<iframe src="//www.googletagmanager.com/ns.html?id=GTM-MVPSQB" height="0" width="0" style="display: none; visibility: hidden"></iframe>
Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K/A
 
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 13, 2018
 
 
Town Sports International Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
Delaware
001-36803
20-0640002
(State or other Jurisdiction
of Incorporation)
(Commission
File Number)
(I.R.S. Employer
Identification No.)
1001 US North Highway 1, Suite 201, Jupiter, Florida
 
33477
(Principal Executive Offices)
 
(Zip Code)
 
 
 
399 Executive Boulevard, Elmsford, New York
 
10523
(Mailing address)
 
(Zip Code)
Registrant’s telephone number, including area code: (212) 246-6700
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
 
 
 
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨






Explanatory Note
On April 16, 2018, Town Sports International Holdings, Inc. (the “Company” or “Town Sports”) filed a Current Report on Form 8-K (the “Initial Form 8-K”) to report that the Company pursuant to an asset purchase agreement executed on February 22, 2018 (the “APA”) by and among the buyer entities as set forth in the APA, subsidiary entities of the Company (the “Buyers”), TW Holdings, Inc. (“Total Woman”), SPAD Holdings, LLC (“SPAD”), TW Glendale, Inc. (“Glendale”), TW Westlake Village, Inc. (“Westlake” and together with Total Woman, SPAD and Glendale, collectively referred to herein as the “Sellers”), and Total Woman Franchising, Inc, completed the acquisition of substantially all of the assets used in the business of the Sellers and assumed certain liabilities of the Sellers, as set forth in the APA (the “Acquisition”). The Company is filing this Amendment No. 1 to amend the Initial Form 8-K to include the historical financial statements of the Sellers and pro forma condensed combined financial information required to be filed under Item 9.01 of Form 8-K. The disclosure included in the Initial Form 8-K otherwise remains unchanged.
Item 9.01 Financial Statements and Exhibits
(a)  Financial Statements of Business Acquired.
The audited consolidated balance sheet of the Sellers as of December 31, 2017, and the related consolidated statement of operations, consolidated statement of cash flows, and consolidated statement of stockholders’ equity for the year ended December 31, 2017, are attached hereto as Exhibit 99.1 and are incorporated by reference herein.
(b)  Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition, as if it had occurred on December 31, 2017 and combines the historical balance sheets of the Company and the Sellers as of December 31, 2017. The unaudited pro forma condensed combined statement of operations is presented as if the acquisition had occurred on January 1, 2017 and combines the historical results of operations of the Company and the Sellers for the year ended December 31, 2017. Such unaudited pro forma condensed combined financial statements are included as Exhibit 99.2 to this Form 8-K and are incorporated by reference herein.
(d)  Exhibits.
Exhibit No.
  
  Description
 
  
 






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
 
 
 
 
 
Date: June 20, 2018
 
By:
 
/s/ Carolyn Spatafora
 
 
 
 
Carolyn Spatafora
 
 
 
 
Chief Financial Officer



Exhibit


Exhibit 21.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
We 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, and 333-219517) and Form S-3 (No. 333-167377) of Town Sports International Holdings, Inc. of our report dated March 30, 2018, with respect to the consolidated financial statements of Total Woman Holdings, Inc. and Subsidiaries as of and for the year ended December 31, 2017, included in this Current Report on Form 8-K/A.
/s/ Martini Iosue & Akpovi, LLP
Los Angeles, California
June 20, 2018



exhibit991tw2017
Total Woman Holdings, Inc. and Subsidiaries Consolidated Financial Statements and Independent Auditors’ Report December 31, 2017


 
Total Woman Holdings, Inc. and Subsidiaries Consolidated Financial Statements December 31, 2017 Table of Contents Page Independent Auditors' Report 1 Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Operations 3 Consolidated Statement of Stockholders' Equity 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 - 15


 
Independent Auditors' Report To the Board of Directors Total Woman Holdings, Inc. and Subsidiaries San Diego, California We have audited the accompanying consolidated financial statements of Total Woman Holdings, Inc. and Subsidiaries (the "Company"), which comprise the consolidated balance sheet as of December 31, 2017, the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. This includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Total Woman Holdings, Inc. and Subsidiaries as of December 31, 2017, and the result of its operations and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Los Angeles, California March 30, 2018


 
Total Woman Holdings, Inc. and Subsidiaries Consolidated Balance Sheet December 31, 2017 Assets Current Assets Cash and cash equivalents $ 470,745 Inventories 41,591 Prepaid expenses and other current assets 341,886 Total Current Assets 854,222 Leasehold improvements and equipment, net 6,655,671 Deposits 313,593 Total Assets $ 7,823,486 Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 614,062 Accrued liabilities 3,958,877 Deferred revenues 3,505,779 Due to stockholder 3,576,363 Current portion of capital lease obligations 119,970 Total Current Liabilities 11,775,051 Deferred revenues, net of current portion 780,663 Due to related entity 1,000,000 Notes payable to stockholder 12,075,002 Note payable to stockholder - Assumed debt 15,160,521 Capital lease obligations, net of current portion 99,356 Total Liabilities 40,890,593 Commitments and Contingencies Stockholders' Equity Common stock, $1.40 par value, 100,000,000 shares authorized, 12,285,715 shares issued and outstanding 17,031,081 Additional paid-in capital 293,934 Accumulated deficit (50,392,122) Total Stockholders' Equity (33,067,107) Total Liabilities and Stockholders' Equity $ 7,823,486 The Accompanying Notes are an Integral Part of These Consolidated Financial Statements 2


