Drive April 2018Studio City, CA 12050 Ventura Boulevard April 2018Canoga Park, CA 6600 Topanga Canyon Boulevard April 2018Torrance, CA 2755 E Pacific Coast Highway April 2018Valencia, CA 24245 Magic Mountain Parkway April 2018Westlake Village, CA 30770 Russell Ranch Road April 2018Christi's Fitness: Vero Beach, FL 1250 Old Dixie Highway January 2018Palm Beach Sports Clubs:Jupiter, FL 201 N US Highway 1 August 2018Palm Beach Gardens, FL 4540 Donald Ross Rd August 2018Port St. Lucie, FL 250 NW Peacock Blvd August 2018LIV Fitness: San Juan, Puerto Rico 103 De Diego Avenue September 2018Guaynabo, Puerto Rico Calle Parkside 2 September 2018New York Sports Clubs - Switzerland:Basel, Switzerland St. Johanns-Vorstadt 41 August 1987Zurich, Switzerland Glarnischstrasse 35 August 1987Basel, Switzerland Gellerstrasse 235 August 200126Table of ContentsItem 3. Legal ProceedingsOn 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 fitnessclubs 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 clubsubsidiaries alleging, among other things, breach of lease in connection with the decision to close the club located in a building owned by the plaintiff andleased to a subsidiary of TSI LLC, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI LLC. Following adetermination 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 August29, 2011, an additional award (amounting to approximately $900,000) (the “Additional Award”), was entered against the tenant, which has recorded aliability. Separately, TSI LLC is party to an agreement with a third-party developer, which by its terms provides indemnification for the full amount of anyliability of any nature arising out of the lease described above, including attorneys’ fees incurred to enforce the indemnity. As a result, the developerreimbursed 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 theAdditional Award, and the tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord arecurrently 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 29, 2015. TSI LLC does not believe it is probable that TSI LLC will berequired 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 and proceedings incidental to the ordinarycourse of business, including personal injury, landlord tenant disputes, construction matters, employee and member relations, and Telephone ConsumerProtection Act claims (a number of which purport to represent a class and one of which was brought by the Washington, D.C. Attorney General’s Office). Theresults of litigation are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costlylitigation, require significant amounts of management time and result in diversion of significant resources. The results of these other lawsuits, claims andproceedings cannot be predicted with certainty. The Company establishes accruals for loss contingencies when it has determined that a loss is probable andthat the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes incircumstances. We currently believe that the ultimate outcome of such lawsuits, claims and proceedings will not, individually or in the aggregate, have amaterial adverse effect on our consolidated financial position, results of operations or liquidity. However, depending on the amount and timing, anunfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.Item 4. Mine Safety DisclosuresNot applicable.27Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock currently trades on The NASDAQ Global Market, under the symbol CLUB.HoldersAs of February 22, 2019, there were approximately 101 holders of record of our common stock. There are additional holders who are not “holders ofrecord” but who beneficially own stock through nominee holders such as brokers and benefit plan trustees.Dividends PolicyThe Company did not declare any dividends in 2018 and 2017.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 businessconditions, our strategic plans, our financial results and condition, contractual, legal and regulatory restrictions on the payment of dividends by us and oursubsidiaries and such other factors as our board of directors may consider relevant. If we decide to pay a dividend, we may rely on cash on hand at TSIHoldings, which was approximately $2.0 million at December 31, 2018.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 topay cash dividends except (a) in an amount, when combined with certain prepayments of indebtedness, of up to $35.0 million, subject to pro formacompliance with a total leverage ratio, as defined, and no default or event of default existing or continuing under the credit agreement, and (b) an additionalamount 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 ofdefault existing or continuing under the credit agreement. In October 2017, TSI LLC made a dividend distribution of $35.0 million to TSI Holdings, Inc.Issuer Purchases of Equity SecuritiesWe did not purchase any equity securities during the fourth quarter ended December 31, 2018.Recent Sales of Unregistered SecuritiesWe did not sell any securities during the year ended December 31, 2018 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 DataNot Applicable.28Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou 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 notesappearing at the end of this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements thatinvolve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a resultof 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.OverviewBased on the number of clubs, we are one of the leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the UnitedStates and one of the largest fitness club owners and operators in the United States. Our clubs collectively served approximately 627,000 members as ofDecember 31, 2018. As of December 31, 2018, we owned and operated 185 fitness clubs (“clubs”) under the various brand names, primarily located in theUnited States of America.Brand CountNew York Sports Clubs 98 Boston Sports Clubs 33 Washington Sports Clubs 10 Philadelphia Sports Clubs 5 Lucille Roberts 16 TMPL 2 Total Woman Gym and Spa 12 Palm Beach Sports Clubs 3 Christi’s Fitness 1 LIV Fitness 2 New York Sports Clubs - Switzerland 3 185 We develop clusters of clubs to serve densely populated metropolitan regions and we service such populations by clustering clubs near the highestconcentrations of our target customers’ areas of both employment and residence. Our clubs are located for maximum convenience to our members in urban orsuburban areas, close to transportation hubs or office or retail centers. Our members include a wide age demographic covering the student market to the activemature market. In each of our main regions, we have developed clusters by initially opening or acquiring clubs located in the more central urban markets ofthe region and then branching out from these urban centers to suburbs and neighboring communities.In recent years, our focus has been on acquiring health clubs that have already reached maturity and therefore operating results are established andstable upon acquisition. We also focus on opening and acquiring clubs in areas where we believe the region is underserved or where new clubs are intendedto replace existing clubs at lease expiration. We believe these are important elements of our corporate strategies as it strengthens our competitive positionand expands and enhances the services that we can offer to members. We expect to continue to acquire selective clubs to continue our expansion of clubofferings, including clubs outside of our current regions. In the event we build and acquire additional new clubs, the club expansion is expected to be fundedwith cash on hand or through internally generated cash flows. We may also consider certain acquisitions other than health clubs to diversify the businesswhile enhancing shareholder value.In 2018, we acquired 25 clubs and constructed and opened one new club for which we had an existing lease. In 2017, we acquired 18 clubs andconstructed and opened two clubs.Revenue and Operating ExpensesWe 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 andprocessing fees paid by our members. In addition, we collect usage fees on a per visit basis for non-passport members using non-home clubs. Thesedues and fees comprised 76.9% of our total revenue for the year ended December 31, 2018. We recognize revenue from membership dues in themonth when the29Table of Contentsservices are rendered. We recognize revenue from initiation and processing fees over the estimated average membership life and annual fees over atwelve month period.•Ancillary club revenue: For the year ended December 31, 2018, we generated 16.5% of our revenue from personal training and 5.3% of ourrevenue from other ancillary programs and services consisting of Sports Clubs for Kids, racquet sports, Small Group Training programs and spaservices. We continue to grow ancillary club revenue by building on ancillary programs such as our personal training membership product and ourfee-based Small Group Training programs.We also receive revenue (approximately 1.3% of our total revenue for the year ended December 31, 2018) from the rental of space in our facilities tooperators who offer wellness-related offerings, such as physical therapy and juice bars. In addition, we sell in-club advertising and sponsorships, providelaundry 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 andother revenue.Our performance is dependent in part on our ability to continually attract and retain members at our clubs. In the years ended December 31, 2018 and2017, our attrition rate was 49.9% and 46.9%, respectively.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 areprimarily 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 andcommunication systems, acquisition related costs, purchasing, member relations, legal and consulting fees, and real estate development expenses. Payroll andrelated expenses are included in a separate line item on the consolidated statement of operations and are not included in general and administrative expenses.Approximately 45% of general and administrative expenses relate directly to club operations including phone and data lines, computer maintenance,business licenses, office and sales supplies, general liability insurance, 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 toimprove. Conversely, when our membership base declines, our operating margins are negatively impacted. At acquired clubs, operating margins may initiallydecline 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 andrenovation of our existing clubs. The construction and equipment costs vary based on the costs of construction labor, as well as the planned service offeringsand size and configuration of the facility. We perform routine improvements at our clubs and partial replacement of the fitness equipment each year for whichwe are currently budgeting approximately 2% of projected annual revenue. In this regard, facility remodeling is also considered where appropriate.As of December 31, 2018, our consolidated operating results included five majority owned clubs for which we had 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 theequity method of accounting. We also owned and licensed one club and provided management services at two locations that we did not have an equityinterest.Operating income is impacted by certain charges and benefits which can fluctuate year to year. In 2018 and 2017, operating income was impacted byfixed asset impairment charges of $2.1 million and $6.5 million, respectively, related to underperforming clubs. Year Ended December 31, 2018 2017 ($ amounts in thousands)Operating income $12,519 $6,937Increase over prior period 80.5 % 208.7 %Net (loss) income $(125) $4,369Decrease over prior period (102.9)% (45.7)%Cash flows provided by operating activities $64,094 $28,199Increase over prior period 127.3 % 33.1 %30Table of ContentsComparable Club RevenueWe define comparable club revenue as revenue at those clubs that were operated by us for over 12 months 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. Comparable Club Revenue Increase Quarter Full-Year2018 First Quarter 1.7% Second Quarter 1.8% Third Quarter 1.5% Fourth Quarter 1.1% 1.6%2017 First Quarter 0.7% Second Quarter 1.2% Third Quarter 1.8% Fourth Quarter 2.8% 1.6%Key determinants of comparable club revenue increases are new memberships, member retention rates, pricing and ancillary revenue increases.The comparable club revenue increase in 2018 was primarily due to higher average dues per membership, increased annual fees and personal trainingrevenue. The comparable club revenue increase was partially offset by a decrease in member count and other ancillary club revenue, particularly our SportsClubs for Kids programs. The comparable club revenue increase in 2017 was primarily due to higher average dues per membership and an increase in membercount in comparable clubs, partially offset by decreased initiation and processing fees and other ancillary club revenue.Historical Club Count Year Ended December 31, 2018 2017Clubs operated in consolidated operating results: Clubs operated at beginning of period 164 149Acquired clubs 25 18New clubs opened 1 2Club converted to licensed club (3) (1) —Clubs closed (6) (5)Clubs operated at end of period 183 164Club included in equity investment at end of period (1) 1 1Licensed club operated at end of period (3) 1 —Total clubs operated at end of period(1)(2) 185 165(1)Excludes one 20% owned club that operated under a different brand name in our Washington, D.C. region.(2)Excludes two locations that were managed by us in which we did not have an equity interest.(3)Represents one club that transitioned to a licensed location in the first quarter of 2018 and bears the “Washington Sports Clubs” brand name.31Table of ContentsConsolidated Results of OperationsThe following table sets forth certain operating data as a percentage of revenue for the periods indicated: Year Ended December 31, 2018 2017Revenues100.0 % 100.0 %Operating expenses: Payroll and related38.0 36.1Club operating44.5 44.8General and administrative5.7 5.6Depreciation and amortization8.5 10.2Impairment of fixed assets0.5 1.6 97.2 98.3Operating income2.8 1.7Interest expense, net3.0 3.1Equity in the earnings of investees and rental income(0.1) (0.1)Loss before benefit for corporate income taxes(0.1) (1.3)Benefit for corporate income taxes(0.1) (2.4)Net income including non-controlling interests— 1.1Net income attributable to Town Sports International Holdings, Inc. and subsidiaries— % 1.1 %Year ended December 31, 2018 compared to year ended December 31, 2017RevenueRevenue (in thousands) was comprised of the following for the periods indicated: Year Ended December 31, 2018 2017 Revenue % Revenue Revenue % Revenue % VarianceMembership dues$339,397 76.6% $307,966 76.4% 10.2 %Initiation and processing fees1,209 0.3% 2,268 0.6% (46.7)%Membership revenue340,606 76.9% 310,234 77.0% 9.8 %Personal training revenue73,458 16.5% 69,735 17.3% 5.3 %Other ancillary club revenue23,293 5.3% 17,197 4.3% 35.4 %Ancillary club revenue96,751 21.8% 86,932 21.6% 11.3 %Fees and other revenue5,737 1.3% 5,876 1.4% (2.4)%Total revenue$443,094 100.0% $403,042 100.0% 9.9 %Revenue increased $40.1 million, or 9.9%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Revenue at clubsopened or acquired in the last 24 months increased approximately $49.9 million and clubs that have operated over 24 months increased approximately $2.7million, primarily due to increased membership dues and personal training at these clubs. This was offset by an $8.7 million decrease in revenue at clubsclosed in the last 24 months. In addition to these variances, in the year ended December 31, 2017, we recognized approximately $3.6 million of out of periodpersonal training revenue at three of our jurisdictions.Comparable club revenue increased 1.6% in the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due tohigher average dues per membership, increased annual fees and personal training revenue. The comparable club revenue increase was partially offset by adecrease in member count and other ancillary club revenue, particularly our Sports Clubs for Kids programs.Membership dues revenue increased $31.4 million, or 10.2%, in the year ended December 31, 2018 compared to the year ended December 31, 2017,primarily reflecting the favorable impact from the newly acquired and opened clubs, higher average dues per membership and increased annual fees. Theseincreases were partially offset by the impact of club closures.32Table of ContentsInitiation and processing fees revenue decreased $1.1 million, or 46.7%, in the year ended December 31, 2018 compared to the year endedDecember 31, 2017. Initiation and processing fees revenue is recognized over the estimated average membership life of 26 months. Amounts collected persale has decreased in recent years, resulting in less revenue recognized in recent months as higher collection periods are fully recognized.Personal training revenue increased $3.7 million, or 5.3% in the year ended December 31, 2018 compared to the year ended December 31, 2017. Theincrease in personal training revenue was primarily related to the newly acquired and opened clubs, and increased member interest resulting from improvedproduct management and marketing strategies. This increase was partially offset by the recognition of $3.6 million in 2017 related to unused and expiredsessions in three of our states, and the impact of club closures.We recognize revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personal training sessionsexpire after a set, disclosed period of time after purchase and are not refundable or redeemable by the member for cash. For a total of six of the jurisdictions inwhich we operate, we have concluded, based on opinions from outside counsel, that money held by a company for unused and expired personal trainingsessions were not escheatable. In 2010, for three jurisdictions, we concluded, based on opinions from outside counsel, that monies held by a company forunused and expired personal training sessions were not escheatable. As a result, we recorded approximately $2.7 million as personal training revenue in thefourth quarter of 2010. This amount was previously recorded in deferred revenue. In 2017, for another three jurisdictions, we concluded, based on opinionsfrom outside counsel, that monies held by a company for unused and expired personal training sessions were not escheatable. As a result, we recordedapproximately $3.6 million as personal training revenue in the fourth quarter of 2017. This amount was previously recorded in deferred revenue, which wasprimarily related to sessions purchased prior to the year ended December 31, 2015.Other ancillary club revenue increased $6.1 million, or 35.4%, in the year ended December 31, 2018 compared to the year ended December 31, 2017,primarily due to the favorable impact from the newly acquired and opened clubs, which included $3.0 million related to spa services. These increases werepartially offset by decreased revenue from our Sports Clubs for Kids programs and 30-day guest pass.Operating ExpensesOperating expenses (in thousands) were comprised of the following for the periods indicated: Year Ended December 31, 2018 2017 $ Variance % VariancePayroll and related $168,315 $145,612 $22,703 15.6 %Club operating 197,689 180,467 17,222 9.5 %General and administrative 25,047 22,680 2,367 10.4 %Depreciation and amortization 37,442 40,849 (3,407) (8.3)%Impairment of fixed assets 2,082 6,497 (4,415) (68.0)%Operating expenses $430,575 $396,105 $34,470 8.7 %Operating expenses increased due to the following factors:Payroll and related. Payroll and related expenses for the year ended December 31, 2018 increased $22.7 million, or 15.6%, compared to the year endedDecember 31, 2017, primarily reflecting the impact from newly acquired and opened clubs of approximately $21.0 million. We also experienced minimumwage increases and increased personal training payroll expenses related to higher personal training revenue. These increases were partially offset by theimpact of club closures of approximately $2.8 million and other saving initiatives.Club operating. Club operating expenses increased $17.2 million or 9.5% in the year ended December 31, 2018 compared to the year endedDecember 31, 2017, primarily reflecting the impact from newly acquired and opened clubs of $19.6 million, including $12.7 million for rent and occupancyexpenses at these new clubs. Rent and occupancy expenses also increased $3.9 million at mature clubs due to rent escalations. Partially offsetting theseincreases were decreases of $2.6 million reflecting the impact of club closures.General and administrative. General and administrative expense increased $2.4 million, or 10.4%, in the year ended December 31, 2018 compared tothe year ended December 31, 2017, primarily reflecting increased acquisition costs of $2.6 million and an increase of in expenses, such as general liabilityinsurance, related to newly acquired and opened clubs of $1.3 million, partially offset by decreases of such expenses at recently closed clubs and the resultsof our cost-savings initiatives.33Table of ContentsDepreciation and amortization. In the year ended December 31, 2018 compared to the year ended December 31, 2017, depreciation and amortizationexpense decreased $3.4 million, or 8.3%, primarily due to a decrease at our mature clubs and the impact of closed locations. These decreases were offset bydepreciation of assets at our new clubs.Impairment of fixed assets. Due to triggering events, we recorded impairment charges of $2.1 million and $6.5 million at underperforming clubs in theyear ended December 31, 2018 and 2017, respectively.Benefit for Corporate Income TaxesWe recorded income tax benefit of $357,000 and $9.7 million during the year ended December 31, 2018 and 2017, respectively, reflecting an effectiveincome tax rate of 74% for the December 31, 2018 and 182% for the year ended December 31, 2017. Separate from the impact of valuation allowance, oureffective tax rate was (41)% and 31% for the years ended December 31, 2018 and 2017, respectively.As of December 31, 2018 and 2017, we have a net deferred tax liability of $0 and $93,000, respectively, as there is a full valuation allowance recordedagainst the U.S. net deferred tax assets. Inclusive in these amounts is the state net deferred tax liability balance of $0 and $37,000, respectively, as ofDecember 31, 2018 and 2017.