 
Total Woman Holdings, Inc. and Subsidiaries Consolidated Statement of Operations For the Year Ended December 31, 2017 Revenue Recurring membership revenue $ 16,084,589 New membership revenue 3,307,891 Ancillary service revenue 7,010,715 Other products/services 1,459,801 Total Revenue 27,862,996 Operating Expenses Club operating costs 15,961,978 Costs of products and services 7,093,259 General and administrative 3,042,385 Depreciation and amortization 1,958,951 Selling and marketing 539,933 Total Operating Expenses 28,596,506 Loss from Operations (733,510) Other Income (Expenses) Interest expense, net (1,823,035) Loss on disposal of leasehold improvements and equipment (1,028,247) Other, net 79,580 Net Other Expenses (2,771,702) Net Loss before Provision for Income Taxes (3,505,212) Provision for Income Taxes 8,800 Net Loss $ (3,514,012) The Accompanying Notes are an Integral Part of These Consolidated Financial Statements 3


 
Total Woman Holdings, Inc. and Subsidiaries Consolidated Statement of Stockholders’ Equity For the Year Ended December 31, 2017 Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity Balances as of December 31, 2016 12,285,715 $ 17,031,081 $ 293,934 $ (46,878,110) $ (29,553,095) Net loss - - - (3,514,012) (3,514,012) Balances as of December 31, 2017 12,285,715 $ 17,031,081 $ 293,934 $ (50,392,122) $ (33,067,107) The Accompanying Notes are an Integral Part of These Consolidated Financial Statements 4


 
Total Woman Holdings, Inc. and Subsidiaries Consolidated Statement of Cash Flows For the Year Ended December 31, 2017 Cash Flows from Operating Activities Net loss $ (3,514,012) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,958,951 Loss on disposal of leasehold improvements and equipment 1,028,247 Changes in assets and liabilities: Inventories 63,234 Prepaid expenses and other current assets 891,229 Deposits (480) Accounts payable 145,369 Accrued liabilities (1,302,680) Deferred revenues (1,169,938) Due to related entity 200,000 Due to stockholder 1,221,138 Net Cash Used in Operating Activities (478,942) Total Cash Used in Investing Activities Purchase of leasehold improvements and equipment (1,405,005) Cash Flows from Financing Activities Borrowings on notes payable to stockholder 1,475,000 Net borrowings on line of credit 270,156 Payments on capital lease obligations (161,098) Net Cash Provided by Financing Activities 1,584,058 Net Decrease in Cash and Cash Equivalents (299,889) Cash and Cash Equivalents, Beginning of Year 770,634 Cash and Cash Equivalents, End of Year $ 470,745 Supplemental Cash Flow Information Cash Paid During the Year for: Interest $ 667,387 Income taxes $ 8,800 Non-Cash Investing and Financing Activities: Assumption of Credit Facility by the majority stockholder $ 15,160,521 The Accompanying Notes are an Integral Part of These Consolidated Financial Statements 5


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 1 - Summary of Significant Accounting Policies Description of Business Total Woman Holdings, Inc. and Subsidiaries (collectively the "Company") operate fitness facilities and day spas in California, primarily under the name of Total Woman Gym + Spa. The Company's 12 clubs are operated as "boutique fitness and spa facilities" offering a full range of services including numerous fitness options, spa services and other amenities. The Company markets to health-conscious women who enjoy a spa-oriented club. On January 29, 2013, Total Woman Holdings, Inc. formed Total Woman Franchising, Inc. ("Total Woman Franchising") to sell franchises for the right to operate Total Woman Gym + Spa facilities. Total Woman Franchising has sold one franchise through December 31, 2017. Principles of Consolidation The consolidated financial statements include the accounts of Total Woman Holdings, Inc. and its wholly owned subsidiaries, TW Holdings, Inc. and Total Woman Franchising, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Asset Purchase Agreement In February 2018, the Company and its stockholders entered into an asset purchase agreement with Town Sports International Holdings, Inc., to acquire substantially all of the assets and operating liabilities of the Company for $8,000,000. Management anticipates that the transaction will close in April 2018. Liquidity The Company’s primary sources of liquidity and capital resources are cash provided from operations and loans from the majority stockholder of the Company. The Company expects it will generate or obtain sufficient cash flows to continue operations over the next twelve months to satisfy operating cash needs. In the event the transaction mentioned above does not close, the majority stockholder intends to fund the Company’s operations at least through March 2019. There are no guarantees that the Company will continue to receive funding from the majority stockholder of the Company indefinitely. No adjustments have been recorded in the accompanying consolidated financial statements related to this uncertainty. Use of Estimates The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions made by management are used for, but not limited to, the estimated useful lives and impairment of long lived assets and deferred revenues. Actual results could differ from those estimates. 6