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 thedeferred tax assets will be realized. A valuation allowance, if needed reduces the deferred tax assets to the amount expected to be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences becomedeductible and/or net operating loss carry forwards can be utilized. We assess all positive and negative evidence when determining the amount of the netdeferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal oftaxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence thatis 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 ateach 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 thedeferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likelythan not realizable, we establish a valuation allowance. We recorded valuation allowances in the amounts of $39.8 million and $38.8 million as ofDecember 31, 2018 and 2017, respectively.In recording the valuation allowance, deferred tax liabilities associated with indefinite lived intangible assets generally cannot be used as a source ofincome to realize deferred tax assets with a definitive loss carry forward period. We do not amortize goodwill for book purposes but have amortized goodwillwith tax basis for tax purposes. The deferred tax liabilities recorded at December 31, 2017 related to the tax effect of differences between the book and taxbasis of goodwill that was not expected to reverse until some indefinite future period for indefinite lived intangibles. Following the Tax Legislation, thefederal net operating losses generated after December 31, 2017 can be carried forward indefinitely and we have considered its deferred tax liabilities relatedto indefinite lived intangibles as a source of taxable income against its indefinite lived net operating losses.The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2014),and New York City (2006 through 2014). In particular, we disagree with the proposed assessment dated December 12, 2016 from the State of New York andattended a conciliation conference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached atthe conference and the proposed assessment was sustained. As such, in a revised letter dated November 30, 2017, we received from the State of New York arevised assessment related to tax years 2006-2009 for approximately $5.1 million, inclusive of approximately $2.4 million of interest. We have appealed theassessment with the New York State Division of Tax Appeals. On November 17, 2017, the Company was notified that the State of New York proposed anadjustment in the amount of approximately $3.9 million for the years 2010 to 2014, inclusive of approximately $757,000 in interest. In November 2018, wemet with the Department officials for the assessment related to 2010 to 2014. The meeting ended with the company disagreeing with the proposed assessmentfor the years in audit. Subsequently, in a letter dated February 4, 2019, the interest amount is revised to $1.2 million. We disagree with the proposedassessment and have consented to extend such assessment period through December 31, 2019.We are also under examination in New York City (2006 through 2014). New York City Department of Finance has proposed an audit change notice tothe Company dated May 2, 2018, for the tax years ended December 31, 2006 through December 31, 2009 for proposed general corporation tax liability in theamount of $4.8 million and $4.1 million in interest. In a letter dated January 18, 2019, NYC Department of finance has issued a proposed general tax liabilityof $5.6 million,34Table of Contentsinclusive of $1.6 million in interest for audit periods 2010 to 2014. We disagree with the proposed assessment and have consented to extend such assessmentperiod through September 31, 2019.The Company has not recorded a tax reserve related to these proposed assessments. It is difficult to predict the final outcome or timing of resolution ofany particular matter regarding these examinations. An estimate of the reasonably possible changes to unrecognized tax benefits within the next 12 monthscannot be made.In March 2018, Commonwealth of Massachusetts began an audit of state tax filing of the company for the state of Massachusetts for the 12 monthperiods ending December 31, 2014, 2015 and 2016. We have agreed to extend the assessment period for state of Massachusetts through March 31, 2019.Liquidity and Capital ResourcesWe continue to experience revenue pressure as the fitness industry continues to be highly competitive in the areas in which we operate. We continue tostrategize on improving our financial results and focus on increasing membership in existing clubs to increase revenue. We may consider additional actionswithin our control, including certain acquisitions, licensing arrangements, the closure of unprofitable clubs upon lease expiration and the sale of certainassets. Our ability to continue to meet our obligations is dependent on our ability to continue to generate positive cash flow from a combination ofinitiatives, including those mentioned above. Failure to continue to successfully implement these initiatives could have a material adverse effect on ourliquidity and our operations, and we would need to implement alternative plans that could include additional asset sales, additional reductions in operatingcosts, additional reductions in working capital, debt restructurings and the deferral of capital expenditures. There can be no assurance that such alternativeswould be available to us or that we would be successful in their implementation.As of December 31, 2018, we had $48.1 million of cash and cash equivalents. Financial instruments that potentially subject us to concentrations ofcredit risk consist of cash and cash equivalents. Although we deposit our cash with more than one financial institution, as of December 31, 2018, $24.6million was held at one financial institution. We have not experienced any losses on cash and cash equivalent accounts to date and we do not believe that,based on the credit ratings of the aforementioned institutions, we are exposed to any significant credit risk related to cash at this time.Historically, we have satisfied our liquidity needs through cash generated from operations and various borrowing arrangements. Principal liquidityneeds have included the acquisition and development of new clubs, debt service requirements, debt purchases and other capital expenditures necessary toupgrade, expand and renovate existing clubs. We believe that our existing cash and cash equivalents, and cash generated from operations will be sufficient tofund capital expenditures, working capital needs and other liquidity requirements associated with our existing operations through at least the next12 months. To the extent we continue to expand our business through construction of new clubs or acquisitions, we may need to obtain additional sources offinancing.Operating Activities. Net cash provided by operating activities increased $35.9 million for the year ended December 31, 2018 compared to the yearended December 31, 2017. The changes in operating cash flow were primarily due to timing differences of certain payments. There were also changesresulting from newly opened and acquired clubs. Increases in operating cash included the following:•Cash collected for membership dues increased $27.9 million.•Cash collected for personal training memberships increased $5.1 million.•Cash collected for recurring annual fees increased $2.2 million.•Cash collected for member enrollment, including the initial annual fee paid upon joining, increased by $669,000.•Cash collected for tax refund increased $12.0 million.•Cash paid for taxes decreased $3.4 million.•Cash paid for occupancy decreased $2.9 million.Offsetting decreases in operating cash included the following:•Cash paid for payroll increased $13.1 million.•Cash collected for landlord contributions decreased $1.3 million.•Cash paid for utilities increased $1.2 million.•Cash paid for interest increased $959,000 primarily due to the increase in the LIBOR rate.Investing Activities. Net cash used in investing activities increased $5.5 million in the year ended December 31, 2018 compared to the year endedDecember 31, 2017, primarily related to the increase in acquisition activity in 2018. Cash paid in35Table of Contentsconnection with the acquisition of businesses, property and other assets, including deposits, increased $4.5 million in the 2018 period. The increase was alsodue to an increase in cash related to capital expenditures of approximately $1.7 million.Financing Activities. Net cash provided by financing activities for the year ended December 31, 2018 was $2.6 million compared to net cash used infinancing activities of $2.0 million for the year ended December 31, 2017. For the year ended December 31, 2018 as compared to the year endedDecember 31, 2017, increased financing activities was primarily related to the $5.5 million proceeds from a mortgage and term loan related to our propertiesin Massapequa, New York and Vero Beach, Florida, and principal payments on capital lease obligations for fitness equipment in our clubs in 2018.2013 Senior Credit FacilityOn November 15, 2013, TSI LLC, an indirect, wholly-owned subsidiary, entered into a $370.0 million senior secured credit facility (“2013 SeniorCredit 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 syndicationagent. 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 $323.4million were issued, net of an original issue discount of 0.5%, or $1.6 million. The borrowings under the 2013 Senior Credit Facility are guaranteed andsecured by assets and pledges of capital stock by Holdings II, TSI LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiariesof TSI LLC.On January 30, 2015, the 2013 Senior Credit Facility was amended (the “ First Amendment”) to permit TSI Holdings to purchase term loans under thecredit agreement. Any term loans purchased by TSI Holdings will be canceled in accordance with the terms of the credit agreement, as amended by the FirstAmendment. The Company may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however theCompany is under no obligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing marketconditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.On November 8, 2018, the 2013 Senior Credit Facility was amended (the “ Second Amendment”), which modified the revolving loan facility amount to$15.0 million from $45.0 million, and extended the maturity date from November 15, 2018 to August 14, 2020. In addition, the Second Amendment restatedthat the Company is not able to utilize more than 20% or $3.0 million in accordance with terms of the 2013 Revolving Loan Facility if the total leverageratio exceeds 4.00:1.00 (calculated on a proforma basis to give effect to any borrowing). Previously, the Company was not able to utilize more than 25% or$11.3 million in accordance with terms of the 2013 Revolving Loan Facility if the total leverage ratio exceeded 4.50:1.00 (calculated on a proforma basis togive effect to any borrowing).Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI LLC’s option, bear interest at either the administrativeagent’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 CreditFacility. 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 thelast 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 maybe reduced by voluntary prepayments. As of December 31, 2018, TSI LLC had made a total of $26.2 million in principal payments on the 2013 Term LoanFacility.In May 2017, TSI LLC loaned $5.0 million to TSI Group, a wholly-owned subsidiary of TSI Holdings, at a rate of LIBOR plus 9.55% per annum. Inaddition to the interest payments, TSI Group is required to repay 1.0% of the principal amount of the loan, $50,000 per annum, on a quarterly basiscommencing September 30, 2017. The loan is secured by certain collateral. This transaction has no impact on the Company's consolidated financialstatements as it is eliminated in consolidation. In October 2017, TSI LLC made a dividend distribution of $35.0 million to TSI Holdings, Inc. As ofDecember 31, 2018, TSI Group had a cash balance of approximately $2.0 million.As of December 31, 2018, TSI LLC had outstanding letters of credit of $2.2 million and a total leverage ratio that was below 4.00:1.00. Other than theseoutstanding letters of credit, TSI LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. The unutilized portion of the 2013 RevolvingLoan Facility as of December 31, 2018 was $12.8 million, with borrowings under such facility subject to the conditions applicable to borrowings under theCompany’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 financialcovenant described above, the 2013 Senior Credit Facility contains certain affirmative and negative covenants, including those that may limit or restrict TSILLC and Holdings II’s ability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; makeinvestments; pay dividends and make payments to stockholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in eachcase, subject to certain qualifications and exceptions. The 2013 Senior Credit Facility also includes customary events of default (including non-36Table of Contentscompliance with the covenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate the commitments under the 2013Revolving Loan Facility and declare all outstanding term loans and revolving loans immediately due and payable and enforce its rights as a secured creditor.TSI LLC may prepay the 2013 Term Loan Facility and 2013 Revolving Loan Facility without premium or penalty in accordance with the 2013 SeniorCredit Facility. Mandatory prepayments are required relating to certain asset sales, insurance recovery and incurrence of certain other debt and commencingin 2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures.Pursuant to the terms of the 2013 Senior Credit Facility, the Company is required to apply net proceeds in excess of $30.0 million from sales of assets in anyfiscal year towards mandatory prepayments of outstanding borrowings.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined therein, to be applied againstoutstanding 2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days afterthe 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 flowrepayment 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 thetotal 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 paydividends 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 LLCis 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 hadapproximately $36.0 million of excess cash flow and expects to pay approximately $18.0 million in principal payments in April 2019 and such amount isincluded in Current portion of long-term debt on the Company’s accompanying consolidated balance sheet as of December 31, 2018.As of December 31, 2018, the 2013 Term Loan Facility has a gross principal balance of $197.8 million and a balance of $195.3 million net ofunamortized debt discount of $1.9 million and unamortized debt issuance costs of $634,000. As of December 31, 2018, both the unamortized balance of debtissuance costs and unamortized debt discount are recorded as a contra-liability and netted with long-term debt on the accompanying consolidated balancesheet and are being amortized as interest expense using the effective interest method.Financial InstrumentsWe are exposed to market risks relating to fluctuations in interest rates. In order to minimize the possible negative impact of such fluctuations on ourcash flows, we entered into derivative financial instruments, such as interest-rate swaps. Derivatives were not entered into for trading purposes and we onlyused commonly traded instruments. We used derivatives solely relating to the variability of cash flows from interest rate fluctuations.We originally entered into an interest rate swap arrangement on July 13, 2011 in connection with our previous credit facility. In connection withentering into the 2013 Senior Credit Facility, we amended and restated the interest rate swap agreement initially entered into (and amended in August 2012and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swap arrangement had anotional amount of $160,000 and matured on May 15, 2018. The swap effectively converted $160,000 of the outstanding principal of the total variable-ratedebt under the 2013 Senior Credit Facility to a fixed rate of 0.884% plus the 3.5% applicable margin and the Eurodollar rate, which had a floor of 1%. Aspermitted by ASC 815, Derivatives and Hedging, we designated this swap as a cash flow hedge, the effects of which were reflected in our consolidatedfinancial statements as of December 31, 2017 and for the years ended December 31, 2018 and 2017. The objective of this hedge was to manage the variabilityof cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.When our derivative instrument was executed, hedge accounting was deemed appropriate and it was designated as a cash flow hedge at inception withre-designation being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps were designated as cash flow hedges for accounting purposessince they were being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt). We performed aquarterly assessment of the hedge effectiveness of the hedge relationship and measured and recognized any hedge ineffectiveness in the consolidatedstatements of operations. For the years ended December 31, 2018 (through May 15, 2018, the maturity date) and 2017, hedge ineffectiveness was evaluatedusing the hypothetical derivative method and there was no hedge ineffectiveness noted.The counterparty to our interest rate swap is a major banking institution with a credit rating of investment grade or better and no collateral is required,and there are no significant risk concentrations. We believe the risk of incurring losses on derivative contracts related to credit risk is unlikely.37Table of ContentsConsolidated DebtAs of December 31, 2018, our total principal amount of debt outstanding under our 2013 Term Loan Facility was $197.8 million, all of which is due byNovember 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 generalcorporate 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 RevolvingLoan Facility and partially variable on our 2013 Term Loan Facility, and/or principal pursuant to excess cash flow requirements and reducing ourability 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, some of which are atvariable interest rates;•limiting our ability to refinance our existing indebtedness on favorable terms, 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, obtain or generate sufficient funds to finance our current operating plans through the next 12 months. Anymaterial acceleration or expansion of our plans through newly constructed clubs or acquisitions (to the extent such acquisitions include cash payments) mayrequire us to pursue additional sources of financing. There can be no assurance that such financing will be available, available on acceptable terms, orpermitted under the 2013 Credit Facility.Recent Changes in or Recently Issued Accounting StandardsFor details of applicable new accounting standards, please, see Note 3 — Recent Accounting Pronouncements to our consolidated financial statementsin this Annual Report.Use of Estimates and Critical Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from thoseestimates.The most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangibleassets, deferred income tax valuation, valuation of and expense incurred in connection with stock options, valuation of interest-rate swap arrangements,insurance reserves, legal contingencies and the estimated average membership life.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, whichare 30 years for building and improvements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computersoftware. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Expenditures formaintenance and repairs are charged to operations as incurred. The cost and related accumulated depreciation of assets retired or sold is removed from therespective accounts and any gain or loss is recognized in operations. Third-party costs related to developing web applications, developing web pages andinstalling or enhancing developed applications on the web servers are capitalized and classified as computer software. Website hosting fees and maintenancecosts are expensed as incurred.Fixed assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that related carrying amounts may not berecoverable from undiscounted cash flows in accordance with the Financial Accounting Standards Board (“FASB”) guidance. The Company’s long-livedassets 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 estimatedfuture undiscounted net cash flows38Table of Contentsattributable to the assets are less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and theirfair values is recognized.In the years ended December 31, 2018 and 2017, the Company tested underperforming clubs and recorded impairment charges of $2.1 million and $6.5million, respectively, on leasehold improvements and furniture and fixtures at clubs that experienced decreased profitability and sales levels belowexpectations 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 since the third quarter of 2017 and has recorded goodwill asapplicable to the appropriate regions. For more information on these acquisitions, refer to Note 6 - Acquisitions. Goodwill for all acquisitions was recorded atfair value at the time of such acquisitions and may have changes to the balances up to one year after acquisition. As of December 31, 2018, the New York,Boston, California, Florida, Puerto Rico and Switzerland regions each have goodwill balances.The Company historically performed its goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurred. In 2018, the Company established August 1 to be the annual testing date for all of the Company’s reporting units that have a goodwill balance.As of February 28, 2018, the Company performed a goodwill impairment test on the Switzerland region in line with the historical policy. As of August1, 2018, the Company performed a goodwill impairment test on the New York, Boston, California and Switzerland regions, within 12 months of the relatedacquisitions. For the Florida and Puerto Rico regions, the acquired goodwill was related to the acquisitions of clubs after the annual testing date. As such,these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for all reporting units will be August 1, 2019.The Company’s annual goodwill impairment tests as of August 1, 2018 and February 28, 2018 were performed by comparing the fair value of theCompany’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, for the amount by which the carrying amountexceeds 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 byusing an income approach. The income approach was based on discounted future cash flows and required significant assumptions, including estimatesregarding revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The August 1, 2018 andFebruary 28, 2018 annual impairment tests supported the goodwill balance and as such, no impairment of goodwill was required.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 alsolimit 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 insuranceyear, 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 eitherhigher 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 andthe 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 hasbeen 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 makingsuch determination, we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected futuretaxable income, tax planning strategies and recent financial operations. Significant weight is given to positive and negative evidence that is objectivelyverifiable.Our deferred tax asset realization assessment considers future income which considers the execution of our business plans and other expectations aboutfuture outcomes and is based on certain assumptions. These assumptions require significant judgment about the forecast of future income and are consistentwith 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 futurebusiness results, such changes can lead to a change in judgment related to the realization of the deferred tax asset.Based on the weight of the evidence at December 31, 2014, we were projected to be in a cumulative loss position during the three year period ending inDecember 31, 2015, which was considered to be a significant piece of negative evidence. Further we determined that there would be projected losses in thenear term due to continued competitive pressure. Based on these factors, and most notably the projected three year cumulative loss, in the fourth quarter of2014, we recorded a $60.4 million non-cash charge to income tax expense to establish a full valuation allowance against our U.S. net deferred tax assets.39Table of ContentsAs of December 31, 2018, we continue to maintain a full valuation allowance of $39.8 million against outstanding net deferred tax assets as the companycontinues to have a three year cumulative loss position excluding one-time extraordinary income and expense items.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 uponexamination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largestamount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated withunrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new oremerging legislation. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes inthe liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. The number of years with open tax auditsvaries 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 liabilityfor unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in our tax provision andeffective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit or a recognized tax position under examination couldincrease 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 liabilityfor unrecognized tax benefits is recorded as income tax expense.Business Combinations. In connection with an acquisition of a business, the Company records all assets acquired and liabilities assumed of the acquiredbusiness at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair valuedeterminations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflowsand outflows, discount rates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in makingthese fair value determinations.InflationAlthough we cannot accurately anticipate the effect of inflation on our operations, we believe that inflation has not had a material impact on our resultsof operations or financial condition. Should there be periods of high inflation in the future, our results of operations or financial condition would be exposedto 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 thevariable rate portion of our debt.Off-Balance Sheet ArrangementsNone.Item 7A. Quantitative and Qualitative Disclosures About Market RiskNone.Item 8. Financial Statements and Supplementary DataOur Financial Statements appear following the signature page hereto, are incorporated herein by reference and are listed in the index appearing underItem 15.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-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 usunder the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such informationis accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonableassurances of achieving the desired controls.As of December 31, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including the ChiefExecutive Officer and the Chief Financial Officer, of the effectiveness of the design and40Table of Contentsoperation of our disclosure controls and procedures defined above. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of December 31, 2018, 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 maintainingadequate 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 supervisionand with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our management’sassessment using those criteria, our management concluded that, as of December 31, 2018, we maintained effective internal control over financial reporting.As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded five entities from its assessmentof internal control over financial reporting as of December 31, 2018 because they were acquired by the Company in purchase business combinations during2018. We have also excluded these five entities from our audit of internal control over financial reporting. These entities, each of which is a consolidatedsubsidiary, comprised, in the aggregate, total assets and total revenues excluded from management’s assessment and our audit of internal control overfinancial reporting of approximately 0.8% and 2.5% of consolidated total assets and consolidated total revenues, respectively, as of and for the year endedDecember 31, 2018. The most significant of these entities, representing 1.1%, 0.4% and 0.4% of consolidated total revenues and 0.2%, 0.4%, and 0.0% ofconsolidated total assets were Westboro Tennis & Swim Club, Palm Beach Sports Clubs, and Christi’s Fitness, respectively.Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherentlimitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.PricewaterhouseCoopers LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financialreporting as of December 31, 2018, 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 quarterended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.41Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information with respect to directors, executive officers and corporate governance of the Company is incorporated herein by reference to thefollowing sections of the Company’s definitive Proxy Statement relating to the Company’s 2019 Annual Meeting of Stockholders to be filed with the SECwithin 120 days of the Company’s fiscal year ended December 31, 2018 (the “Proxy Statement”): “Matters to be Considered at Annual Meeting —Proposal One — Election of Directors,” “Corporate Governance and Board Matters — Corporate Governance Documents,” “Corporate Governance and BoardMatters — Committee Membership — Audit Committee,” “Section 16(A) Beneficial Ownership Reporting Compliance,” “Executive Officers,” and“Deadline for Receipt of Stockholder Proposals.”The following are the members of our Board of Directors and our Executive Officers:Board of Directors: Patrick Walsh Chairman and Chief Executive Officer, Town Sports International Holdings, Inc.and Chief Executive Officer, PW Partners Atlas Funds, LLCMartin Annese Principal, MJA Consulting, LLCMarcus B. Dunlop Managing Partner, HG Vora Capital Management, LLCJason M. Fish Private Investor, Vice Chair of Congressional Bancshares, INCThomas J. Galligan III Former Executive Chairman, Papa Gino’s Holdings Corp.Mandy Lam General Counsel, HG Vora Capital Management, LLCL. Spencer Wells Partner, Drivetrain Advisors, LLC Executive Officers: Patrick Walsh Chief Executive OfficerCarolyn Spatafora Chief Financial OfficerStuart Steinberg General CounselNitin Ajmera Senior Vice President — Shared Services and ControllerItem 11. Executive CompensationThe 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 2018 Fiscal Year.”Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information about securities authorized for issuance under equity compensation plans is incorporated herein by reference to the following sectionof 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 followingsection of the Proxy Statement: “Ownership of Securities.”Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information with respect to certain relationships and related transactions and director independence is incorporated herein by reference to thefollowing sections of the Proxy Statement: “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters — DirectorIndependence.”Item 14. Principal Accountant Fees and ServicesThe information with respect to principal accountant fees and services is incorporated herein by reference to the following section of the ProxyStatement: “Matters to be Considered at Annual Meeting — Proposal Two — Ratification of Independent Registered Public Accounting Firm.”42Table of ContentsPART IVItem 15. Exhibits And Financial Statements(a) Financial Statements(1) Financial statements filed as part of this report: Page NumberConsolidated Annual Financial Statements of Town Sports International Holdings, Inc: Report of Independent Registered Public Accounting Firm F-2 Consolidated balance sheets at December 31, 2018 and 2017 F-3 Consolidated statements of operations for the years ended December 31, 2018 and 2017 F-4 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2018 and 2017 F-5 Consolidated statements of stockholders’ deficit for the years ended December 31, 2018 and 2017 F-6 Consolidated statements of cash flows for the years ended December 31, 2018 and 2017 F-7 Notes to consolidated financial statements F-8(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 notesthereto.(3) Exhibits. See Item 15(b) below.(b) Exhibits required by Item 601 of Regulation S-KThe information required by this item is incorporated herein by reference from the Index to Exhibits immediately following page F-36 of this AnnualReport.43Table of ContentsSIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized, on February 28, 2019. TOWN SPORTS INTERNATIONAL HOLDINGS, INC. By: /s/ PATRICK WALSH Chairman and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date By: /s/ PATRICK WALSH Chairman and Chief Executive Officer February 28, 2019 Patrick Walsh (principal executive officer) By: /s/ CAROLYN SPATAFORA Chief Financial Officer February 28, 2019 Carolyn Spatafora (principal financial and accounting officer) By: /s/ MARTIN ANNESE Director February 28, 2019 Martin Annese By: /s/ MARCUS B. DUNLOP Director February 28, 2019 Marcus B. Dunlop By: /s/ JASON M. FISH Director February 28, 2019 Jason M. Fish By: /s/ THOMAS J. GALLIGAN III Director February 28, 2019 Thomas J. Galligan III By: /s/ MANDY LAM Director February 28, 2019 Mandy Lam By: /s/ L. SPENCER WELLS Director February 28, 2019 L. Spencer Wells 44Table of ContentsINDEX TO FINANCIAL STATEMENTS PageConsolidated Annual Financial Statements of Town Sports International Holdings, Inc.: Report of Independent Registered Public Accounting FirmF-2 Consolidated balance sheets at December 31, 2018 and 2017F-4 Consolidated statements of operations for the years ended December 31, 2018 and 2017F-5 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2018 and 2017F-6 Consolidated statements of stockholders’ deficit for the years ended December 31, 2018 and 2017F-7 Consolidated statements of cash flows for the years ended December 31, 2018 and 2017F-8 Notes to consolidated financial statementsF-9F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofTown Sports International Holdings, Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Town Sports International Holdings, Inc. and its subsidiaries (the “Company”) as ofDecember 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit and cash flows foreach of the two years in the period ended December 31, 2018, 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, 2018, 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 ofDecember 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control overFinancial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on theCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities lawsand 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 reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol 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 financialstatements, 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 usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded five entities from its assessment ofinternal control over financial reporting as of December 31, 2018 because they were acquired by the Company in purchase business combinations during2018. We have also excluded these five entities from our audit of internal control over financial reporting. These entities, each of which is a consolidatedsubsidiary, comprised, in the aggregate, total assets and total revenues excluded from management’s assessment and our audit of internal control overfinancial reporting of approximately 0.8% and 2.5% of consolidated total assets and consolidated total revenues, respectively, as of and for the year endedDecember 31, 2018. The most significant of these entities, representing 1.1%, 0.4% and 0.4% of consolidated total revenues and 0.2%, 0.4%, and 0.0% ofconsolidated total assets were Westboro Tennis & Swim Club, Palm Beach Sports Clubs, and Christi’s Fitness, respectively.F-2Table of ContentsDefinition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPNew York, New YorkFebruary 28, 2019We 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 theCompany.F-3Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAs of December 31, 2018 and 2017(All figures in thousands except share and per share data) 2018 2017ASSETSCurrent assets:Cash and cash equivalents$48,088$30,321Accounts receivable, net3,0502,216Prepaid corporate income taxes74613,563Prepaid rent expense63 9,153Prepaid expenses and other current assets9,98412,894Total current assets61,93168,147Fixed assets, net157,677151,498Goodwill21,8776,217Intangible assets, net9,4395,134Deferred membership costs1,803959Other assets8,7274,716Total assets$261,454$236,671LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Current portion of long-term debt$21,080$2,242Current portion of mortgage and term loan314 —Accounts payable3,6722,247Accrued expenses32,54724,669Accrued interest34118Deferred revenue37,45933,473Total current liabilities95,10662,749Long-term debt178,002193,947Long-term mortgage and term loan5,113 —Deferred lease liabilities44,37447,356Deferred tax liabilities—93Deferred revenue258351Other liabilities11,29810,132Total liabilities334,151314,628Commitments and Contingencies (Note 16)Stockholders’ deficit:Preferred stock, $0.001 par value; no shares issued and outstanding at both December 31, 2018 andDecember 31, 2017Common stock, $0.001 par value; issued and outstanding 27,192,154 and 27,149,135 shares at December 31,2018 and 2017, respectively2525Additional paid-in capital(1,644)(4,290)Accumulated other comprehensive income1,8411,201Accumulated deficit(73,212)(74,893)Total Town Sports International Holdings, Inc. and subsidiaries stockholders’ deficit(72,990)(77,957)Non-controlling interests293 —Total stockholders’ deficit(72,697) (77,957)Total liabilities and stockholders’ deficit$261,454$236,671See notes to consolidated financial statements.F-4Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYears Ended December 31, 2018 and 2017(All figures in thousands except share and per share data) 20182017Revenues:Club operations$437,357$397,166Fees and other5,7375,876 443,094403,042Operating Expenses:Payroll and related168,315145,612Club operating197,689180,467General and administrative25,04722,680Depreciation and amortization37,44240,849Impairment of fixed assets2,082 6,497 430,575396,105Operating income12,5196,937Interest expense13,47812,665Interest income(133)(78)Equity in the earnings of investees and rental income(344) (333)Loss before benefit for corporate income taxes(482)(5,317)Benefit for corporate income taxes(357)(9,686)Net (loss) income including non-controlling interests(125)4,369Less: net loss attributable to non-controlling interests(202) —Net income attributable to Town Sports International Holdings, Inc. and subsidiaries$77 $4,369Earnings per share:Basic$—$0.17Diluted$—$0.17Weighted average number of shares used in calculating earnings per share:Basic25,858,49425,229,614Diluted26,252,13725,948,870See notes to consolidated financial statements.F-5Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)Years Ended December 31, 2018 and 2017(All figures in thousands) 2018 2017Net (loss) income including non-controlling interests$(125) $4,369Other comprehensive income, net of tax: Foreign currency translation adjustments, net of tax of $0 for the years ended in December 31, 2018 and 2017530 42Interest rate swap, net of tax of $0 for the years ended in December 31, 2018 and 2017110 1,327Total other comprehensive income, net of tax640 1,369Total comprehensive income including non-controlling interests515 5,738Less: comprehensive loss attributable to non-controlling interests(202) —Total comprehensive income attributable to Town Sports International Holdings, Inc. and subsidiaries$717 $5,738See notes to consolidated financial statements.F-6Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITYears Ended December 31, 2018 and 2017(All figures in thousands except share and per share data) Common Stock($.001 par) AdditionalPaid-inCapital AccumulatedOtherComprehensiveIncome RetainedEarnings(Deficit) Total Town SportsInternational andSubsidiariesStockholders’(Deficit) Equity Non-controllinginterests TotalStockholders’(Deficit) Equity Shares Amount Balance at December 31, 201626,560,547 24 (6,261) (168) (79,265) (85,670) — (85,670)Stock option exercises44,114 1 110 — — 111 — 111Common stock grants108,940 — 368 — — 368 — 368Restricted stock grants506,200 — — — — — — —Forfeiture of restricted stock(70,666) — — — — — — —Stock-based compensation expense— — 1,493 — — 1,493 — 1,493Dividend forfeitures— — — — 3 3 — 3Net income— — — — 4,369 4,369 — 4,369Derivative financial instruments— — — 1,327 — 1,327 — 1,327Foreign currency translation adjustment— — — 42 — 42 — 42Balance at December 31, 201727,149,135 25 (4,290) 1,201 (74,893) (77,957) — (77,957)Stock option exercises13,110 — 30 — — 30 — 30Common stock grants52,460 — 320 — — 320 — 320Restricted stock grants13,115 — — — — — — —Shares issued under Employee StockPurchase Plan8,643 — — — — — — —Forfeiture of restricted stock(44,309) — — — — — — —Stock-based compensation expense— — 2,296 — — 2,296 — 2,296Net income (loss)— — — — 77 77 (202) (125)Other increases from non-controllinginterests— — — — — — 495 495Cumulative effect of change inaccounting principle— — — — 1,604 1,604 — 1,604Derivative financial instruments— — — 110 — 110 — 110Foreign currency translation adjustment— — — 530 — 530 — 530Balance at December 31, 201827,192,154 $25 $(1,644) $1,841 $(73,212) $(72,990) $293 $(72,697)See notes to consolidated financial statements.F-7Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31, 2018 and 2017(All figures in thousands)20182017Cash flows from operating activities:Net (loss) income including non-controlling interests$(125) $4,369Adjustments to reconcile net (loss) income including non-controlling interests to net cash provided by operating activities: Depreciation and amortization37,442 40,849Impairment of fixed assets2,082 6,497Amortization of debt discount976 939Amortization of debt issuance costs580 601Noncash rental income, net of non-cash rental expense(3,324) (4,250)Share-based compensation expense2,616 1,861Net change in deferred taxes(166) 32Net change in certain operating assets and liabilities25,626 (24,450)(Increase) decrease in deferred membership costs(844) 133Landlord contributions to tenant improvements800 2,115(Decrease) increase in insurance reserves(61) 552Other(1,508) (1,049)Total adjustments64,219 23,830Net cash provided by operating activities64,094 28,199Cash flows from investing activities: Capital expenditures(11,887) (10,206)Acquisition of businesses(31,277) (15,375)Acquisition of assets(3,989) (12,600)Deposit paid in connection with acquisitions— (2,800)Other135 (550)Net cash used in investing activities(47,018) (41,531)Cash flows from financing activities: Principal payments on 2013 Term Loan Facility(2,083) (2,082)Principal payments on capital lease obligations(583) —Proceeds from mortgage and term loan5,530 —Principal payments on mortgage and term loan(103) —Debt issuance costs(186) —Cash dividends paid(2) (9)Proceeds from stock option exercises30 111Net cash provided by (used in) financing activities2,603 (1,980)Effect of exchange rate changes on cash, cash equivalents and restricted cash61 37Net increase (decrease) in cash, cash equivalents and restricted cash19,740 (15,275)Cash, cash equivalents and restricted cash beginning of period30,321 45,596Cash, cash equivalents and restricted cash end of period$50,061 $30,321Summary of the change in certain operating assets and liabilities: Increase in accounts receivable$(834) $(984)Increase in inventory— 238Decrease (increase) in prepaid expenses and other current assets8,851 (9,180)Increase in accounts payable, accrued expenses and accrued interest7,330 143Change in prepaid corporate income taxes and corporate income taxes payable12,898 (12,010)Decrease in deferred revenue(2,619) (2,657)Net change in certain working capital components$25,626 $(24,450)See notes to consolidated financial statements.F-8Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2018 and 2017(In thousands except share and per share data)1. Basis of PresentationTown Sports International Holdings, Inc. (the “Company” or “TSI Holdings”) is a diversified holding company that owns subsidiaries engaged in anumber of business and investment activities. References to “TSI LLC” refer to Town Sports International, LLC, and references to “TSI Group” refer to TownSports Group, LLC, both of which are wholly-owned operating subsidiaries of the Company.As of December 31, 2018, the Company operated 185 fitness clubs (“clubs”) under various brand names, primarily located in the United States ofAmerica.The Company continues to experience revenue pressure as the fitness industry continues to be highly competitive in the areas in which the Companyoperates. The Company continues to strategize on improving its financial results and focuses on increasing membership in existing clubs to increase revenue.The Company may consider additional actions within its control, including certain acquisitions, licensing arrangements, the closure of unprofitable clubsupon lease expiration and the sale of certain assets. The Company’s ability to continue to meet its obligations is dependent on its ability to generate positivecash flow from a combination of initiatives, including those mentioned above. Failure to continue to successfully implement these initiatives could have amaterial adverse effect on the Company’s liquidity and its operations, and the Company would need to implement alternative plans that could includeadditional asset sales, additional reductions in operating costs, additional reductions in working capital, debt restructurings and the deferral of capitalexpenditures. There can be no assurance that such alternatives would be available to the Company or that the Company would be successful in theirimplementation.Certain reclassifications were made to the reported amounts in the consolidated balance sheet as of December 31, 2017 to conform to the presentation asof December 31, 2018.2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements include the accounts of TSI Holdings and all wholly-owned subsidiaries. All intercompanyaccounts and transactions have been eliminated in consolidation.Operating SegmentThe Company’s operations are conducted mainly through its clubs and continue to be aggregated into one reportable segment. Each of the clubs hassimilar economic characteristics, services, product offerings and revenues are derived primarily from services to the Company’s members. The Company’schief operating decision maker is the Chief Executive Officer.The operating segment is the level at which the chief operating decision maker manages the business and reviews operating performance in order tomake business decisions and allocate resources. Due to its recent acquisition activity, the Company re-evaluated its operating segments in the fourth quarterof 2018 and determined the business is managed and operating performance is reviewed on a consolidated company level and therefore has one operatingsegment.Advertising and Marketing CostsAdvertising and marketing costs are charged to operations during the period in which they are incurred. Total advertising costs incurred by theCompany for the years ended December 31, 2018 and 2017 totaled $2,842 and $2,827, respectively, and are included in Club operating expenses in theaccompanying statements of operations for each respective year.Cash and Cash Equivalents and Restricted CashThe Company considers all highly liquid instruments which have original maturities of three months or less when acquired to be cash equivalents. Thecarrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value. The Company owns and operates a captive insurancecompany in the State of New York. Under the insurance laws of the State of New York, this captive insurance company is required to maintain a cash balanceof at least $250. Cash related to this wholly-owned subsidiary of $278 and $276 is included in cash and cash equivalents at December 31, 2018 and 2017,F-9Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)respectively. The Company also holds long-term restricted cash associated with certain letters of credit to secure lease related obligations. Restricted cash of$1,973 was included in Other assets in the Company’s accompanying consolidated balance sheet at December 31, 2018. There was no restricted cash atDecember 31, 2017.Deferred Lease Liabilities, Non-Cash Rental Expense and Additional RentThe Company recognizes rental expense for leases with scheduled rent increases and inclusive of rental concessions, on the straight-line basis over thelife of the lease beginning upon the commencement date of the lease. Rent concessions, primarily received in the form of free rental periods, are also deferredand amortized on a straight-line basis over the life of the lease.The Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. Also, theCompany has operating and capital leases for certain fitness equipments. In addition to base rent, the facility leases generally provide for additional rent tocover common area maintenance charges incurred and to pass along increases in real estate taxes. The Company accrues for any unpaid common areamaintenance charges and real estate taxes on a club-by-club basis.Upon entering into certain leases, the Company receives construction allowances from the landlord. These construction allowances are recorded asdeferred lease liability credits on the balance sheet when the requirements for these allowances are met as stated in the respective lease and are amortized as areduction of rent expense over the term of the lease. Amortization of deferred construction allowances were $2,729 and $2,884 as of December 31, 2018 and2017, respectively.Certain leases provide for contingent rent based upon defined formulas of revenue, cash flows or operating results for the respective facilities. Thesecontingent rent payments typically call for additional rent payments calculated as a percentage of the respective club’s revenue or a percentage of revenue inexcess of defined break-points during a specified year. The Company records contingent rent expense over the related contingent rental period at the time therespective contingent targets are probable of being met. Contingent rent expense was $370 and $131 for the years ended December 31, 2018 and 2017,respectively, and is included in Club operating expenses in the accompanying consolidated statements of operations for each respective year.Lease termination gains and losses are recognized at fair value based on the expected settlement amount with the landlord when the Companyterminates the contract before the lease termination date. In closing a club, the Company discontinues operating 30 days prior to giving back the space to thelandlord, and uses this time to remove equipment and clean the premises. Accordingly, lease termination gains and losses related to certain club closures alsoinclude one month additional rent to the landlord. In the year ended December 31, 2017, the Company recorded $201 of lease termination losses, which wasincluded in Club operating expenses in the accompanying consolidated statements of operations. There were no lease termination losses in the year endedDecember 31, 2018.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable consists of amounts due from the Company’s membership base and was $7,628 and $6,453 at December 31, 2018 and 2017,respectively, before the allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from theinability of the Company’s customers to make required payments. The Company considers factors such as: historical collection experience, the age of thereceivable balance and general economic conditions that may affect a customer’s ability to pay.Following are the changes in the allowance for doubtful accounts for the years December 31, 2018 and 2017: Balance Beginningof the Year Additions Write-offs Net ofRecoveries Balance atEnd of YearDecember 31, 2018$4,237 $11,883 $(11,542) $4,578December 31, 2017$2,912 $9,712 $(8,387) $4,237Fixed AssetsFixed 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 andimprovements, five years for club equipment, furniture, fixtures and computer equipment and three to five years for computer software. Leaseholdimprovements are amortized over the shorter of their estimated useful lives or the remaining period of the related lease. Expenditures for maintenance andrepairs are charged to operations asF-10Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)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 inoperations. Third-party costs related to developing web applications, developing web pages and installing or enhancing developed applications on the webservers are capitalized and classified as computer software. Website hosting fees and maintenance costs are expensed as incurred.Intangible Assets and Debt Issuance CostsIntangible assets are stated at cost and amortized by the straight-line method over their respective estimated lives. Intangible assets currently consist ofmembership lists, favorable lease commitments, management contracts, trade names and non-compete agreements. Membership lists are amortized over theestimated average membership life, currently 26 months, favorable lease commitments are amortized over the remaining life of the lease, trade names areamortized over their estimated useful lives of between five and 15 years, management contracts were amortized over their contractual lives of between nineand 11 years, and non-compete agreements are amortized over the agreement life.Debt issuance costs for the 2013 Revolving Loan Facility are classified within Other assets and are being amortized as additional interest expense toAugust 2020, the remaining life of the underlying debt, using the interest method. Amortization expense for debt issuance costs related to the 2013Revolving Loan Facility was $236 and $254 for the years ended December 31, 2018 and 2017, respectively.Debt issuance costs for the 2013 Term Loan Facility are classified within Long-term debt and are being amortized as additional interest expense overthe life of the underlying debt, five to seven years, using the interest method. Amortization expense for debt issuance costs related to the 2013 Term LoanFacility was $343 and $347 for the years ended December 31, 2018 and 2017, respectively.Business CombinationsIn connection with an acquisition of a business, the Company records all assets acquired and liabilities assumed, if any, of the acquired business at theiracquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations requirejudgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discountrates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in making these fair valuedeterminations.Fair Value MeasurementsAccounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuationtechniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect theCompany’s market assumptions. These two types of inputs create the following fair value hierarchy:•Level 1 — Quoted prices for identical instruments in active markets.•Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.•Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determiningfair value.Accounting for the Impairment of Long-Lived Assets and GoodwillLong-lived assets, such as fixed assets and intangible assets are reviewed for impairment periodically whenever events or changes in circumstancesindicate that their carrying amounts may not be recoverable from undiscounted cash flows. Estimated undiscounted expected future cash flows are used todetermine if an asset group is impaired, in which case the asset carrying value would be reduced to its fair value, calculated considering a combination ofmarket approach and a cost approach. In determining the recoverability of fixed assets Level 3 inputs were used in determining undiscounted cash flows,which are based on internal budgets and forecasts through the end of the life of the primary asset in the asset group which is normally theF-11Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)life of leasehold improvements. The most significant assumptions in those budgets and forecasts relate to estimated membership and ancillary revenue,attrition rates, discount rates, income tax rates, estimated results related to new program launches and maintenance capital expenditures, which are generallyestimated at approximately 2% of total revenues depending upon the conditions and needs of a given club. If the Company continues to experiencecompetitive pressure, certain assumptions may not be accurate.Goodwill represents the excess of consideration paid over the fair value of the net identifiable business assets acquired in the acquisition of a club orgroup of clubs. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-20, Intangibles – Goodwill and Other,requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. TheCompany’s impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value.The Company’s annual goodwill impairment tests were performed by comparing the fair value of the Company’s reporting unit with its carrying amountand then recognizing an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceedthe total amount of goodwill allocated to that reporting unit. The estimated fair value was determined by using an income approach. The income approachwas 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.The Company historically performed its goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurred. In 2018, the Company established August 1 to be the annual testing date for all of the Company’s reporting units that have a goodwill balance.As of February 28, 2018, the Company performed a goodwill impairment test on the Switzerland region in line with the historical policy. As of August1, 2018, the Company performed a goodwill impairment test on the New York, Boston, California and Switzerland regions, within 12 months of the relatedacquisitions. For the Florida and Puerto Rico regions, the acquired goodwill was related to the acquisitions of clubs after the annual testing date. As such,these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for all reporting units will be August 1, 2019.InsuranceThe Company obtains insurance coverage for significant exposures as well as those risks required to be insured by law or contract. The Company retainsa portion of risk internally related to general liability losses. Where the Company retains risk, provisions are recorded based upon the Company’s estimates ofits ultimate exposure for claims, which are included in general and administrative expenses in the accompanying statements of operations. The provisions areestimated using actuarial analysis based on claims experience, an estimate of claims incurred but not yet reported and other relevant factors. In thisconnection, under the provision of the deductible agreement related to the payment and administration of the Company’s insurance claims, we are required tomaintain irrevocable letters of credit, totaling $415 for both December 31, 2018 and 2017, respectively.The Company maintains a self-insured health benefits plan, which provides medical benefits to employees electing coverage under the plan. TheCompany maintains a reserve for incurred but not reported medical claims and claim development. The reserve is an estimate based on historical experience,actuarial estimates and other assumptions, some of which are subjective. The Company will adjust its self-insured medical benefits reserve as the Company’sloss experience changes due to medical inflation, changes in the number of plan participants and an aging employee base.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from thoseestimates.The most significant assumptions and estimates relate to the useful lives of long-term assets, recoverability and impairment of fixed and intangibleassets, valuation of business combinations, valuation of deferred income taxes and insurance reserves and the underlying forecasts for these assumptions andestimates.F-12Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Income TaxesDeferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statementsor tax returns. Deferred tax liabilities and assets are determined on the basis of the difference between the financial statement and tax basis of assets andliabilities (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. A valuationallowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance,we consider all positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, taxplanning strategies and recent financial operations. As of December 31, 2018, the Company maintained a full valuation allowance of $39,762 againstoutstanding net deferred tax assets as the company had a three year cumulative loss position excluding one-time extraordinary income and expense items.The guidance related to accounting for uncertain tax positions prescribes a recognition threshold and measurement attribute for a tax position taken orexpected to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosureand transition. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.Statements of Cash FlowsSupplemental disclosure of cash flow information: Year Ended December 31, 2018 2017Cash and cash equivalents$48,088 $30,321Restricted cash included in other assets(a)1,973 —Total cash, cash equivalents and restricted cash$50,061 $30,321Cash paid: Interest paid (net of amounts capitalized)$12,125 $11,165Income tax paid$512 $3,891Cash received: Income tax refund$13,619 $1,600Noncash investing and financing activities: Acquisition of fixed assets included in accounts payable and accrued expenses$2,566 $455(a)Restricted cash associated with certain letters of credit to secure lease related obligations.Other Comprehensive (Loss) IncomeOther comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events andcircumstances from non-owner sources, including changes in the fair value of the Company’s derivative financial instrument and foreign currency translationadjustments. The Company presents other comprehensive (loss) income in its consolidated statements of comprehensive (loss) income.Through May 15, 2018, the Company used a derivative financial instrument to limit exposure to changes in interest rates on the Company’s existingterm loan facility. Derivative financial instruments are recorded at fair value on the balance sheet and changes in the fair value are either recognized inaccumulated other comprehensive income (a component of stockholders’ equity) or net income depending on the nature of the underlying exposure, whetherthe hedge is formally designated as a hedge, and if designated, the extent to which the hedge is effective. The Company’s derivative financial instrument wasdesignated as a cash flow hedge. See Note 10 - Derivative Financial Instruments for more information on the Company’s risk management program andderivatives.At December 31, 2018, the Company owned three clubs in Switzerland, which use the Swiss Franc, their local currency, as their functional currency.Assets and liabilities are translated into U.S. dollars at year-end exchange rates, while income and expense items are translated into U.S. dollars at the averageexchange rate for the period. Adjustments resulting from the translation of foreign functional currency financial statements into U.S. dollars are included inthe currency translation adjustment in the consolidated statements of stockholders’ deficit and the consolidated statements of comprehensive incomeF-13Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(loss). The effect of foreign exchange translation adjustments was $530 (net of tax of $0) and $42 (net of tax of $0) for the years ended December 31, 2018and 2017, respectively.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and the interest rateswap. Although the Company deposits its cash with more than one financial institution, as of December 31, 2018, $24,590 of the cash balance of $48,088was held at one financial institution. The Company has not experienced any losses on cash and cash equivalent accounts to date, and the Company believesthat, based on the credit ratings of these financial institutions, it is not exposed to any significant credit risk related to cash at this time.Earnings (Loss) Per ShareBasic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) applicable to common stockholders by the weighted average numbersof shares of common stock outstanding during the period. Diluted EPS calculated using the treasury stock method and is computed similarly to basic EPS,except that the denominator is increased for the assumed exercise of dilutive stock options and unvested restricted stock for the diluted shared based awards.The following table summarizes the weighted average common shares for basic and diluted EPS computations. For The Year Ended December 31, 2018 2017Net (loss) income including non-controlling interests$(125) $4,369Weighted average number of common share outstanding — basic25,858,494 25,229,614Effect of dilutive share-based awards393,643 719,256Weighted average number of common shares outstanding — diluted26,252,137 25,948,870Earnings per share: Basic$— $0.17Diluted$— $0.17For the year ended December 31, 2018, there were no stock options or outstanding restricted stock awards excluded from the computation of earningsper diluted share as there were no shares with an anti-dilutive effect.For the year ended December 31, 2017, the Company did not include options to purchase 28,681 shares of the Company’s common stock in thecalculations of diluted EPS because the exercise prices of those options were greater than the average market price and such inclusion would be anti-dilutive.In the year ended December 31, 2018, the Company determined that it had incorrectly computed the number of weighted average common shares usedin basic earnings per share in previously issued financial statements. This resulted in misstatements of basic EPS for the annual period of 2017. This item alsoresulted in corresponding misstatements in diluted EPS in the respective period. These errors had no impact to the Company’s revenues, operating income(loss), or net income (loss), and had no impact to the Company’s consolidated balance sheets, consolidated statements of cash flows, consolidated statementsof comprehensive income (loss), or consolidated statements of stockholders’ deficit.The Company assessed the materiality of these errors on the previously issued annual financial statements in accordance with SEC Staff AccountingBulletin No. 99 and No. 108, and concluded that the errors were not material to the previously issued consolidated financial statements. The Companyappropriately reflected the weighted average common shares calculations in the accompanying consolidated statements of operations for the year endedDecember 31, 2018 and revised the comparative presentation of the financial statements.F-14Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The effects of the revision had the following impacts for the interim and annual periods of 2017: Three Months Ended March 31, 2017 (As Reported) (Adjustment) (As Revised)Weighted average number of common shares outstanding — basic26,610,215 (1,567,892) 25,042,323Effect of dilutive share based awards— — —Weighted average number of common shares outstanding — diluted26,610,215 (1,567,892) 25,042,323 Loss per share: Basic$(0.11) $(0.01) $(0.12)Diluted$(0.11) $(0.01) $(0.12) Three Months Ended June 30, 2017 Six Months Ended June 30, 2017 (As Reported) (Adjustment) (As Revised) (As Reported) (Adjustment) (As Revised)Weighted average number of commonshares outstanding — basic26,692,919 (1,454,628) 25,238,291 26,651,796 (1,510,948) 25,140,848Effect of dilutive share based awards— — — — — —Weighted average number of commonshares outstanding — diluted26,692,919 (1,454,628) 25,238,291 26,651,796 (1,510,948) 25,140,848 Loss per share: Basic$(0.02) $— $(0.02) $(0.13) $— $(0.13)Diluted$(0.02) $— $(0.02) $(0.13) $— $(0.13) Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017 (As Reported) (Adjustment) (As Revised) (As Reported) (Adjustment) (As Revised)Weighted average number of commonshares outstanding — basic26,683,425 (1,438,163) 25,245,262 26,662,455 (1,486,420) 25,176,035Effect of dilutive share based awards— — — — — —Weighted average number of commonshares outstanding — diluted26,683,425 (1,438,163) 25,245,262 26,662,455 (1,486,420) 25,176,035 Loss per share: Basic$(0.50) $(0.03) $(0.53) $(0.62) $(0.04) $(0.66)Diluted$(0.50) $(0.03) $(0.53) $(0.62) $(0.04) $(0.66) Three Months Ended December 31, 2017 Twelve Months Ended December 31, 2017 (As Reported) (Adjustment) (As Revised) (As Reported) (Adjustment) (As Revised)Weighted average number of commonshares outstanding — basic26,825,605 (1,437,003) 25,388,602 26,703,577 (1,473,963) 25,229,614Effect of dilutive share based awards637,107 — 637,107 719,256 — 719,256Weighted average number of commonshares outstanding — diluted27,462,712 (1,437,003) 26,025,709 27,422,833 (1,473,963) 25,948,870 Earnings per share: Basic$0.78 $0.05 $0.83 $0.16 $0.01 $0.17Diluted$0.76 $0.05 $0.81 $0.16 $0.01 $0.17Stock-Based CompensationF-15Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718requires that the cost resulting from all share-based payment transactions be treated as compensation and recognized in the consolidated financial statements.We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest. Thefair value of stock options and the fair value of the purchase rights granted under the Employee Stock Purchase Plan are determined using the Black-Scholesoption-pricing model. Refer to Note 13 - Stockholders’ (Deficit) Equity for further detail about the Employee Stock Purchase Plan. The assumptions in theBlack-Scholes model include risk-free interest rate, the Company's expected stock price volatility over the term of the awards, expected term of the award,and dividend yield. The fair value of the restricted stock awards is based on the closing price of the Company’s common stock on the date of the grant.3. Recent Accounting PronouncementsIn August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles -Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud ComputingArrangement That Is a Service Contract”. This new guidance requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is aservice contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense asincurred. Also, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hostingarrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This standard is effective for fiscal yearsbeginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of this standard is permitted. The Company is evaluatingthe impact of this standard on its financial statements.In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for HedgingActivities. The updated standard expands the range of transactions that qualify for hedge accounting. It also amends the presentation and disclosurerequirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk managementstrategies, simplify the application of hedge accounting, and increase the transparency as to the scope and results of hedging programs. This standard iseffective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The adoption of thisguidance will not have an impact on the Company’s financial statements.In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, which requires amounts generallydescribed as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and endingamounts for the periods shown on the statement of cash flows. The Company adopted the updated guidance for the fiscal year beginning January 1, 2018.Restricted cash of $1,973 is combined with the cash and cash equivalents balance in the Consolidated Statement of Cash Flows as of December 31, 2018.There was no restricted cash as of or in the year ended December 31, 2017.In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments(A Consensus of the FASB Emerging Issues Task Force).” This ASU provides specific guidance over eight identified cash flow issues. This standard iseffective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company adopted the updated guidance forthe fiscal year beginning January 1, 2018 with no material impact on the Company’s financial statements.In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which requires a lessee to recognize assets and liabilities on the balancesheet for leases with lease terms greater than 12 months, using a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-10,“Codification Improvements to Topic 842, Leases” which updates narrow aspects of the guidance issued in ASU No. 2016-02. In July 2018, the FASB issuedASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings inthe period of adoption. In December 2018, the FASB issued ASU No. 2018-20, “Narrow-Scope Improvements for Lessors” which updates amendments relatedto sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and non-leasecomponents.In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” In issuing ASU No. 2018-11, the FASB is permittinganother transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to theopening balance of retained earnings in the period of adoption. The Company will adopt this transition method on January 1, 2019. The Company alsoelected certain available practicalF-16Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)expedients on adoption. In preparation for adoption of the standard, the Company implemented an enterprise-wide lease management system to assist in theaccounting and internal controls to ensure they meet the standard reporting and disclosure requirements. As of December 31, 2018, operating leases are off-balance sheet, however Topic ASC 842 reflects operating leases with terms greater than one year on the balance sheet as both a right-of-use asset and aliability for the obligation to make lease payments, similar to the accounting for capital leases under current guidance. The amounts to be recorded on thebalance sheet are based upon the present value of future lease payments, which are based upon discount rates which will be determined using a third partyvaluation. The Company is in the process of finalizing the calculations of the assets and liabilities to be recorded on the balance sheet at January 1, 2019.In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). On January 1, 2018, the Company adoptedFASB Accounting Standards Codification (“ASC”) Topic 606 and all the related amendments (the “new revenue standard”) using the modified retrospectivemethod. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retainedearnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Refer toNote 14 - Revenue for further detail.4. Fixed AssetsFixed assets as of December 31, 2018 and 2017 are shown at cost, less accumulated depreciation and amortization and are summarized below: December 31, 2018 2017Leasehold improvements$494,418 $489,738Fitness equipment(a)109,545 103,998Furniture, fixtures and computer equipment58,188 56,203Computer software19,778 19,048Construction in progress2,685 1,237Building and improvements16,010 9,575Land4,778 2,675 705,402 682,474Less: Accumulated depreciation and amortization(547,725) (530,976) $157,677 $151,498(a) Included $4,850 and $505 of fitness equipment in our clubs under capital lease for the years ending December 31, 2018 and 2017, respectively.Depreciation and leasehold amortization expense for the years ended December 31, 2018 and 2017, was $35,115 and $40,299, respectively.Fixed assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that related carrying amounts may not berecoverable from undiscounted cash flows in accordance with the FASB guidance. The Company’s long-lived assets and liabilities are grouped at theindividual club level which is the lowest level for which there are identifiable cash flows. To the extent that estimated future undiscounted net cash flowsattributable to the assets are less than the carrying amount, an impairment charge equal to the difference between the carrying value of such asset and theirfair values is recognized.In the years ended December 31, 2018 and 2017, the Company tested underperforming clubs and recorded impairment charges of $2,082 and $6,497,respectively, on leasehold improvements and furniture and fixtures at clubs that experienced decreased profitability and sales levels below expectationsduring these periods.The fair value of long-lived assets is determined using the level 3 valuation technique established by the FASB. Level 3 valuation is based uponunobservable inputs that are significant to the fair value measurement.F-17Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)5. Goodwill and Intangible AssetsGoodwill 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 since the third quarter of 2017 and has recorded goodwill asapplicable to the appropriate regions. For more information on these acquisitions, refer to Note 6 - Acquisitions. Goodwill for all acquisitions was recorded atfair value at the time of such acquisitions and may have changes to the balances up to one year after acquisition. As of December 31, 2018, the New York,Boston, California, Florida, Puerto Rico and Switzerland regions each have goodwill balances.The Company historically performed its goodwill impairment test annually as of the last day of February and in the interim if a triggering eventoccurred. In 2018, the Company established August 1 to be the annual testing date for all of the Company’s reporting units that have a goodwill balance.As of February 28, 2018, the Company performed a goodwill impairment test on the Switzerland region in line with the historical policy. As of August1, 2018, the Company performed a goodwill impairment test on the New York, Boston, California and Switzerland regions, within 12 months of the relatedacquisitions. For the Florida and Puerto Rico regions, the acquired goodwill was related to the acquisitions of clubs after the annual testing date. As such,these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for all reporting units will be August 1, 2019.The Company’s annual goodwill impairment tests as of August 1, 2018 and February 28, 2018 were performed by comparing the fair value of theCompany’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, for the amount by which the carrying amountexceeds 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 byusing an income approach. The income approach was based on discounted future cash flows and required significant assumptions, including estimatesregarding revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. The August 1, 2018 andFebruary 28, 2018 annual impairment tests supported the goodwill balance and as such, no impairment of goodwill was required.The changes in the carrying amount of goodwill in the year ended December 31, 2018 are detailed in the charts below. New York Boston California Florida Puerto Rico Switzerland OutlierClubs TotalGoodwill$36,707 $15,775 $— $— $— $1,175 $3,982 $57,639Changes due to foreign currencyexchange rate fluctuations— — — — — (116) — (116)Less: accumulated impairment ofgoodwill(31,549) (15,775) — — — — (3,982) (51,306)Balance as of December 31, 20175,158 — — — — 1,059 — 6,217Acquired goodwill1,669 7,573 1,584 2,467 2,380 — — 15,673Changes due to foreign currencyexchange rate fluctuations— — — — — (13) — (13)Balance as of December 31, 2018$6,827 $7,573 $1,584 $2,467 $2,380 $1,046 $— $21,877Amortization expense of intangible assets for the years ended December 31, 2018 and 2017 was $2,327 and $550, respectively. Intangible assets wereacquired in connection with club acquisitions in the years ended December 31, 2018 and 2017. Intangible assets are as follows: As of December 31, 2018 As of December 31, 2017 Gross CarryingAmount AccumulatedAmortization NetIntangibles Gross CarryingAmount AccumulatedAmortization NetIntangiblesMembership lists$7,042 $(4,224) $2,818 $12,744 $(11,577) $1,167Favorable lease commitments2,390 (553) 1,837 2,350 (136) 2,214Trade names3,050 (295) 2,755 900 (47) 853Non-compete agreement2,337 (308) 2,029 900 — 900 $14,819 $(5,380) $9,439 $16,894 $(11,760) $5,134F-18Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The aggregate amortization expense for the next five years and thereafter of the acquired intangible assets is as follows:Year Ending December 31, 2019$3,22420202,05620211,20020221,01720235302024 and thereafter1,412 $9,4396. AcquisitionsAcquisitions of businesses are accounted for in accordance with ASC 805, Business Combinations and ASU 2017-01. According to ASC 805,transactions that represent business combinations should be accounted for under the acquisition method. In addition, the ASC 805 includes a subtopic whichprovides guidance on transactions sometimes associated with business combinations but that do not meet the requirements to be accounted for as businesscombinations under the acquisition method. Under the acquisition method, the purchase price is allocated to the assets acquired and the liabilities assumedbased on their respective estimated fair values as of the acquisition date. Any excess of the purchase price over the fair values of the assets acquired andliabilities assumed was allocated to goodwill. The results of operations of the clubs acquired have been included in the Company’s consolidated financialstatements from the date of acquisition.The Company incurred acquisition-related costs of $3,114 and $468 in the years ended December 31, 2018 and 2017, respectively. These costs areincluded in general and administrative expenses in the accompanying consolidated statements of operations.Acquisition in the Boston Metropolitan RegionIn December 2018, the Company acquired four existing clubs in the Boston metropolitan region for a purchase price of $12,500 and a net cashpurchase price of $12,267 and was accounted for as a business combination. The following table summarizes the allocation of the purchase price to the fairvalue of the assets and liabilities acquired. The purchase price allocation presented below has been prepared on a preliminary basis and changes to thepreliminary purchase price allocations may occur as additional information concerning asset and liability valuations are finalized. December 2018Allocation of purchase price: Fixed assets$3,680Goodwill6,498Definite lived intangible assets: Membership list1,435Trade name248Non-compete agreement717Deferred revenue(311)Total allocation of purchase price$12,267The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives with the membership lists over the estimatedaverage membership life, the trade name over three years and the non-compete agreement over the contract life of five years.In the year ended December 31, 2018, the Company recorded revenue of $902 associated with these clubs. Net results were not material to theCompany’s accompanying consolidated statement of operations.F-19Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Acquisition of LIV FitnessIn September 2018, the Company acquired LIV Fitness for a purchase price of $5,000 and net cash purchase price of $4,930. The acquisition added twoclubs in Puerto Rico to the Company’s portfolio. These clubs continue to operate under the LIV Fitness trade name. The purchase price allocation presentedbelow has been prepared on a preliminary basis and changes to the preliminary purchase price allocations may occur as additional information concerningasset and liability valuations are finalized. September 2018Allocation of purchase price: Fixed assets$2,134Goodwill2,380Definite lived intangible assets: Membership list480Trade name340Non-compete agreement320Unfavorable lease commitment(400)Deferred revenue(324)Total allocation of purchase price$4,930The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives with the membership lists being amortized overthe estimated average membership life, the trade name over 13 years, the non-compete agreement over the contract life of five years, and the unfavorablelease commitment through March 31, 2023, the remaining life of the lease.In the year ended December 31, 2018, the Company recorded revenue of $1,516 and net income of $46 related to LIV Fitness. Such amounts areincluded in the respective accompanying consolidated statements of operations.Acquisition in the New York Metropolitan RegionIn September 2018, the Company acquired 60% of two existing clubs in the New York metropolitan region, with the seller retaining the other 40%. Asa result, these two clubs became majority owned subsidiaries of the Company. This acquisition added two clubs to the Company’s portfolio in the New YorkMetropolitan region and operates under the New York Sports Clubs brand. The following table summarizes an estimated allocation of the purchase price ofthe assets and liabilities acquired. September 2018 (as adjusted)Allocation of purchase price: Fixed assets$703Goodwill237Capital lease liabilities(76)Other assets and liabilities assumed, net(111)Deferred revenue(476)Total allocation of purchase price$277The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety.In the year ended December 31, 2018, the Company recorded revenue of $596 and net loss attributable to Town Sports International Holdings, Inc. andsubsidiaries of $571 related to these two clubs. Such amounts are included in the respective accompanying consolidated statements of operations.F-20Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Acquisition of Palm Beach Sports ClubsIn August 2018, the Company acquired 85% of three clubs in Florida, with the seller retaining the other 15%, for a purchase price of $7,307 and a netcash purchase price of $6,697 and branded them “Palm Beach Sports Clubs”. A net amount of $610 is owed to the seller over the next four years. As a result,Palm Beach Sports Clubs became a majority owned subsidiary of the Company. The acquisition added three clubs to the Company’s portfolio in the Floridaregion and was accounted for as a business combination. The acquisition also included the purchase of a building in which one of the three clubs operates.The following table summarizes the allocation of the purchase price to the fair value of the assets and liabilities acquired. The purchase price allocationpresented below has been prepared on a preliminary basis and changes to the preliminary purchase price allocations may occur as additional informationconcerning asset and liability valuations are finalized. August 2018 (as adjusted)Allocation of purchase price: Fixed assets$5,646Goodwill2,467Definite lived intangible assets: Membership list288Amount due to seller, net(610)Deferred revenue(599)Non-controlling interest(495)Total allocation of purchase price$6,697The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are amortized over their estimated useful lives with the membership lists being amortized over theestimated average membership life.In the year ended December 31, 2018, the Company recorded revenue of $1,571 and net loss attributable to Town Sports International Holdings, Inc.and subsidiaries of $40 related to Palm Beach Sports Clubs. Such amounts are included in the respective accompanying consolidated statements ofoperations.Acquisition of Total Woman Gym and Spa BusinessIn April 2018, the Company acquired substantially all of the assets of the Total Woman Gym and Spa business for a purchase price of $8,000 and a netcash purchase price of $7,265. The acquisition added 12 clubs to the Company’s portfolio in California and was accounted for as a business combination.These 12 clubs continue to operate under the Total Woman Gym and Spa trade name. The following table summarizes the allocation of the purchase price tothe fair value of the assets and liabilities acquired. The purchase price allocation presented below has been prepared on a preliminary basis and changes to thepreliminary purchase price allocations may occur as additional information concerning asset and liability valuations are finalized. April 2018 (as adjusted)Allocation of purchase price: Fixed assets$8,064Goodwill1,584Definite lived intangible assets: Favorable lease commitment440Trade name1,562Working capital, net161Deferred revenue(4,546)Total allocation of purchase price$7,265F-21Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives of 15 years for the trade name, and through June30, 2026, the remaining life of the related lease, for the favorable lease commitment.In the year ended December 31, 2018, the Company recorded revenue of $16,220 and a net loss of $988 related to Total Woman Gym and Spa. Suchamounts are included in the respective accompanying consolidated statements of operations.Acquisition in the Boston Metropolitan RegionIn January 2018, the Company acquired an existing club in the Boston metropolitan region for a purchase price of $2,750 and a net cash purchase priceof $2,866 and was accounted for as a business combination. The following table summarizes the allocation of the purchase price to the fair value of the assetsand liabilities acquired. The purchase price allocation presented below has been prepared and changes to the preliminary purchase price allocations mayoccur as additional information concerning asset and liability valuations are finalized. January 2018 (as adjusted)Allocation of purchase price: Fixed assets$982Goodwill1,075Definite lived intangible assets: Membership list600Non-compete agreement400Working capital assets130Deferred revenue(321)Total allocation of purchase price$2,866The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives with the membership list over the estimatedaverage membership life and the non-compete agreement over the contract life of five years.In the year ended December 31, 2018, the Company recorded revenue of $4,844 and a net loss of $104 related to this club. Such amounts are includedin the respective accompanying consolidated statements of operations.Acquisition of TMPLIn December 2017, the Company acquired TMPL Gym, an existing club in the New York metropolitan region, for a cash purchase of $6,500 and a netcash purchase price of $5,925. TMPL is a luxury gym that features a wide variety of fitness programs and group exercises. The club continues to operateunder the TMPL trade name and was accounted for as a business combination.F-22Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company received additional information in the year ended December 31, 2018 and adjusted the purchase price allocation. In the year endedDecember 31, 2018, the Company recorded measurement period adjustments of $1,011 to both goodwill and deferred revenue. The following tablesummarizes the allocation of the purchase price to the fair value of the assets and liabilities acquired. December 2017 (as adjusted)Allocation of purchase price: Fixed assets$5,195Goodwill1,376Definite lived intangible assets: Non-compete agreement900Trade name200Deferred revenue(1,511)Capital lease liability(160)Other liabilities(75)Total allocation of purchase price$5,925The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are being amortized over their estimated useful lives of 15 years for the trade name and the contract lifeof 5 years for the non-compete agreement.In the year ended December 31, 2018, the Company recorded revenue of $5,432 and net loss of $1,166 related to TMPL. Such amounts are included inthe respective accompanying consolidated statements of operations. In the year ended December 31, 2017, the revenue and net results related to thisacquisition were immaterial to the Company’s accompanying consolidated statement of operations. TMPL was launched as a new brand in 2016 focusing onthe intersection of metabolic science, exercise and nutrition, and as expected, it will take time to mature given the age of the club.Acquisition of Lucille Roberts Health Club BusinessIn September 2017, the Company acquired Lucille Roberts for a purchase price of $9,500 and a net cash purchase price of $9,450. The acquisitionadded 16 clubs to the Company’s portfolio in the New York metropolitan region and was accounted for as a business combination. These 16 clubs continueto operate under the Lucille Roberts trade name.The Company received additional information in the year ended December 31, 2018 and adjusted the purchase price allocation. In the year endedDecember 31, 2018, the Company recorded measurement period adjustments of $421 to both goodwill and deferred revenue. The following table summarizesthe allocation of the purchase price to the fair value of the assets and liabilities acquired. September 2017 (as adjusted)Allocation of purchase price: Fixed assets1,024Goodwill5,214Definite lived intangible assets: Membership lists1,400Trade names700Favorable lease commitment2,350Deferred revenue(1,238)Total allocation of purchase price$9,450The goodwill recognized represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The goodwillassociated with this acquisition is partially attributable to the avoided costs of acquiring the assembled workforce and is deductible for tax purposes in itsentirety. The definite lived intangible assets acquired are beingF-23Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)amortized over their estimated useful lives with the membership lists amortized over the estimated average membership life, the trade name over five years,and the favorable lease commitment through June 30, 2023.In the year ended December 31, 2018, the Company recorded revenue of $16,413 and net income of $3,484 related to the Lucille Roberts clubs. Fromthe acquisition on in September 2017 through December 2017, the Lucille Roberts clubs generated revenue of $3,937 and net loss of $778. Such amounts areincluded in the respective accompanying consolidated statements of operations.Unaudited Pro forma ResultsThe following table provides the Company’s consolidated unaudited pro forma revenues, net income and net income per basic and diluted commonshare had the results of the acquired businesses’ operations been included in its operations commencing on January 1, 2017, based on available informationrelated to the respective operations. This pro forma information is not necessarily indicative either of the combined results of operations that actually wouldhave been realized by the Company had the acquisitions been consummated at the beginning of the period for which the pro forma information is presented,or of future results and does not account for any operational improvements to be made by the Company post-acquisition. Year Ended December 31, 2018 2017Revenue$473,802 $481,027Net income$1,587 $4,183 Income per share: Basic$0.06 $0.16Diluted$0.06 $0.16Acquisition of AssetsIn January 2018, the Company acquired a building and the land it occupies in the Florida region, as well as a single health club located on the premisesfor a purchase price of $4,039. Of the total purchase price, $2,691 was attributed to the building, $1,021 was attributed to the land, and the remainder of thepurchase price was primarily attributed to the equipment, intangible assets and deferred revenue. This transaction was accounted for as an asset acquisition.In November 2017, the Company acquired a building and the land it occupies in the New York metropolitan region, as well as a single health clublocated on the premises for a purchase price of $12,600. Of the total purchase price, $2,675 was attributed to land, $9,675 was attributed to building, and theremainder of the purchase price was primarily equipment and deferred revenue. This transaction was accounted for as an asset acquisition.7. Accrued ExpensesAccrued expenses as of December 31, 2018 and 2017 consisted of the following: December 31, 2018 2017Accrued payroll and related$9,163 $5,888Accrued occupancy costs11,020 10,009Accrued insurance claims2,321 2,282Accrued operating expenses1,994 1,347Accrued general and administrative3,302 2,504Accrued other4,747 2,639 $32,547 $24,669F-24Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)8. Long-Term DebtLong-term debt as of December 31, 2018 and 2017 consisted of the following: December 31, 2018 20172013 Term Loan Facility$197,835 $199,918Capital lease liabilities3,817 160Less: Unamortized discount(1,936) (2,912)Less: Deferred financing costs(634) (977)Less: Current portion due within one year(21,080) (2,242)Long-term portion$178,002 $193,947The aggregate long-term debt obligations maturing in the next five years and thereafter are as follows: Amount DueYear Ending December 31, 2019$21,0802020178,67520211,060202267320231642024 and thereafter— $201,652The table above does not reflect potential commitments in connection with our outstanding letters of credit under the 2013 Revolving Loan Facility(defined below) which matures on August 14, 2020.2013 Senior Credit FacilityOn November 15, 2013, TSI LLC, an indirect, wholly-owned subsidiary, entered into a $370,000 senior secured credit facility (“2013 Senior CreditFacility”), 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 2013Senior Credit Facility consists of a $325,000 term loan facility maturing on November 15, 2020 (“2013 Term Loan Facility”) and a $15,000 revolving loanfacility maturing on August 14, 2020 (“2013 Revolving Loan Facility”). Proceeds from the 2013 Term Loan Facility of $323,375 were issued, net of anoriginal issue discount of 0.5%, or $1,625. The borrowings under the 2013 Senior Credit Facility are guaranteed and secured by assets and pledges of capitalstock by Holdings II, TSI LLC, and, subject to certain customary exceptions, the wholly-owned domestic subsidiaries of TSI LLC.On January 30, 2015, the 2013 Senior Credit Facility was amended (the “ First Amendment”) to permit TSI Holdings to purchase term loans under thecredit agreement. Any term loans purchased by TSI Holdings will be canceled in accordance with the terms of the credit agreement, as amended by the FirstAmendment. The Company may from time to time purchase term loans in market transactions, privately negotiated transactions or otherwise; however theCompany is under no obligation to make any such purchases. Any such transactions, and the amounts involved, will depend on prevailing marketconditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.On November 8, 2018, the 2013 Senior Credit Facility was amended (the “ Second Amendment”), which modified the revolving loan facility amount to$15,000 from $45,000, and extended the maturity date from November 15, 2018 to August 14, 2020. In addition, the Second Amendment restated that theCompany is not able to utilize more than 20% or $3,000 in accordance with terms of the 2013 Revolving Loan Facility if the total leverage ratio exceeds4.00:1.00 (calculated on a proforma basis to give effect to any borrowing). Previously, the Company was not able to utilize more than 25% or $11,250 inaccordance with terms of the 2013 Revolving Loan Facility if the total leverage ratio exceeded 4.50:1.00 (calculated on a proforma basis to give effect to anyborrowing).F-25Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Borrowings under the 2013 Term Loan Facility and the 2013 Revolving Loan Facility, at TSI LLC’s option, bear interest at either the administrativeagent’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 CreditFacility. 