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 1 - Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments Unless otherwise specified, management believes the carrying value of financial instruments approximates their fair value. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with maturities of three months or less at the time of purchase to be cash equivalents. The Company also maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash and cash equivalents. Inventories Inventories primarily consist of retail merchandise sold in the clubs and are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Leasehold Improvements and Equipment Leasehold improvements and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the improvements, which range up to 10 years. Upon the disposition of an asset, its accumulated depreciation is deducted from the original cost, and any gain or loss is reflected in current earnings. Repairs and maintenance that do not enhance the use or extend the life of leasehold improvements and equipment are expensed as incurred. Impairment of Long Lived Assets The Company reviews its long-lived assets whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. Impairment is evaluated by comparing the carrying value of the assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date for the amount by which the carrying amount of the asset exceeds its fair value. Management has determined that no material impairment existed at December 31, 2017. Gift Certificates and Gift Cards At December 31, 2017, the Company had customer gift certificates and gift cards outstanding of $349,054, which represents the value of services that may be redeemed in the future. This amount has been included in the balance of current deferred revenues as of December 31, 2017. 7


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 1 - Summary of Significant Accounting Policies (continued) Revenue Recognition The Company receives initiation fees and monthly membership dues from its members. Substantially all of the Company's members join on a month-to-month basis and are able to cancel their membership at any time. The Company amortizes non-refundable initiation fees over the club's estimated average membership lives, which was determined to be 25 months. Dues that are received in advance are initially deferred and then recognized over the respective membership period. In addition, payments of last month dues are deferred and recognized as revenue at the end of the members’ 25th month of membership. Revenue for ancillary services, including private training and spa services, are recorded when such services are performed. Amounts received in advance of performing these services are recorded as deferred revenue. Generally, the services are provided only to gym members. When a membership is cancelled or expires, unused services are generally expired and are then recorded as revenue. Starting in September 2016, the Company changed its policy in such a way that spa sessions expire 1 year after the purchase date, and private training sessions, depending on quantity purchased, expire after 60 days, 6 months or 1 year after the purchase date. Accordingly, payments for the unused portion of such services received in advance are recognized as income upon the respective expiration dates to utilize the services. Private training and spa sessions purchased prior to September 2016 are not affected by the new expiration policy. Payments for private training and spa sessions received in advance prior to September 2016 are recognized as income as they are redeemed, expired or based on management’s estimate of the portion of such services that will ultimately not be utilized by the gym members. The Company offers packaged membership services with fixed monthly dues, in which members are entitled to a monthly health club membership plus spa or training sessions during that month or within 30 days. Members are not permitted to carry the unused spa and training sessions beyond one month. Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition, the Company determined that the monthly membership dues, spas and private training sessions represent separate units of accounting. Accordingly, spa and private training sessions are originally deferred using vendor specific objective evidence of fair value and recognized when services are rendered or upon expiration. The remaining revenue from monthly membership dues is recognized on a pro-rata basis as earned. Revenue from product sales is recognized upon the customer's receipt of goods. The Company collects sales taxes, which are levied by state and local government jurisdictions, on retail products sold. These taxes are accounted for on a net basis and recorded as a liability until paid. Initial franchise fees are recognized as income when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by Total Woman Franchising. Initial franchise fees are generally recognized upon the opening of a franchise. In cases where Total Woman Franchising receives a note receivable for the franchise fee, and collectability is not reasonably assured, the Company defers recognition of such revenue until the cash is collected. Total Woman Franchising earns royalties based upon a percentage of revenues earned by franchisees in the respective period. 8


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 1 - Summary of Significant Accounting Policies (continued) Advertising Costs Advertising and promotion costs are expensed as incurred. Total advertising expense was approximately $540,000 for the year ended December 31, 2017. Lease Accounting The Company records rent expense for its facilities under the terms of various operating leases. The aggregate rental obligation is expensed on a straight-line basis over the lease term, commencing with the date when the Company takes possession of the property, including periods of construction and improvements. Stock Based Compensation The Company follows ASC Topic 718, Compensation - Stock Compensation, for recording its stock- based compensation arrangements. This standard requires the fair value of share-based payments, including grants of employee stock options, to be recognized in the consolidated statements of operations based on their grant date fair values. The fair value of the Company's stock options issued under the requirements of ASC Topic 718 have been estimated using a Black-Scholes option pricing model, which assumes no expected dividends and estimates the option's expected life, volatility and risk free interest rate at the time of the grant. Income Taxes The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. Under ASC Topic 740, deferred income tax assets and liabilities are determined on the estimated future tax effects of differences between financial and tax bases of assets and liabilities given the application of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the asset or liability from year to year. A valuation allowance is recorded when it is more likely than not that some deferred tax assets will not be realized. The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The Company’s provision for income taxes primarily reflects a combination of income earned and taxed in various U.S. federal and state jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowance and the Company’s change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2017, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. The Company is subject to routine audits by taxing and other jurisdictions. However, there are currently no audits in progress for any prior tax periods. 9


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 1 - Summary of Significant Accounting Policies (continued) Subsequent Events The Company has considered subsequent events through March 30, 2018, the date the consolidated financial statements were available to be issued, in preparing the consolidated financial statements and notes thereto. In February 2018, the Company and its stockholders entered into an asset purchase agreement with Town Sports International Holdings, Inc., to acquire substantially all of the assets and operating liabilities of the Company for $8,000,000. Management anticipates that the transaction will close in April 2018. Note 2 – Deferred Revenues The Company follows the breakage model required by ASC 606, Revenue from Contracts with Customers, with respect to its deferred revenues for private training, spa, gift cards and gift certificates. Accordingly, the Company is required to recognize the expected breakage amount (i.e., derecognize the liability) either (1) proportionally in earnings as redemptions occur, or (2) when redemption is remote, if entities are not entitled to breakage. As discussed in Note 1 – Revenue Recognition, in September 2016 the Company shortened its expiration for spa sessions and private training sessions. In addition, as discussed in Note 9 – Reinstatement of Expired Unused Services, the Company experienced requests from members to reinstate expired sessions. While the Company has been tracking and evaluating the redemption and reinstatement patterns of spa and private training sessions for sales after the implementation of the new expiration policy, sufficient time has not passed for management to determine a reasonable estimate of the breakage of those sessions. Accordingly, during the year ended December 31, 2017 no deferred revenue liabilities were derecognized and no corresponding revenues from breakage were recognized by the Company. Note 3 - Leasehold Improvements and Equipment Leasehold improvements and equipment consisted of the following: Leasehold improvements $ 12,546,315 Furniture, fixtures and equipment 5,662,286 18,208,601 Less: accumulated depreciation and amortization (11,552,930) Leasehold improvements and equipment, net $ 6,655,671 10


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 3 - Leasehold Improvements and Equipment (continued) Included in furniture, fixtures and equipment was $1,619,387 of assets acquired under capital leases. Accumulated depreciation of these assets as of December 31, 2017 was $984,536. Depreciation expense related to the assets acquired under capital leases included in depreciation and amortization was $252,246 for the year ended December 31, 2017. In 2017, as a result of management’s decision to cease operations at 2 locations, the Company disposed of leasehold improvements and equipment with net book value of $1,028,247. This amount is included in the loss on disposal of leasehold improvements and equipment in the accompanying consolidated statements of operations. Note 4 - Accrued Liabilities Accrued liabilities consisted of the following: Deferred rent $ 2,764,011 Payroll and related taxes 1,017,021 Other 177,845 $ 3,958,877 Note 5 - Notes Payable to Stockholder Notes Payable to Stockholder The Company has entered into multiple promissory note agreements with the majority stockholder. The notes bear interest at 8% per annum and are due on demand. The notes are secured by substantially all assets of the Company and were subordinated to the credit agreement discussed in Note 6. The principal balance of the notes as of December 31, 2017 was $12,075,002. During 2017, the Company recognized approximately $941,000 of interest expense related to these notes. Unpaid interest related to these notes was approximately $3,297,000 at December 31, 2017. The majority stockholder does not intend to demand payment of these notes payable in 2018. Note Payable to Stockholder – Assumed Debt In September 2017, as a result of a Loan Sale Agreement between the majority stockholder and City National Bank, a National Banking Association (“CNB”), the Company’s majority stockholder purchased the Company’s Credit Facility from CNB (see Note 6). The purchase, as defined in the Loan Sale Agreement, included the transfer of all of CNB’s interest in the Credit Facility, including, without limitation, any and all of CNB’s rights, title and interest relating to or arising out of the Credit Facility and the Loan Documents (as defined). The balance on the Credit Facility at the time of the purchase including accrued interest was $15,160,521 and the obligation was purchased at CNB’s carrying value. The assumed debt bears interest equal to the greater of (i) 3.50% or (ii) the prime rate plus 1.50% (which aggregated to 6.00% at December 31, 2017) and is due on demand. For the year ended December 31, 2017, the Company recognized approximately $280,000 of interest expense related to this debt of which approximately $280,000 remained unpaid as of December 31, 2017. The majority stockholder does not intend to demand payment of this debt in 2018. 11