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 thelast 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 maybe reduced by voluntary prepayments. As of December 31, 2018, TSI LLC had made a total of $26,184 in principal payments on the 2013 Term LoanFacility.In May 2017, TSI LLC loaned $5,000 to TSI Group, a wholly-owned subsidiary of TSI Holdings, at a rate of LIBOR plus 9.55% per annum. In additionto the interest payments, TSI Group is required to repay 1.0% of the principal amount of the loan, $50 per annum, on a quarterly basis commencingSeptember 30, 2017. The loan is secured by certain collateral. This transaction has no impact on the Company's consolidated financial statements as it iseliminated in consolidation. In October 2017, TSI LLC made a dividend distribution of $35,000 to TSI Holdings, Inc. As of December 31, 2018, TSI Grouphad a cash balance of approximately $1,968.As of December 31, 2018, TSI LLC had outstanding letters of credit of $2,238 and a total leverage ratio that was below 4.00:1.00. Other than theseoutstanding letters of credit, TSI LLC did not have any amounts utilized on the 2013 Revolving Loan Facility. The unutilized portion of the 2013 RevolvingLoan Facility as of December 31, 2018 was $12,762, with borrowings under such facility subject to the conditions applicable to borrowings under theCompany’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 financialcovenant described above, the 2013 Senior Credit Facility contains certain affirmative and negative covenants, including those that may limit or restrict TSILLC and Holdings II’s ability to, among other things, incur indebtedness and other liabilities; create liens; merge or consolidate; dispose of assets; makeinvestments; pay dividends and make payments to stockholders; make payments on certain indebtedness; and enter into sale leaseback transactions, in eachcase, subject to certain qualifications and exceptions. The 2013 Senior Credit Facility also includes customary events of default (including non-compliancewith the covenants or other terms of the 2013 Senior Credit Facility) which may allow the lenders to terminate the commitments under the 2013 RevolvingLoan Facility and declare all outstanding term loans and revolving loans immediately due and payable and enforce its rights as a secured creditor.TSI LLC may prepay the 2013 Term Loan Facility and 2013 Revolving Loan Facility without premium or penalty in accordance with the 2013 SeniorCredit Facility. Mandatory prepayments are required relating to certain asset sales, insurance recovery and incurrence of certain other debt and commencingin 2015 in certain circumstances relating to excess cash flow (as defined) for the prior fiscal year, as described below, in excess of certain expenditures.Pursuant to the terms of the 2013 Senior Credit Facility, the Company is required to apply net proceeds in excess of $30,000 from sales of assets in any fiscalyear towards mandatory prepayments of outstanding borrowings.In addition, the 2013 Senior Credit Facility contains provisions that require excess cash flow payments, as defined therein, to be applied againstoutstanding 2013 Term Loan Facility balances. The excess cash flow is calculated annually for each fiscal year ending December 31 and paid 95 days afterthe 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 flowrepayment 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 thetotal 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 paydividends 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 LLCis 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 hadapproximately $36,000 of excess cash flow and expects to pay approximately $18,000 in principal payments in April 2019 and such amount is included inCurrent portion of long-term debt on the Company’s accompanying consolidated balance sheet as of December 31, 2018.As of December 31, 2018, the 2013 Term Loan Facility has a gross principal balance of $197,835 and a balance of $195,265 net of unamortized debtdiscount of $1,936 and unamortized debt issuance costs of $634. As of December 31, 2018, both the unamortized balance of debt issuance costs andunamortized debt discount are recorded as a contra-liability and netted with long-term debt on the accompanying consolidated balance sheet and are beingamortized as interest expense using the effective interest method.F-26Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Fair Market ValueBased on quoted market prices, the 2013 Term Loan Facility had a fair value of approximately $183,987 or 93% at December 31, 2018 and $188,173or 94% at December 31, 2017, and is classified within level 2 of the fair value hierarchy. Level 2 is based on quoted prices for similar instruments in activemarkets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets. The fair value for the Company’s 2013 Term Loan Facility is determined using observable currentmarket information such as the prevailing Eurodollar interest rate and Eurodollar yield curve rates and includes consideration of counterparty credit risk.For the fair market value of the Company’s interest rate swap instrument in 2017, refer to Note 10 - Derivative Financial Instruments.9. Mortgage and Term LoanOn August 3, 2018, TSI - Donald Ross Realty LLC, a subsidiary of TSI Group, entered into a mortgage note for $3,150 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 yearamortization 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 fullon its maturity date of August 3, 2028. On April 24, 2018, Dixie Highway Realty, LLC, a subsidiary of TSI Group, entered into promissory notes for $1,880 (the “Mortgage Note”) and $500(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 andinterest 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 isdue 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 ofprincipal 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 mustmaintain a minimum relationship liquidity balance with the Lender of $500 in the form of an operating account.The carrying amount of the mortgage notes and Term Note approximates fair value based on Level 2 inputs. Level 2 is based on quoted prices forsimilar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in whichall significant inputs and significant value drivers are observable in active markets.10. Derivative Financial InstrumentsThe Company is exposed to market risks relating to fluctuations in interest rates. In order to minimize the possible negative impact of such fluctuationson the Company’s cash flows, the Company entered into derivative financial instruments (“derivatives”), such as interest-rate swaps. Derivatives were notentered into for trading purposes and the Company only used commonly traded instruments. The Company used derivatives solely relating to the variabilityof cash flows from interest rate fluctuations.The Company originally entered into an interest rate swap arrangement on July 13, 2011 in connection with the Company’s previous credit facility. Inconnection with entering into the 2013 Senior Credit Facility, the Company amended and restated the interest rate swap agreement initially entered into (andamended in August 2012 and November 2012). Effective as of November 15, 2013, the closing date of the 2013 Senior Credit Facility, the interest rate swaparrangement had a notional amount of $160,000 and matured on May 15, 2018. The swap effectively converted $160,000 of the outstanding principal of thetotal variable-rate debt under the 2013 Senior Credit Facility to a fixed rate of 0.884% plus the 3.5% applicable margin and the Eurodollar rate, which had afloor of 1%. As permitted by ASC 815, Derivatives and Hedging, the Company designated this swap as a cash flow hedge, the effects of which were reflectedin the Company’s consolidated financial statements as of December 31, 2017 and for the years ended December 31, 2018 and 2017. The objective of thishedge was to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.When the Company’s derivative instrument was executed, hedge accounting was deemed appropriate and it was designated as a cash flow hedge atinception with re-designation being permitted under ASC 815, Derivatives and Hedging. Interest rate swaps were designated as cash flow hedges foraccounting purposes since they were being used to transform variable interest rate exposure to fixed interest rate exposure on a recognized liability (debt).The Company performed aF-27Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)quarterly assessment of the hedge effectiveness of the hedge relationship and measured and recognized any hedge ineffectiveness in the consolidatedstatements of operations. For the years ended December 31, 2018 (through May 15, 2018, the maturity date) and 2017, hedge ineffectiveness was evaluatedusing the hypothetical derivative method and there was no hedge ineffectiveness noted.The fair value for the Company’s interest rate swap was determined using observable current market information such as the prevailing Eurodollarinterest rate and Eurodollar yield curve rates and include consideration of counterparty credit risk. The following table presents the aggregate fair value of theCompany’s derivative financial instrument: Fair Value Measurements Using: TotalFair Value Quoted Pricesin Active Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3)Interest rate swap liability as of December 31, 2018$— $— $— $—Interest rate swap liability as of December 31, 2017$184 $— $184 $—There was no contract liability as of December 31, 2018. As of December 31, 2017, the swap contract liability of $184 was recorded as a component ofaccrued expenses, with the offset to accumulated other comprehensive income ($104, net of taxes) on the accompanying consolidated balance sheets.There were no significant reclassifications out of accumulated other comprehensive income in 2018 and 2017 and there are no remaining amounts inaccumulated other comprehensive income as of December 31, 2018 due to the maturity of the interest rate swap on May 15, 2018.11. Related PartyOn April 25, 2017, the Company approved the appointment of Stuart M. Steinberg as General Counsel of the Company, effective as of May 1, 2017.Furthermore, the Company and Mr. Steinberg's law firm (the “Firm”) previously entered into an engagement letter agreement (the “Agreement”) dated as ofFebruary 4, 2016, and as amended and restated effective as of May 1, 2017, pursuant to which the Company engaged the Firm to provide general legalservices requested by the Company. Mr. Steinberg continues to provide services for the Firm while employed by the Company. The Agreement provides for amonthly retainer fee payable to the Firm in the amount of $21, excluding litigation services. The Company will also reimburse the Firm for any expensesincurred in connection with the Firm’s services to the Company. In connection with this arrangement, the Company incurred legal expenses payable to theFirm in the amount of $269 and $183 in the year ended December 31, 2018 and 2017, respectively. These amounts were classified within general andadministrative expenses on the accompanying consolidated statements of operations for the year ended December 31, 2018 and 2017. Additionally, theCompany paid a bonus to Mr. Steinberg in January 2019 related to services performed in 2018 in the amount of $280. Such amount was paid to the order ofthe Firm. This amount was classified within payroll and other expense in the accompanying consolidated statement of operations for the year endedDecember 31, 2018 and in accrued expenses in the accompanying consolidated balance sheet as of December 31, 2018.12. LeasesThe Company leases office, warehouse and multi-recreational facilities and certain equipment under non-cancelable operating leases. In addition tobase rent, the facility leases generally provide for additional rent based on operating results, increases in real estate taxes and other costs. Certain leasesprovide for additional rent based upon defined formulas of revenue, cash flow or operating results of the respective facilities. Under the provisions of certainof these leases, the Company is required to maintain irrevocable letters of credit, which amounted to $1,823 as of December 31, 2018.The leases expire at various times through June 30, 2038 and certain leases may be extended at the Company’s option. Escalation terms on these leasesgenerally include fixed rent escalations, escalations based on an inflation index such as the consumer price index, and fair market value adjustments. In thenext five years, or the period from January 1, 2019 through December 31, 2023, the Company has leases for 27 club locations that are due to expire withoutany renewal options, six of which are due to expire in 2019, and 69 club locations that are due to expire with renewal options.F-28Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Future minimum rental payments under non-cancelable leases and future capital lease payments are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2019$110,2152020 107,1432021 96,7682022 83,7662023 70,8922024 and thereafter 325,644Rent expense for the years ended December 31, 2018 and 2017 was $139,109 and $126,318, respectively, such amounts include non-base rent items of$27,448 and $24,881, respectively. Including the effect of deferred lease liabilities, rent expense was $138,556 and $124,997 for the years endedDecember 31, 2018 and 2017.The Company, as landlord, leases space to third party tenants under non-cancelable operating leases and licenses. In addition to base rent, certain leasesprovide for additional rent based on increases in real estate taxes, indexation, utilities and defined amounts based on the operating results of the lessee. Thesub-leases expire at various times through December 31, 2023. Future minimum rentals receivable under non-cancelable leases are shown in the chart below. MinimumAnnual RentalYear Ending December 31, 2019$2,47720201,65820211,1892022485202352024 and thereafter—Rental income, including non-cash rental income, for the years ended December 31, 2018 and 2017 was $3,005 and $2,558, respectively. For the yearsended December 31, 2018 and 2017, such amounts included no additional rental charges above the base rent.13. Stockholders’ (Deficit) EquityThe Company’s certificate of incorporation adopted in connection with the IPO provides for 105,000,000 shares of capital stock, consisting of5,000,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”) and 100,000,000 shares of Common Stock, par value $0.001 per share(“Common Stock”).The Company’s 2006 Stock Incentive Plan, as amended and restated in April 2015 (the “2006 Plan”), authorizes the Company to issue up to 3,500,000shares of Common Stock to employees, non-employee directors and consultants pursuant to awards of stock options, stock appreciation rights, restrictedstock, in payment of performance shares or other stock-based awards. The Company amended the 2006 Plan to increase the aggregate number of shares ofcommon stock issuable under the 2006 Plan by 1,000,000 shares to a total of 4,500,000 in May 2016, and by 2,000,000 shares to a total of 6,500,000 in May2017. As of December 31, 2018, there were 2,077,165 shares available to be issued under the 2006 Plan.Beginning January 1, 2017, the Company adopted ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” As a result ofthis updated guidance, the Company accounted for forfeitures as they occur in the year ended December 31, 2018. The forfeiture adjustment reduced stock-based compensation expense by $51 in the year ended December 31, 2018.F-29Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Common Stock OptionsThe outstanding Common Stock options as of December 31, 2018 were all fully vested. Stock options generally expire ten years from the date of grant.As of December 31, 2018 and 2017, a total of 22,439 and 61,013 Common Stock options were exercisable and outstanding, respectively.The Company recognizes stock option expense equal to the grant date fair value of a stock option on a straight-line basis over the requisite serviceperiod, which is generally the vesting period. For the year ended December 31, 2017, the total compensation expense related to options, classified withinPayroll and related on the consolidated statements of operations was $15 and the related tax benefit was $5. The 2017 tax benefit was prior to the recognitionof the valuation allowance. There was no compensation expense related to stock options outstanding for the year ended December 31, 2018.The following table summarizes the stock option activity for the year ended December 31, 2018: Common Weighted AverageExercise PriceBalance at January 1, 201861,013 $2.19Exercised(13,110) 2.34Canceled(25,464) 2.42Balance at December 31, 201822,439 $1.82The following table summarizes information about stock options outstanding and exercisable as of December 31, 2018: Options Outstanding Options Exercisable Number of Options Weighted-AverageRemainingContractual Life Weighted-AverageExercise Price Number of Options Weighted-AverageExercise PriceCommon 2009 grants11,124 11 months $1.74 11,124 $1.742010 grants11,315 18 months $1.91 11,315 $1.91Total Grants22,439 15 months $1.82 22,439 $1.82At December 31, 2018, stock options outstanding and exercisable have a weighted average remaining contractual life of 1.2 years and the total intrinsicvalue for “in-the-money” options, based on the Company’s closing stock price of $6.40, was $103.The aggregated intrinsic value represents the pre-tax intrinsic value (the difference between the fair value of the Company’s common stock atDecember 31, 2018 of $6.40 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holdershad all option holders exercised their options on December 31, 2018. The intrinsic value is based on the fair market value of the Company’s stock andtherefore changes as the fair market value of the stock price changes.Under the 2006 Plan, stock options must be granted at a price not less than the fair market value of the stock on the date the option is granted, generallyare not subject to re-pricing, and will not be exercisable more than ten years after the date of grant. Options granted under the 2006 Plan generally qualify as“non-qualified stock options” under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the fair market value of the Company’sCommon Stock on the option grant date. The Company did not grant any stock options during the years ended December 31, 2018 and 2017.As of December 31, 2018, there was no unrecognized compensation cost related to stock options.F-30Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Common Stock GrantsRestricted Stock GrantsThe following restricted stock was granted during the year ended December 31, 2018. Numberof Shares SharePrice Grant DateFair ValueFebruary 1, 201813,115 $6.10 $80The following table summarizes the restricted stock activity for the years ended December 31, 2018: Numberof Shares Weighted AverageGrant Date Fair ValueBalance as of January 1, 20181,511,941 $3.73Granted13,115 6.10Vested(660,475) 3.50Forfeited(44,309) 4.51Balance as of December 31, 2018820,272 $3.92The fair value of restricted stock is based on the closing stock price of an unrestricted share of the Company’s Common Stock on the grant date and isamortized to compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period. The total compensationexpense, classified within Payroll and related on the consolidated statements of operations, related to restricted stock grants was $2,275 and $1,478 for theyears ended December 31, 2018 and 2017, respectively, and the related tax benefit was $696 and $452 for the years ended December 31, 2018 and 2017,respectively. Each of these 2018 and 2017 tax benefits were prior to the recognition of the valuation allowance. The restricted shares contain vestingrestrictions and vest in equal installments over either three or four years on the anniversary date of the grants. In the years ended December 31, 2018 and2017, the Company granted 13,115 and 506,200 restricted shares with an aggregate grant date fair value of $80 and $2,913, respectively.As of December 31, 2018, $2,742 of unrecognized compensation cost related to restricted stock was expected to be recognized over a weighted-averageperiod of 1.6 years.Non-Restricted Stock GrantsThe Company issued 52,460 shares of Common Stock to members of the Company’s Board of Directors with respect to their annual retainer onFebruary 1, 2018. The fair value of the shares issued on February 1, 2018 was $6.10 per share and was expensed upon the date of grant. The totalcompensation expense, classified within general and administrative expenses, related to Board of Director Common Stock grants was $320 in the year endedDecember 31, 2018. In the year ended December 31, 2017, the Company issued 108,940 shares of Common Stock with an aggregate grant date fair value of$368.Management Stock Purchase PlanThe Company adopted the 2018 Management Stock Purchase Plan in January 2018, and amended and restated it in March 2018 (the “MSPP”). Thepurpose of the MSPP is to provide eligible employees of the Company (corporate title of Director or above) an opportunity to voluntarily purchase theCompany’s stock in a convenient manner. As of December 31, 2017, shares purchased under this plan did not have a material impact on the Company’sfinancial statements. There