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 6 - Credit Agreement The Company had a $15,000,000 Credit Facility with CNB in the form of (i) a revolving credit commitment ("Revolving Line of Credit") and (ii) letters of credit ("Letters of Credit"). Borrowings under the Revolving Line of Credit carried interest at a per annum rate equal to the greater of (i) 3.50% or (ii) the prime rate plus 1.50% and was guaranteed by the majority stockholder. As discussed in Note 5 – Note Payable to Stockholder – Assumed Debt, the Company’s Credit Facility was purchased by the majority stockholder as a result of the Loan Sale Agreement entered into in September 2017. Note 7 - Capital Lease Obligations The Company leases certain equipment under agreements classified as capital leases. These leases were recorded to reflect the present value of the net minimum lease payments, at acquisition date, using interest rates ranging from 6.5% to 7.9% Aggregate maturities required on capital lease obligations are as follows for the years ending December 31: 2018 $ 132,779 2019 103,207 Less: interest (16,660) 219,326 Less: current portion (119,970) $ 99,356 Note 8 - Related Party Transactions The Company leases one of its club facilities from a stockholder under a non-cancelable operating lease expiring in December 2022. The stockholder is holding a deposit of approximately $18,325 related to the lease. During the year ended December 31, 2017, approximately $297,000 was paid to the stockholder under this agreement. The Company entered into an advisory services agreement with an entity related to the majority stockholder through common ownership for an annual fee of $200,000. The agreement shall continue as long as the majority stockholder, or any of their affiliates, owns any equity interest and/or security interests in the Company. The Company recorded an advisory fee expense under the terms of this agreement of $200,000 for the year ended December 31, 2017. As of December 31, 2017, the amount due to the related entity under the terms of this advisory service agreement was $1,000,000. The related entity does not intend to demand payment of the unpaid advisory fees in 2018. Accordingly, the amount has been included in non-current portion of the consolidated balance sheet. 12


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 9 - Commitments and Contingencies Lease Commitments The Company leases its club facilities under operating leases expiring through 2029. Club facility leases are generally long-term and non-cancelable triple-net leases (requiring the Company to pay their proportionate share of real estate taxes, insurance and common area and maintenance expenses) that generally commence near the opening date of the underlying club. The majority of the Company's leases provide for fixed rent escalation clauses tied to the Consumer Price Index. During the year ended December 31, 2017, total rent expense charged to operations under these operating leases was $4,742,377. The Company's future estimated minimum lease payments (exclusive of real estate taxes, maintenance and other related charges) required under club facility leases are as follows for the years ending December 31: 2018 $ 3,677,314 2019 3,301,346 2020 2,781,813 2021 2,311,031 2022 1,692,612 Thereafter 3,427,888 $ 17,192,004 Legal The Company is involved in various claims and lawsuits incidental to its business, including claims arising from accidents. However, in the opinion of management, the Company is adequately insured against such claims and lawsuits involving personal injuries, and any ultimate liability arising out of any such proceedings, will not have a material adverse effect on the Company's consolidated financial condition, cash flow or results of operations. 13


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 9 – Commitments and Contingencies (continued) Reinstatement of Expired Unused Services As discussed in Note 1 – Revenue Recognition, in September 2016 the Company shortened its expiration for spa sessions and private training sessions. As a result, the Company experienced requests from members to reinstate expired sessions. In order to accommodate members and increase member retention, the Company, at the discretion of club management, has reinstated expired sessions during 2017. The value of such expired sessions that are reinstated are added back to deferred revenues at the time of reinstatement and are recognized as revenues when redeemed or until such time when the sessions are re-expired or a determination is made by management that the likelihood of redemption is remote. As of December 31, 2017, the total value of unused and expired spa and private training sessions that expired during the year, including those related to members with canceled or expired club memberships, was approximately $404,000. The balance of the expired sessions consisted of approximately $253,000 of spa and private training sessions related to active members and approximately $151,000 related to memberships that have been canceled or expired. The Company has no obligation to reinstate any expired sessions. Management has performed an analysis of the likelihood that these remaining expired sessions will be reinstated based on future member requests, recognizing that the likelihood that requests for reinstatement will decrease over time, and that reinstatement requests related to members with canceled or expired club memberships are not likely to be made. Based on management’s analysis, the amount estimated that may be reinstated based on member requests is not significant. Accordingly, no additional deferred revenues were recorded for the possible reinstatement of expired spa and private training sessions as of December 31, 2017. Note 10 - Income Taxes Income tax expense consisted of the following: Current Federal $ - State 8,800 $ 8,800 Deferred Federal $ - State - $ - Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes. Deferred income taxes represent future tax benefits or costs to be recognized when those temporary differences reverse. As of December 31, 2017, the Company had federal and state net operating loss carryforwards of approximately $31,000,000 and $30,000,000, respectively, which will be available for utilization through 2037 to offset future taxable income. 14


 
Total Woman Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2017 Note 10 - Income Taxes (continued) The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2017 are presented below: Net operating losses $ 9,209,000 Depreciation and amortization 1,328,000 Deferred rent 825,000 Accrued liabilities 82,000 Prepaid expenses and other current assets (22,000) 11,422,000 Less: valuation allowance (11,422,000) Net deferred tax assets $ - The Company recorded a full valuation allowance against its deferred tax assets because it believes it is more likely than not that sufficient taxable income will not be realized during the carry-forward period to utilize the deferred tax asset. The valuation allowance decreased by $5,843,000 during the year ended December 31, 2017. Realization of future tax benefits is dependent upon many factors, including the Company's ability to generate taxable income within the loss carry-forward periods. Note 11 - Stock Based Compensation Under the Company's Option Plan ("2010 Plan"), the Company's Board of Directors, or appointed committee, may approve the grant of stock options to employees, board members, consultants or advisors. Awards under the 2010 Plan may be designated as incentive or non-qualified stock options at the discretion of the Board of Directors or committee. The number of shares for which options may be granted under the 2010 Plan is 1,365,079 shares. Generally, stock options granted under the 2010 Plan have 10 year terms and vest over a 5 year period. All stock options granted to date have an exercise price of $1.40 per option. The per share fair value of stock options granted under the 2010 Plan is determined on the date of grant using the Black-Scholes option pricing model. During the year ended December 31, 2017, no options were granted. As of December 31, 2017, there were 136,508 options exercisable with an exercise price of $1.40 and remaining contractual life of 6 years. The fair value of the stock options was fully amortized as of the end of prior year. Accordingly, no compensation expense was recognized during the year ended December 31, 2017 related to the vesting of stock options. As of December 31, 2017, the total compensation cost related to non-vested stock options was $0. 15


 
Exhibit


Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(All figures in thousands)
Town Sports International Holdings, Inc. (the “Company” or “TSI”) acquired Total Woman Gym and Spas (“Total Woman”) for total cash consideration of approximately $7,264 on April 13, 2018 (the “Acquisition”).
The unaudited pro forma condensed combined balance sheet as of December 31, 2017, gives effect to the Acquisition, as if the Acquisition had been completed on December 31, 2017 and combines the audited consolidated balance sheet of TSI as of December 31, 2017 with Total Woman’s audited consolidated balance sheet as of December 31, 2017. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 gives effect to the Acquisition as if it had occurred on January 1, 2017 and combines the audited consolidated statement of operations of TSI for the year ended December 31, 2017 with Total Woman’s audited consolidated statement of operations for the year ended December 31, 2017.
The Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”) pursuant to which the total purchase price of the Acquisition will be allocated to the net assets acquired based upon their estimated fair values as of the date of the completion of the Acquisition. The process of valuing the tangible and intangible assets and liabilities of Total Woman, as well as evaluating accounting policies for conformity, is preliminary and based upon currently available information, estimates and assumptions that management believes are reasonable. These preliminary estimates may be revised and there can be no assurance that such revisions will not result in material changes. Refer to Note 1 of the “Notes to Unaudited Pro Forma Condensed Combined Financial Information” for more information on the basis of presentation. 
The unaudited pro forma condensed combined financial information is for informational purposes only and does not purport to represent or be indicative of what the financial condition or results of operations would have been had the Acquisition occurred on such dates, nor is it indicative of future results or financial position of the combined company.
The pro forma adjustments give pro forma effect to events that are (1) directly attributable to the Acquisition, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined company’s results. The unaudited pro forma condensed combined statement of operations exclude certain non-recurring charges that have been or will be incurred in connection with the Acquisition, including acquisition related costs.
The assumptions and estimates underlying the adjustments to the unaudited pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements should be read together with the Company’s historical financial statements, which are included in the Company’s latest annual report on Form 10-K and Total Woman’s historical information included herein.





TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2017
(All figures in thousands)

 
Historical
 
Note 2
 
Note 4
 
 
Pro forma
 
 
 
Total
 
 
 
Pro forma and
 
 
Condensed
 
TSI
 
Woman
 
Reclassifications
 
Other Adjustments
 
 
Combined
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
30,321

 
$
471

 
$

 
$
(7,735
)
 
(a)
$
23,057

Accounts receivable, net
2,216

 

 

 

 
 
2,216

Inventory

 
41

 

 

 
 
41

Prepaid corporate income taxes
13,563

 

 

 

 
 
13,563

Prepaid rent expense
9,153

 

 

 

 

9,153

Prepaid expenses and other current assets
12,894

 
342

 

 
(342
)
 
(b)
12,894

Total current assets
68,147

 
854

 

 
(8,077
)
 
 
60,924

Fixed assets, net
151,498

 
6,656

 

 
1,408

 
(c)
159,562

Goodwill
6,217

 

 

 
1,236

 
(d)
7,453

Intangible assets, net
5,134

 

 

 
2,025

 
(e)
7,159

Deferred membership costs
959

 

 

 

 
 
959

Other assets
4,716

 
314

 

 
(92
)
 
(f)
4,938

Total assets
$
236,671

 
$
7,824

 
$

 
$
(3,500
)
 
 
$
240,995

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
2,082

 
$

 
$

 
$

 
 
$
2,082

Accounts payable
2,247

 
614

 

 
(614
)
 
(g)
2,247

Accrued expenses
24,669

 
3,959

 
(2,764
)
 
(1,092
)
 
(g)
24,772

Accrued interest
118

 

 

 

 
 
118

Capital lease liabilities
160

 
120

 

 
(120
)
 
(g)
160

Deferred revenue
33,473

 
3,506

 