was no compensation expense related to MSPP for each of the years ended December 31, 2018 and 2017.The following is a summary of the MSPP, which is qualified in its entirety by the terms of the MSPP. Eligible employees may elect to use up to 20% oftheir cash compensation (as defined in the MSPP), but in no event more than $200 in any calendar year, to purchase the Company’s common stock generallyon a quarterly basis on the open market through a broker (such purchased shares being referred to as “MSPP Shares”). If the participant holds the MSPP Sharesfor the requisite period specified in the Plan (two years from the purchase date) and remains an employee of the Company, the participant will receive anaward of shares of restricted stock under the Company’s 2006 Stock Incentive Plan, as amended, in an amount equal to the number of MSPP Shares thatsatisfied the holding period. The award will vest on the second anniversary of the award date so long as the participant remains an employee on the vestingdate. Awards granted under the Stock Incentive Plan in any calendar year as a result of participants holding the MSPP Shares for the requisite period will bethe lesser of (i) 50% of the sharesF-31Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)available for grant under the Stock Incentive Plan and (ii) the number of MSPP Shares that have satisfied the two year holding period.Employee Stock Purchase PlanIn May 2018, the Company’s shareholders approved the Town Sports International Holdings, Inc. Employee Stock Purchase Plan (the “ESPP”),effective as of June 15, 2018. Under the ESPP, an aggregate of 800,000 shares of common stock (subject to certain adjustments to reflect changes in theCompany’s capitalization) are reserved and may be purchased by eligible employees who become participants in the ESPP. The purchase price per share ofthe common stock will be the lesser of 85% of the fair market value of a share of common stock on the offering date or 85% of the fair market value of a shareof common stock on the purchase date. As of December 31, 2018, there were 791,357 shares of common stock available for issuance pursuant to the ESPP.Total compensation expense, classified within Payroll and related on the accompanying consolidated statements of operations, related to ESPP was $21for the year ended December 31, 2018.The fair value of the purchase rights granted under the ESPP for the offering period beginning December 17, 2018 was $1.64. It was estimated byapplying the Black-Scholes option-pricing model to the purchase period in the offering period using the following assumptions: December 17, 2018Grant price $6.16Expected term 3 monthsExpected volatility 57.61%Risk-free interest rate 2.37%Expected dividend yield —%Grant price - Closing stock price on the first day of the offering period.Expected Term - The expected term is based on the end date of the purchase period of each offering period, which is three months from thecommencement of each new offering period.Expected volatility - The expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publiclytraded options on the Company’s stock.Risk-free interest rate - The risk-free interest rate is based on a U.S. Treasury rate in effect on the date of grant with a term equal to the expected term.14. RevenuesAdoption of ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606)On January 1, 2018, the Company adopted ASU No. 2014-09 using the modified retrospective method applied to those contracts which were notcompleted as of January 1, 2018. Results for reporting period beginning after January 1, 2018 are presented under ASU No. 2014-09, while prior periodamounts are not adjusted and continue to be reported in accordance with our historic accounting under “Revenue Recognition” (Topic 605). The Companyrecorded a net addition to opening retained earnings of $1,604 as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with theimpact related to membership costs requiring deferral. ASC Topic 606 requires the Company to defer costs related to obtaining members and expense thosecosts over the estimated membership life. Under previous guidance, these membership costs were expensed at the time of the respective sale.F-32Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our accompanying consolidated balance sheetand statements of operations was as follows: As of December 31, 2018 Balances Without Effect of ChangeBalance SheetAs Reported Adoption of ASC 606 Increase/(Decrease)Asset Deferred membership costs$1,803 $476 $1,327 Equity Accumulated deficit$(73,212) $(74,539) $1,327 Year Ended December 31, 2018 Balances Without Effect of ChangeStatements of OperationsAs Reported Adoption of ASC 606 Increase/(Decrease)Expenses Payroll and related168,315 168,038 277Disaggregation of RevenueThe following table presents our revenue by type: Years Ended December 31, 2018 2017Membership dues$339,397 $307,966Initiation and processing fees1,209 2,268Membership revenue340,606 310,234Personal training revenue73,458 69,735Other ancillary club revenue23,293 17,197Ancillary club revenue96,751 86,932Fees and other revenue5,737 5,876Total revenue$443,094 $403,042Revenue RecognitionMembership dues:The Company generally receives one-time non-refundable joining fees and monthly dues from its members. The Company also offers paid-in-fullmemberships giving members the option to pay their membership dues in advance. The Company offers both month-to-month and commit memberships.Members can cancel their membership with a fee charged to those members still under contract. Membership dues are recognized in the period in whichaccess to the club is provided.The Company’s membership plans allow for club members to elect to pay a per visit fee to use non-home clubs. These usage fees are recorded tomembership revenue in the month the usage occurs.Initiation and processing fees:Initiation and processing fees, as well as related direct and incremental expenses of membership acquisition, which may include sales commissions,bonuses and related taxes and benefits, are deferred and recognized, on a straight-line basis, in operations over the estimated average membership life or 12months to the extent these costs are related to the first annual fee paid within one month of enrollment. Annual fees are amortized over 12 months.The estimated average membership life was 26 months for each of the years ended December 31, 2018 and 2017. The Company monitors factors thatmight affect the estimated average membership life including retention trends, attrition trends,F-33Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)membership sales volumes, membership composition, competition, and general economic conditions, and adjusts the estimate as necessary on an annualbasis.Personal training revenue:The Company recognizes revenue from personal training sessions as the services are performed (i.e., when the session is trained). Unused personaltraining sessions expire after a set, disclosed period of time after purchase (except in California and Florida) and are not refundable or redeemable by themember for cash. The Company had collected approximately $12,371 and $12,456 for unused and expired personal training sessions that had not beenrecognized as revenue and was recorded as deferred revenue as of December 31, 2018 and 2017, respectively. For six of the jurisdictions in which theCompany operates, the Company has concluded, based on opinions from outside counsel, that monies paid to the company for unused and expired personaltraining sessions were not escheatable. For the remaining jurisdictions in which the Company operates, the Company has likewise concluded that the moniespaid to the company for unused personal training sessions were not escheatable, regardless of whether they expire. However, the Company has not yetobtained opinions from outside counsel for these jurisdictions. It is possible however, that one or more of these jurisdictions may not agree with theCompany’s position and may claim that the Company must remit all or a portion of these amounts to such jurisdiction. This could have a material adverseeffect on the Company’s cash flows. The State of New York has informed the Company that it is considering whether the Company is required to remit theamount received by the Company for unused, expired personal training sessions to the State of New York as unclaimed property.In addition to the prepaid personal training sessions the Company also offers a personal training membership product which consists of single or multi-session packages ranging from four to 12 sessions per month. These sessions provided by the membership product are at a discount to our stand-alone sessionpricing and must be used in each respective month. Revenue related to this product is recognized in each respective month.Other ancillary club revenue:Other ancillary club revenue primarily consists of Sports Clubs for Kids, Small Group Training and racquet sports. Revenues are recognized as theservices are performed.Fees and other revenue:Fees and other revenue primarily consist of rental income from third party tenants, marketing revenue related to third party marketing in the Company’sclub locations, management fees related to clubs the Company manages but does not wholly-own and revenue related to laundry services. Revenue generatedfrom fees and other revenue is generally recognized at the time the related contracted services are performed.The Company generates management fees from certain club facilities that are not wholly-owned, which include two and four managed sites as ofDecember 31, 2018 and 2017, respectively. Management fees earned for services rendered are recognized at the time the related services are performed.Revenue generated from managed sites was $439 and $922 for the year ended December 31, 2018 and 2017, respectively.When a revenue agreement involves multiple elements, such as sales of both memberships and services in one arrangement or potentially multiplearrangements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when the revenuerecognition criteria for each element is met.In connection with advance receipt of fees or dues, the Company was required to maintain bonds totaling $3,443 and $2,658 as of December 31, 2018and 2017, respectively.Contract LiabilityThe Company records deferred revenue when cash payments are received or due in advance of our performance. In the year ended December 31, 2018,the Company recognized revenue of $20,764 that was included in the deferred revenue balance as of December 31, 2017.Practical Expedients and ExemptionsThe Company has elected to not capitalize contracts that are shorter than one year. The majority of the Company's contracts have an expected length ofone year or less. The Company does not disclose the value of unsatisfied performanceF-34Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which wehave the right to invoice for services performed.15. Corporate Income TaxesOn December 22, 2017, the U.S. President signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The TaxLegislation significantly revised the U.S. tax code by, (i) lowering the U.S federal statutory income tax rate from 35% to 21%, (ii) implementing a territorialtax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries (“Transition Tax”), (iv) requiring a currentinclusion of global intangible low taxed income (“GILTI”) of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creatingthe base erosion anti-abuse tax (“BEAT”) regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii)limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its 2018 and 2017 current taxbenefit using the U.S. federal statutory rates of 21% and 35%, respectively while it has computed its deferred tax expense for both years using the newstatutory rate effective on January 1, 2018 of 21%.The Company recorded the applicable impact of the Tax Legislation within its provision for income taxes in the year ended December 31, 2017. TheCompany recorded the required income tax effects under the Tax Legislation and provided disclosure pursuant to ASC 740, Income Taxes, and the SEC StaffAccounting Bulletin (“SAB”) 118, using its best estimates based on reasonable and supportable assumptions and available inputs and underlyinginformation as of that reporting date. The three provisions that most significantly impact the Company for the year ended December 31, 2017 were (i) theimpact of the U.S. federal statutory rate reduction, from 35% to 21%, on the deferred tax provision and related valuation allowance (ii) the full expensing ofqualified property and (iii) the calculation of the Transition Tax. All amounts that were recorded as provisional pursuant to SAB 118 have been finalized inthe year ended December 31, 2018.Other provisions of the new legislation that were not applicable to the Company until the year ended December 31, 2018 include, but are not limitedto, limiting deductibility of interest and executive compensation expense. These additional items have been considered in our income tax provision for theyear ended December 31, 2018 and the impact was not material to the overall financial statements.The (benefit) provision for income taxes for the years ended December 31, 2018 and 2017 consisted of the following: Year Ended December 31, 2018 Federal Foreign State andLocal TotalCurrent$(349) $19 $66 $(264)Deferred(93) — — (93) $(442) $19 $66 $(357) Year Ended December 31, 2017 Federal Foreign State andLocal TotalCurrent$(9,599) $(63) $(56) $(9,718)Deferred12 — 20 32 $(9,587) $(63) $(36) $(9,686)F-35Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The components of deferred tax liabilities, net consist of the following items: December 31, 2018 2017Deferred tax assets Basis differences in depreciation and amortization$3,776 $—Deferred lease liabilities14,761 15,638Deferred revenue4,824 4,590Deferred compensation expense incurred in connection with stock grants887 912Federal and state net operating loss carry-forwards12,716 15,645Accruals, reserves and other4,682 4,942 $41,646 $41,727Deferred tax liabilities Basis differences in depreciation and amortization— 1,311Deferred costs1,884 1,740 $1,884 $3,051Gross deferred tax assets39,762 38,676Valuation allowance(39,762) (38,769)Deferred tax liabilities, net$— $(93) As of December 31, 2018 and 2017, the Company had a net deferred tax liability of $0 and $93, respectively.In assessing the realizability of deferred tax assets, the Company evaluates whether it is more likely than not (more than 50%) that some portion or allof the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amount expected to be realized. Theultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences becomedeductible and/or net operating loss carryforward can be utilized. The Company evaluates all positive and negative evidence when determining the amountof 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, scheduledreversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negativeevidence that is objectively verifiable.As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on ajurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not thatall or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred taxassets are not more likely than not realizable, we establish a valuation allowance. The Company maintains a valuation allowance in the amounts of $39,762and $38,769 at December 31, 2018 and 2017, respectively. As the Company maintains a full valuation allowance against its outstanding net deferred taxassets, the change in net deferred tax assets due to the rate change was offset by a corresponding change in the valuation allowance.Deferred tax liabilities associated with goodwill generally cannot be used as a source of taxable income to realize deferred tax assets with a definitiveloss carry forward period. In recording the valuation allowance, the Company does not amortize goodwill for book purposes but does amortize goodwill thathas tax basis for tax purposes. The deferred tax liability remaining after full valuation allowance at December 31, 2017 related to the tax effect of differencesbetween book and tax basis of intangible assets not expected to reverse during the Company’s net operating loss carry forward period. Following the TaxLegislation, the federal net operating losses generated after December 31, 2017 can be carried forward indefinitely and the Company has considered itsdeferred tax liabilities related to indefinite lived intangibles as a source of taxable income against its indefinite lived net operating losses.As of December 31, 2018, federal and state tax net operating loss carry-forwards were $3,810 and $134,509, respectively. Such amounts expire betweenDecember 31, 2019 and December 31, 2038.F-36Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The differences between the U.S. Federal statutory income tax rate and the Company’s effective tax rate were as follows for the years endedDecember 31, 2018 and 2017: Years Ended December 31, 2018 2017Federal statutory tax rate21 % 35 %State and local income taxes (net of federal tax benefit)(11) 1Permanent differences(27) (3)Refundable AMT Credit (Tax Reform)74 —Noncontrolling interest(10) —Compensation(83) (2)Others(5) — (41) 31Valuation allowance115 151 74 % 182 %The effective tax rate on the Company’s pre-tax income or loss was 74% for 2018 and 182% for 2017, which was primarily impacted by the change inthe valuation allowance. The percentages for the various differences above for the year ended December 31, 2108 are greatly impacted by the relatively lowpre-tax loss as compared to the income tax benefit amount.The amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate in any future periods was $1,155 as ofDecember 31, 2018 and 2017. Interest expense on unrecognized tax benefits was $81 for both the years ended December 31, 2018 and 2017. The Companyrecognizes both interest accrued related to unrecognized tax benefits and penalties in income tax expenses. The Company had total accruals for interest as ofDecember 31, 2018 and 2017 of $946 and $865, respectively.A reconciliation of unrecognized tax benefits, excluding interest and penalties, is as follows: 2018 2017 Balance on January 1$1,155 $1,187Reductions due to a lapse of applicable statute of limitations— (32)Balance on December 31$1,155 $1,155As of December 31, 2018, the Company had $1,155 of unrecognized tax benefits and it is reasonably possible that the entire amount could be realizedby the Company in the year ending December 31, 2019 since the income tax returns may no longer be subject to audit in 2019.From time to time, the Company is under audit by federal, state, and local tax authorities and the Company may be liable for additional tax obligationsand may incur additional costs in defending any claims that may arise. During the quarter ended September 30, 2018, the Company completed its audit bythe Internal Revenue Service for federal income tax returns for the years ended December 31, 2014, 2015 and 2016, resulting in no material changes.The following state and local jurisdictions are currently examining our respective returns for the years indicated: New York State (2006 through 2014),and New York City (2006 through 2014).In particular, the Company disagrees with the proposed assessment dated December 12, 2016 from the State of New York and attended a conciliationconference with the New York State Department of Taxation and Finance Audit section on June 7, 2017. No settlement was reached at the conference and theproposed assessment was sustained. As such, in a revised letter dated November 30, 2017, the Company received from the State of New York a revisedassessment related to tax years 2006-2009 for approximately $5,097, inclusive of approximately $2,419 of interest. The Company has appealed theassessment with the New York State Division of Tax Appeals. On November 17, 2017, the Company was notified that the State of New York proposed anadjustment in the amount of approximately $3,906 for the years 2010 to 2014, inclusive of approximately $757 in interest. In November 2018, we met withthe Department officials for the assessment related to 2010 to 2014. The meeting ended with the company disagreeing with the proposed assessment for theyears in audit. Subsequently, in a letter datedF-37Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)February 4, 2019, the interest amount is revised to $1,203. The Company disagrees to the proposed assessment and the Company has consented to extendsuch assessment period through December 31, 2019.The Company is also under examination in New York City (2006 through 2014). New York City Department of Finance has proposed an audit changenotice to the Company dated May 2, 2018, for the tax years ended December 31, 2006 through December 31, 2009 for proposed general corporation taxliability in the amount of $4,797 plus $4,138 in interest. In a letter dated January 18, 2019, NYC Department of finance has issued a proposed general taxliability of $5,599, inclusive of $1,569 in interest for audit periods 2010 to 2014. The Company disagrees with the proposed assessment and the Companyhas consented to extend such assessment period through September 31, 2019.The Company has not recorded a tax reserve related to these proposed assessments. It is difficult to predict the final outcome or timing of resolution ofany particular matter regarding these examinations. An estimate of the reasonably possible changes to unrecognized tax benefits within the next 12 monthscannot be made.In March 2018, Commonwealth of Massachusetts began an audit of state tax filing of the company for the state of Massachusetts for the 12 monthperiods ending December 31, 2014, 2015 and 2016. The Company has agreed to extend the assessment period for state of Massachusetts through March 31,2019.16. Commitments and ContingenciesOn 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 fitnessclubs 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 clubsubsidiaries alleging, among other things, breach of lease in connection with the decision to close the club located in a building owned by the plaintiff andleased to a subsidiary of TSI LLC, the tenant, and take additional space in a nearby facility leased by another subsidiary of TSI LLC. Following adetermination 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 August29, 2011, an additional award (amounting to approximately $900) (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 ofany nature arising out of the lease described above, including attorneys’ fees incurred to enforce the indemnity. As a result, the developer reimbursed TSILLC 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, andthe tenant has recorded a receivable related to the indemnification for the Additional Award. The developer and the landlord are currently litigating thepayment of the Additional Award and judgment was entered against the developer on June 5, 2013, in the amount of approximately $1,000, plus interest,which judgment was upheld by the appellate court on April 29, 2015. TSI LLC does not believe it is probable that TSI LLC will be required to pay for anyamount of the Additional Award.In addition to the litigation discussed above, the Company is involved in various other lawsuits, claims and proceedings incidental to the ordinarycourse of business, including personal injury, landlord tenant disputes, construction matters, employee and member relations, and Telephone ConsumerProtection Act claims (a number of which purport to represent a class and one of which was brought by the Washington, D.C. Attorney General’s Office). Theresults of litigation are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costlylitigation, require significant amounts of management time and result in diversion of significant resources. The results of these other lawsuits, claims andproceedings cannot be predicted with certainty. The Company establishes accruals for loss contingencies when it has determined that a loss is probable andthat the amount of loss, or range of loss, can be reasonably estimated. Any such accruals are adjusted thereafter as appropriate to reflect changes incircumstances. The Company concluded that an accrual for any such matters is not required as of December 31, 2018.The Company assigned its interest, and is contingently liable, under a real estate lease. This lease expires in 2020. As of December 31, 2018, theundiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was approximately $946. The Companyhas not recorded a liability with respect to this guarantee obligation as of December 31, 2018 as it concluded that payment under this lease guarantee was notprobable.F-38Table of ContentsTOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)17. Employee Benefit PlanThe Company maintains a 401(k) defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974(“ERISA”). The plan provides for the Company to make discretionary contributions. Effective January 1, 2016, the plan was amended to eliminate thenondiscretionary matching contribution and to provide for a discretionary matching contribution as determined by the participating employer.18. Subsequent EventIn January 2019, the Company entered into an agreement to acquire six clubs in Florida for a purchase price of $22,222. This acquisition wascompleted in February 2019. The fair value of the net assets acquired is primarily comprised of club equipment, leasehold improvements and intangibleassets. The acquisition will be accounted for as a business combination in the first quarter of 2019 and the purchase price allocation is pending.F-39Table of ContentsExhibit IndexThe following is a list of all exhibits filed or incorporated by reference as part of this Report: ExhibitNo. Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation of Town Sports International Holdings, Inc. (the “Registrant”) (incorporated byreference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006). 3.2 Third Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report onForm 8-K filed on September 17, 2014). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-1,File No. 333-126428 (the “S-1 Registration Statement”)). 10.1 Registration Rights Agreement, dated as of February 4, 2004, among Town Sports International Holdings, Inc., Town SportsInternational, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. the individuals and entities listed on the BRS Co-Investor Signature Pagesthereto, Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR Capital Partners, L.P., and Farallon CapitalInstitutional Partners II, L.P., Canterbury Detroit Partners, L.P., Canterbury Mezzanine Capital, L.P., Rosewood Capital, L.P., RosewoodCapital IV, L.P., Rosewood Capital IV Associates, L.P., CapitalSource Holdings LLC, Keith Alessi, Paul Arnold, and certainstockholders of the Company listed on the Executive Signature Pages thereto (incorporated by reference to Exhibit 10.5 of theRegistrant’s Registration Statement on Form S-4, File No. 333-114210 (the “S-4 Registration Statement”)). 10.2 Amendment No. 1 to the Registration Rights Agreement dated as of March 23, 2006 (incorporated by reference to Exhibit 10.21 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2005). 10.3 Amendment No. 2 to the Registration Rights Agreement dated as of May 30, 2006 (incorporated by reference to Exhibit 10.9.1 of the S-1 Registration Statement). 10.4 Credit Agreement, dated as of November 15, 2013, among Town Sports International, LLC, TSI Holdings II, LLC, the lenders partythereto, Deutsche Bank Trust Company Americas, as Administrative Agent, and Keybank National Association, as Syndication Agent(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 15, 2013). 10.5 First Amendment to Credit Agreement, dated as of January 30, 2015, among Town Sports International, LLC, TSI Holdings, II, LLC, thelenders party thereto, Deutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.5 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2014). 10.6 Subsidiaries Guaranty, dated as of November 15, 2013, among each of the Guarantors party thereto, and Deutsche Bank AG New YorkBranch, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed onNovember 15, 2013). 10.7 Pledge Agreement, dated as of November 15, 2013, among the Borrower, Holdings II, each of the Pledgors party thereto, and DeutscheBank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form8-K filed on November 15, 2013). 10.8 Security Agreement, dated as of November 15, 2013, among the Borrower, Holdings II, each of the Assignors party thereto, andDeutsche Bank AG New York Branch, as Collateral Agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Reporton Form 8-K filed on November 15, 2013).Table of Contents ExhibitNo. Description of Exhibit 10.9 Amended and Restated Interest Rate Swap Confirmation, dated as of November 15, 2013, between Town Sports International, LLC andDeutsche Bank AG New York (incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2013). 10.10 Agreement of Sale, dated as of December 23, 2013, between Town Sports International, LLC and Monty Two East 86th StreetAssociates LLC (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year endedDecember 31, 2013). 10.11 First Amendment to Agreement of Sale, dated as of March 26, 2014, between Town Sports International, LLC and Monte Two East 86thStreet Associates, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended March 31, 2014). 10.12 Second Amendment to Agreement of Sale, dated as of April 11, 2014, between Town Sports International, LLC and Monte Two East86th Street Associates, LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended March 31, 2014). 10.13 Third Amendment to Agreement of Sale, dated as of July 7, 2014, between Town Sports International, LLC and Monte Two East 86thStreet Associates, LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterended June 30, 2014). *10.14 Agreement Regarding Termination of Nomination and Standstill Agreement, dated as of February 17, 2016, among Town SportsInternational Holdings, Inc., PW Partners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners,LLC, PW Partners Capital Management LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora CapitalManagement, LLC and Parag Vora (incorporated by reference to Exhibit 10.44 of the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2015). *10.15 Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, as amended and restated effective April 2, 2015 (incorporated byreference to Appendix B of the Registrant’s definitive Proxy Statement on Schedule 14A filed on March 28, 2017). *10.16 Amendment No. 2 to the Town Sports International Holdings, Inc. 2006 Stock Incentive Plan, effective March 22, 2017 (incorporatedby reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed on March 28, 2017). *10.17 Form of Incentive Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed on August 8, 2006). *10.18 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K filed on August 8, 2006). *10.19 Form of the Non-Qualified Stock Option Agreement for Non-Employee Directors pursuant to the 2006 Incentive Plan (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 2, 2007). *10.20 Form of Non-Qualified Stock Option Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.3 of theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007). *10.21 Form of Restricted Stock Agreement pursuant to the 2006 Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008). *10.22 Amended and Restated Town Sports International Holdings, Inc. 2006 Annual Performance Bonus Plan (incorporated by reference toAppendix B of the Registrant’s definitive Proxy Statement on Schedule 14A filed on April 27, 2015).Table of Contents ExhibitNo. Description of Exhibit *10.23 Amended and Restated Non-Employee Director Compensation Plan Summary, effective January 1, 2015 (incorporated by reference toExhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). *10.24 Letter Agreement, dated as of April 16, 2014, between Town Sports International, LLC and Carolyn Spatafora (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 25, 2014). *10.25 Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.25 of the S-1/A RegistrationStatement). *10.26 Letter Agreement, dated as of February 25, 2015, between Town Sports International Holdings, Inc. and Robert Giardina (incorporatedby reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on February 25, 2015). *10.27 Letter Agreement, dated as of February 25, 2015, between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporatedby reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed on February 25, 2015). *10.28 Form of Amended and Restated Executive Severance Agreement, dated as of February 25, 2015, between Town Sports InternationalHoldings, Inc. and each of Carolyn Spatafora, and Nitin Ajmera (incorporated by reference to Exhibit 10.3 of the Registrant's CurrentReport on Form 8-K filed on February 25, 2015). *10.29 Nomination and Standstill Agreement, dated as of March 24, 2015, by and among Town Sports International Holdings, Inc. and PWPartners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC, PW Partners CapitalManagement LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora Capital Management, LLC and ParagVora. Holdings, Inc. and PW Partners Atlas Fund III LP, PW Partners Master Fund LP, PW Partners Atlas Funds, LLC, PW Partners, LLC,PW Partners Capital Management LLC, Patrick Walsh, HG Vora Special Opportunities Master Fund, Ltd., HG Vora CapitalManagement, LLC, and Parag Vora (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed onMarch 25, 2015). *10.30 Letter Agreement, dated as of March 24, 2015, between Town Sports International Holdings, Inc. and Farallon Capital Management,L.L.C. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on March 25, 2015). *10.31 Amended and Restated Non-Employee Director Compensation Plan, effective as of February 25, 2015 (incorporated by reference toExhibit 10.3 of the Registrant’s Current Report on Form 8-K filed on March 25, 2015). *10.32 Separation Letter, dated as of June 17, 2015, between Town Sports International Holdings, Inc. and Daniel Gallagher (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on June 18, 2015). *10.33 Letter Agreement, dated as of August 17, 2015, between Town Sports International Holdings, Inc. and Gregory Bartoli (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on August 18, 2015). *10.34 Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report onForm 10-Q for the period ended September 30, 2015).Table of Contents ExhibitNo. Description of Exhibit *10.35 Form of Non-Qualified Stock Option Agreement for Gregory Bartoli pursuant to the 2006 Incentive Plan, as amended (incorporated byreference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2015). *10.36 Form of Restricted Stock Agreement for Gregory Bartoli (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Reporton Form 10-Q for the period ended September 30, 2015). *10.37 Form of Non-Qualified Stock Option Agreement for Gregory Bartoli (incorporated by reference to Exhibit 10.5 of the Registrant’sQuarterly Report on Form 10-Q for the period ended September 30, 2015). *10.38 Amendment to Amended and Restated Executive Severance Agreement, dated as of March 31, 2016, between Town SportsInternational Holdings, Inc. and Carolyn Spatafora (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report onForm 10-Q for the period ended March 31, 2016). *10.39 Form of Executive Officer Indemnification Agreement (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Reporton Form 10-Q for the period ended June 30, 2016). *10.40 Letter Agreement, dated as of September 20, 2016, between Town Sports International, LLC and Patrick Walsh (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 21, 2016). *10.41 Separation Agreement, dated as of September 16, 2016, between Town Sports International LLC and Gregory Bartoli (incorporated byreference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on September 21, 2016). *10.42 Amendment to Amended and Restated Executive Severance Agreement, dated as of February 16, 2017, between Town SportsInternational Holdings, Inc. and Nitin Ajmera (incorporated by reference to Exhibit 10.44 of the Registrant’s Annual Report on Form10-K for the year ended December 31, 2016). *10.43 Letter Agreement, effective as of May 1, 2017, between Town Sports International, LLC and Stuart M. Steinberg (incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 28, 2017). *10.44 Amended and Restated Engagement Letter Agreement, effective as of May 1, 2017, between Town Sports International Holdings, Inc.and Stuart M. Steinberg P.C. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on April28, 2017). *10.45 Town Sports International Holdings, Inc. 2018 Management Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed on January 3, 2018). *10.46 Town Sports International Holdings, Inc. 2018 Management Stock Purchase Plan (incorporated by reference to Exhibit 10.1 of theRegistrant’s Current Report on Form 8-K filed on January 5, 2018). *10.47 Town Sports International Holdings, Inc. 2018 Management Stock Purchase Plan, as Amended and Restated on March 13, 2018(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on March 19, 2018).Table of Contents ExhibitNo. Description of Exhibit 10.48 Asset Purchase Agreement, dated February 22, 2018, by and among Town Sports International Holdings, Inc., TW Holdings, Inc., SPADHoldings, LLC, TW Glendale, Inc., and TW Westlake Village, Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s CurrentReport on Form 8-K filed on February 22, 2018). 10.49 Second Amendment to Credit Agreement, dated as of November 8, 2018, among Town Sports International, LLC, TSI Holdings, II, LLC,the lenders party thereto, Deutsche Bank AG New York Branch, as Administrative agent (incorporated by reference to Exhibit 10.1 ofthe Registrant's Current Report on Form 8-K filed on November 8, 2018). 21 Subsidiaries of the Registrant (Filed herewith). 23.1 Consent of PricewaterhouseCoopers LLP (Filed herewith). 31.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended(Provided herewith). 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (Providedherewith). 32.1 Section 1350 Certification of Chairman and Chief Executive Officer (Provided herewith). 32.2 Section 1350 Certification of Chief Financial Officer (Provided herewith). 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema. 101.CAL XBRL Taxonomy Extension Calculation Linkbase. 101.DEF XBRL Taxonomy Extension Definition Linkbase. 101.LAB XBRL Taxonomy Extension Label Linkbase. 101.PRE XBRL Taxonomy Extension Presentation Linkbase.___________________________*Management contract or compensatory plan or arrangement.Item 16. Form 10-K SummaryNone.Exhibit 21TSI Holdings II, LLC and SubsidiariesCompany State of Incorporation Doing Business AsParent Companies TSI Holdings II, LLC DE n/aTown Sports International, LLC NY n/aSubsidiaries Town Sports AG Swiss n/aTSI – Alameda, LLC CA Total Woman Gym and SpaTSI – Cal. Glendale, LLC CA Total Woman Gym and SpaTSI – Irvine, LLC CA Total Woman Gym and SpaTSI – Laguna Hills, LLC CA Total Woman Gym and SpaTSI – Lucille 38th Avenue, LLC DE Lucille RobertsTSI – Lucille 42nd Street, LLC DE Lucille RobertsTSI – Lucille 89th Street, LLC DE Lucille RobertsTSI – Lucille Astoria, LLC DE Lucille RobertsTSI – Lucille Austin Street, LLC DE Lucille RobertsTSI – Lucille Bayshore, LLC DE Lucille RobertsTSI – Lucille Bronx, LLC DE Lucille RobertsTSI – Lucille Clifton, LLC DE Lucille RobertsTSI – Lucille Commack, LLC DE Lucille RobertsTSI – Lucille Holbrook, LLC DE Lucille RobertsTSI – Lucille Jersey City, LLC DE Lucille RobertsTSI – Lucille Kings Highway, LLC DE Lucille RobertsTSI – Lucille Ralph Avenue, LLC DE Lucille RobertsTSI – Lucille Rockville Centre, LLC DE Lucille RobertsTSI – Lucille St. Nicholas Avenue, LLC DE Lucille RobertsTSI – Lucille Valley Stream, LLC DE Lucille RobertsTSI - Northridge, LLC DE n/aTSI – Northridge, LLC CA Total Woman Gym and SpaTSI - Placentia, LLC DE n/aTSI – Placentia, LLC CA Total Woman Gym and SpaTSI - San Jose, LLC DE n/aTSI – San Jose, LLC CA Total Woman Gym and SpaTSI - Studio City, LLC DE n/aTSI – Studio City, LLC CA Total Woman Gym and SpaTSI - Topanga, LLC DE n/aTSI – Topanga, LLC CA Total Woman Gym and SpaTSI - Torrance, LLC DE n/aTSI – Torrance, LLC CA Total Woman Gym and SpaTSI - Valencia, LLC DE n/aTSI – Valencia, LLC CA Total Woman Gym and SpaTSI - Westlake, LLC DE n/aTSI – Westlake, LLC CA Total Woman Gym and SpaTSI 1231 3rd Avenue, LLC DE NYSCTSI 217 Broadway, LLC DE NYSCTSI 30 Broad Street, LLC DE NYSCTSI 555 6th Avenue, LLC DE NYSCTSI Allston, LLC DE BSCTSI Astor Place, LLC DE NYSCCompany State of Incorporation Doing Business AsTSI Astoria, LLC DE NYSCTSI Avenue A, LLC DE NYSCTSI Back Bay, LLC DE BSCTSI Bay Ridge 86th Street, LLC DE NYSCTSI Bayonne, LLC DE NYSCTSI Bayridge, LLC DE NYSCTSI Beacon Street, LLC DE BSCTSI Bethesda, LLC DE BSCTSI Boylston, LLC DE BSCTSI Bradford, LLC DE Latitude Sports ClubTSI Broadway, LLC DE NYSCTSI Brooklyn Belt, LLC DE NYSCTSI Bulfinch, LLC DE BSCTSI Butler, LLC DE NYSCTSI Canton, LLC DE BSCTSI Carmel, LLC DE NYSCTSI Cash Management, LLC DE n/aTSI Central Square, LLC DE BSCTSI Clarendon, LLC DE WSCTSI Clifton, LLC DE NYSCTSI Cobble Hill, LLC DE NYSCTSI Colonia, LLC DE NYSCTSI Columbia Heights, LLC DE n/aTSI Commack, LLC DE NYSCTSI Connecticut Avenue, LLC DE n/aTSI Court Street, LLC DE NYSCTSI Croton, LLC DE NYSCTSI Danbury, LLC DE NYSCTSI Davis Square, LLC DE BSCTSI Deer Park, LLC DE NYSCTSI Dobbs Ferry, LLC DE NYSCTSI Dorchester, LLC DE BSCTSI Downtown Crossing, LLC DE BSCTSI Dupont Circle, Inc. DE n/aTSI Dupont II, Inc. DE n/aTSI East 23, LLC DE NYSCTSI East 36, LLC DE NYSCTSI East 41, LLC DE NYSCTSI East 48, LLC DE NYSCTSI East 51, LLC DE NYSCTSI East 59, LLC DE NYSCTSI East 76, LLC DE NYSCTSI East 86, LLC DE NYSCTSI East 91, LLC DE NYSCTSI East Brunswick, LLC DE NYSCTSI East Meadow, LLC DE NYSCTSI Elite Back Bay, LLC DE BSCTSI Englewood, LLC DE NYSCTSI Fenway, LLC DE BSCCompany State of Incorporation Doing Business AsTSI First Avenue, LLC DE NYSCTSI Forest Hills, LLC DE NYSCTSI Gallery Place, LLC DE n/aTSI Garden City, LLC DE NYSCTSI Garnerville, LLC DE NYSCTSI Georgetown, LLC DE n/aTSI Giftco, LLC PA n/aTSI Glendale, LLC DE NYSCTSI Glover, LLC DE n/aTSI Grand Central, LLC DE NYSCTSI Great Neck, LLC DE NYSCTSI Greenpoint, LLC DE NYSCTSI Greenwich, LLC DE NYSC and AMFIT Physical TherapyTSI Hartsdale, LLC DE NYSCTSI Hawthorne, LLC DE NYSCTSI Hicksville, LLC DE NYSCTSI Highpoint, LLC DE PSCTSI Hoboken North, LLC DE NYSCTSI Hoboken, LLC DE NYSCTSI Holdings (CIP), LLC DE n/aTSI Holdings (DC), LLC DE n/aTSI Holdings (IP), LLC DE n/aTSI Holdings (MA), LLC DE n/aTSI Holdings (MD), LLC DE n/aTSI Holdings (NJ), LLC DE n/aTSI Holdings (PA), LLC DE n/aTSI Holdings (VA), LLC DE n/aTSI Huntington, LLC DE NYSCTSI Insurance, Inc. NY n/aTSI International, Inc. DE n/aTSI Irving Place, LLC DE NYSCTSI Jersey City, LLC DE NYSCTSI Larchmont, LLC DE NYSCTSI Lexington (MA), LLC DE BSCTSI Lincoln, LLC DE NYSCTSI Livingston, LLC DE NYSCTSI Long Beach, LLC DE NYSCTSI Lynnfield, LLC DE BSCTSI Mahwah, LLC DE NYSCTSI Mamaroneck, LLC DE NYSCTSI Market Street, LLC DE PSCTSI Marlboro, LLC DE NYSCTSI Massapequa, LLC DE n/aTSI Matawan, LLC DE NYSCTSI Mercer Street, LLC DE NYSCTSI Methuen, LLC DE Latitude Sports ClubTSI Midwood, LLC DE NYSCTSI Montclair, LLC DE NYSCTSI Morris Park, LLC DE NYSCCompany State of Incorporation Doing Business AsTSI Murray Hill, LLC DE NYSCTSI New Rochelle, LLC DE NYSCTSI Newark, LLC DE NYSCTSI Newbury Street, LLC DE BSCTSI Newton, LLC DE BSCTSI North Bethesda, LLC DE WSCTSI Oceanside, LLC DE NYSCTSI Peabody, LLC DE Latitude Sports ClubTSI Princeton, LLC DE NYSCTSI Providence Eastside, LLC DE BSC IITSI Radnor, LLC DE PSCTSI Ramsey, LLC DE NYSCTSI Rego Park, LLC DE NYSCTSI Ridgewood, LLC DE NYSCTSI Rodin Place, LLC DE PSCTSI Salisbury, LLC DE Latitude Sports ClubTSI Scarsdale, LLC DE NYSCTSI Sheridan, LLC DE NYSCTSI Silver Spring, LLC DE WSCTSI Smithtown, LLC DE NYSCTSI Society Hill, LLC DE PSCTSI Somers, LLC DE NYSCTSI Somerset, LLC DE NYSCTSI South Bethesda, LLC DE WSCTSI South End, LLC DE BSCTSI South Park Slope, LLC DE NYSCTSI South Station, LLC DE BSCTSI Springfield, LLC DE NYSCTSI Stamford Post, LLC DE NYSCTSI Staten Island, LLC DE NYSCTSI Stoked, LLC DE n/aTSI Summer Street, LLC DE BSC and Boston Racquet ClubTSI Sunnyside, LLC DE NYSCTSI Syosset, LLC DE NYSCTSI Total Woman Holdco, LLC CA n/aTSI University Management, LLC DE n/aTSI Varick Street, LLC DE NYSCTSI Waltham, LLC DE BSCTSI Washington, Inc. DE n/aTSI Watertown, LLC DE BSCTSI Wayland, LLC DE BSCTSI Wellesley, LLC DE BSCTSI Wellington Circle, LLC DE BSCTSI West 115th Street, LLC DE NYSCTSI West 125, LLC DE NYSCTSI West 14, LLC DE NYSCTSI West 145th Street, LLC DE NYSCTSI West 16, LLC DE NYSCTSI West 23, LLC DE NYSCCompany State of Incorporation Doing Business AsTSI West 38, LLCDENYSCTSI West 41, LLCDENYSCTSI West 48, LLCDENYSCTSI West 73, LLCDENYSCTSI West 76, LLCDENYSCTSI West 80, LLCDENYSCTSI West 94, LLCDENYSCTSI West Caldwell, LLCDENYSCTSI West End, LLCDENYSCTSI West Hartford, LLCDENYSCTSI West Newton, LLCDEBSCTSI West Nyack, LLCDENYSCTSI Westboro Tennis, LLCDEn/aTSI Westborough, LLCDEBSCTSI Westwood, LLCDENYSCTSI White Plains City Center, LLCDENYSCTSI White Plains, LLCDENYSCTSI Whitestone, LLCDENYSCTSI Woburn, LLCDEBSCTSI Woodmere, LLCDENYSCTSI-TOH 106th Street, LLCDENYSCTSI-TOH 32nd Street, LLCDENYSCTSI-TOH Holdco, LLCDEn/a Parent Company Town Sports Group, LLC DE n/aSubsidiaries Dixie Highway Realty, LLC FL n/aElmsford Elite Laundry, LLC DE Elite LaundryPalm Beach Sports Club, LLC FL n/aTown Sports Investment Group, LLC DE Town Sports InvestmentTSI – Donald Ross Realty, LLC FL Palm Beach Sports ClubTSI – Gold, LLC FL n/aTSI - Lucille Real Estate, LLCDEn/aTSI – Peacock, Port St. Lucie, LLCFLPalm Beach Sports ClubTSI – US Highway, Jupiter, LLCFLPalm Beach Sports ClubTSI Elite Sheridan, LLCDETMPL West VillageTSI Hell’s Kitchen, LLCDETMPL FitnessTSI-LIV Condado, LLCPuerto RicoLIV Condado, LIV Fitness Condado and LIVFitness Club CondadoTSI-LIV Guaynabo, LLCPuerto RicoLIV Guaynabo, LIV Fitness Guaynabo and LIVFitness Club GuaynaboTSI-LIV Holdco, LLCPuerto RicoLIV Fitness ClubsExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-135048, 333-151965, 333-175884, 333-205955, 333-211093, 333-212726, 333-219517, and 333-226404) of Town Sports International Holdings, Inc. of our report dated February 28, 2019 relatingto the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K./s/ PRICEWATERHOUSECOOPERS LLPNew York, New YorkFebruary 28, 2019Exhibit 31.1CERTIFICATIONSI, Patrick Walsh, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Town Sports International Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.By:/s/ Patrick Walsh Patrick Walsh Chairman and Chief Executive OfficerFebruary 28, 2019Exhibit 31.2CERTIFICATIONSI, Carolyn Spatafora, certify that:1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Town Sports International Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. By:/s/ Carolyn Spatafora Carolyn Spatafora Chief Financial OfficerFebruary 28, 2019Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31,2018 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick Walsh, certify, pursuant to 18 U.S.C. § 1350, as adoptedpursuant to 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany./s/ Patrick WalshPatrick WalshChairman and Chief Executive OfficerFebruary 28, 2019Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Town Sports International Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31,2018 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carolyn Spatafora, certify, pursuant to 18 U.S.C. 1350, asadopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany./s/ Carolyn SpataforaCarolyn SpataforaChief Financial OfficerFebruary 28, 2019

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