 
715

 
(h)
37,694

Due to stockholder

 
3,576

 

 
(3,576
)
 
(g)

Total current liabilities
62,749

 
11,775

 
(2,764
)
 
(4,687
)
 
 
67,073

Long-term debt
193,947

 

 

 

 
 
193,947

Deferred lease liabilities
47,356

 

 
2,764

 
(2,764
)
 
(g)
47,356

Deferred tax liabilities
93

 

 

 

 
 
93

Deferred revenue
351

 
781

 

 
(781
)
 
(h)
351

Due to related entity

 
1,000

 

 
(1,000
)
 
(g)

Note payable to stockholder

 
12,075

 

 
(12,075
)
 
(g)

Note payable to stockholder-assumed debt

 
15,161

 

 
(15,161
)
 
(g)

Capital lease liabilities

 
99

 

 
(99
)
 
(g)

Other liabilities
10,132

 

 

 

 
 
10,132

Total liabilities
314,628

 
40,891

 

 
(36,567
)
 
 
318,952

Stockholders’ deficit:
 
 
 
 
 
 
 
 
 
 
Common stock
25

 
17,031

 

 
(17,031
)
 
(i)
25

Additional paid-in capital
(4,290
)
 
294

 

 
(294
)
 
(i)
(4,290
)
Accumulated other comprehensive income
1,201

 

 

 

 
 
1,201

Accumulated deficit
(74,893
)
 
(50,392
)
 

 
50,392

 
(i)
(74,893
)
Total stockholders’ deficit
(77,957
)
 
(33,067
)
 

 
33,067

 
 
(77,957
)
Total liabilities and stockholders’ deficit
$
236,671

 
$
7,824

 
$

 
$
(3,500
)
 
 
$
240,995

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information






TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2017
(All figures in thousands except share and per share data)

 
 
 
 
 
Note 4
 
 
 
 
 
 
 
 
Pro forma
 
 
Pro forma
 
Historical
 
Note 2
 
and Other
 
 
Condensed
 
TSI
 
Total Woman
 
Reclassifications
 
Adjustments
 
 
Combined
Revenues:
 
 
 
 
 
 
 
 
 
 
Club operations
$
397,166

 
$
26,403

 
$

 
$

 
 
$
423,569

Fees and other
5,876

 
1,460

 

 

 
 
7,336

 
403,042

 
27,863

 

 

 
 
430,905

Operating Expenses:
 
 
 
 
 
 
 
 
 
 
Payroll and related
145,612

 

 
16,146

 

 
 
161,758

Club operating
180,467

 
15,962

 
(6,772
)
 

 
 
189,657

Costs of products and services

 
7,093

 
(7,093
)
 

 
 

General and administrative
22,680

 
3,042

 
(1,741
)
 

 
 
23,981

Selling and marketing

 
540

 
(540
)
 

 
 

Depreciation and amortization
40,849

 
1,959

 
1,028

 
(728
)
 
(c)(e)
43,108

Impairment of fixed assets
6,497

 

 

 

 
 
6,497

 
396,105

 
28,596

 
1,028

 
(728
)
 
 
425,001

Operating income (loss)
6,937

 
(733
)
 
(1,028
)
 
728

 
 
5,904

Interest expense
12,665

 
1,823

 

 
(1,823
)
 
 (j)
12,665

Interest income
(78
)
 

 

 

 
 
(78
)
Equity in earnings of investee
(333
)
 

 

 

 
 
(333
)
Loss on disposal of assets

 
1,028

 
(1,028
)
 

 
 

Other

 
(79
)
 

 

 
 
(79
)
(Loss) income before (benefit) provision for corporate income taxes
(5,317
)
 
(3,505
)
 

 
2,551

 
 
(6,271
)
(Benefit) provision for corporate income taxes
(9,686
)
 
9

 

 
1,046

 
 (k)
(8,631
)
Net income (loss)
$
4,369

 
$
(3,514
)
 
$

 
$
1,505

 
 
$
2,360

Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
$
0.16

 
 
 
 
 
 
 
 
$
0.09

Diluted
$
0.16

 
 
 
 
 
 
 
 
$
0.09

Weighted average number of shares used in calculating earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
26,703,577

 
 
 
 
 
 
 
 
26,703,577

Diluted
27,422,833

 
 
 
 
 
 
 
 
27,422,833


See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information







TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(All figures in thousands)


Note 1 - Basis of presentation
The unaudited pro forma condensed combined financial information and related notes were prepared in accordance with GAAP in the United States and pursuant to the Securities and Exchange Commission’s Article 11 of Regulation S-X. The unaudited pro forma condensed combined financial statements are based on TSI’s and Total Woman’s historical consolidated financial statements to give effect to the Acquisition. The unaudited pro forma condensed combined balance sheet as of December 31, 2017 gives effect to the Acquisition as if it had occurred on December 31, 2017. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 give effect to the Acquisition as if it had occurred on January 1, 2017.
The business combination was accounted for under the acquisition method of accounting in accordance with ASC 805. As the acquirer for accounting purposes, the Company has estimated the fair value of Total Woman’s assets acquired and liabilities assumed.
The pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the Acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The condensed combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the Acquisition as a result of restructuring activities and other planned cost savings initiatives following the completion of the business combination.

Note 2 - Accounting policies and reclassifications
The accounting policies used in the preparation of this unaudited pro forma condensed combined financial information are those set out in TSI’s financial statements as of and for the year ended December 31, 2017. The Company performed certain procedures for the purpose of identifying any material differences in significant accounting policies between TSI and Total Woman, and any accounting adjustments that would be required in connection with adopting uniform policies. Procedures performed by the Company involved a review of Total Woman’s audited financial statements and footnotes to those financial statements, including those disclosed for the year ended December 31, 2017 and discussion with Total Woman’s management and public audit firm. TSI management does not believe there are any differences in the accounting policies of TSI and Total Woman that would result in material adjustments to TSI’s consolidated financial statements as a result of conforming Total Woman’s accounting policies to those of TSI.
Additionally, the historical financial statements of Total Woman have been adjusted by condensing certain line items and by reclassifying certain line items in order to conform to TSI’s consolidated financial statement presentation; these reclassifications are reflected in the column “Reclassifications.”
The reclassification adjustments relate to the following: (1) reclassification of deferred lease liabilities from Accrued expenses to Deferred lease liabilities; (2) reclassification to Payroll and related expenses from Club operating expenses, Costs of products and services, and General and administrative expenses; (3) reclassification of Loss on disposal of assets to Depreciation and amortization; (4) reclassification of Costs of products and services and Selling and marketing expenses to Club operating expenses.






Note 3 - Preliminary purchase price allocation
On April 13, 2018, TSI acquired Total Woman for total consideration of approximately $7,264. The unaudited pro forma condensed combined financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of Total Woman based on management’s best estimates of fair value. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities. Accordingly, the pro forma adjustments are preliminary and have been made solely for illustrative purposes. The following table shows the preliminary allocation of the purchase price for Total Woman to the acquired identifiable assets, liabilities assumed and pro forma goodwill:
Allocation of purchase price
 
Property, plant and equipment
$
8,064

Trade name
1,585

Favorable lease
440

Goodwill
1,236

Security deposits
222

Sales tax liability assumed
(103
)
Inventory
41

Deferred revenue
(4,221
)
Total consideration
$
7,264


Note 4 - Pro forma adjustments
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
(a) Cash and cash equivalents - Represents the preliminary net adjustment to cash in connection with the Acquisition including the purchase price of $7,264 related to the Acquisition and the elimination of $471 not acquired by TSI.
(b) Prepaid expenses and other - Reflects the elimination of amounts not acquired by TSI of $342.
(c) Fixed assets, net - Reflects the preliminary net adjustment of $1,408 to increase the basis in the acquired property, plant and equipment to estimated fair value of $8,064. The estimated useful lives are five years for all exercise equipment, office equipment, furniture and fixtures and computer hardware and range from one to 11 years (remaining lives of leases) for Leasehold improvements. The fair value and useful life calculations are preliminary and subject to change after the Company finalizes its review of the specific types, nature, age, condition and location of Total Woman’s property, plant and equipment. The following table summarizes the changes in the estimated depreciation expense (in thousands):
 
Year ended
 
December 31, 2017
Estimated depreciation expense
$
1,037

Historical depreciation expense
1,959

Pro forma adjustments to depreciation expense
$
(922
)
Refer to Note 4(e) below for the amortization expense related to intangible assets.
(d) Goodwill - Goodwill represents the excess of consideration transferred over the preliminary fair value of the assets acquired and liabilities assumed as described in Note 3. The goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment exists. In the event the Company determines that the value of goodwill has become impaired, it will incur an accounting charge for the amount of impairment during the period in which the determination is made. The goodwill is attributable to the expected synergies of the combined business operations, new growth opportunities and the acquired assembled and trained workforce of Total Woman and is deductible for tax purposes in its entirety.
(e) Intangible assets - Adjustment reflects the preliminary fair market value related to the identifiable intangible assets acquired and the related amortization. As part of the preliminary valuation analysis, the Company identified intangible assets, including the Total Woman Gym and Spa trade name and one favorable lease. The fair value of identifiable intangible assets is determined primarily using the “income approach,” which requires estimates of the expected future cash flows and deemed royalty rates, as well as estimates of useful lives of long-lived assets.





The following table summarizes the estimated fair values of Total Woman’s identifiable intangible assets and their estimated useful lives and uses the straight-line method of amortization:
 
Estimated
 
Estimated Useful
 
Annual 2017
 
Fair Value
 
Life in Years
 
Amortization Expense
Trade name
$
1,585

 
11.3

 
$
140

Favorable lease
440

 
8.2

 
54

 
$
2,025

 
 
 
194

Historical amortization expense
 
 
 
 

Pro forma adjustments
 
 
 
 
$
194

These preliminary estimates of fair value and estimated useful lives may differ from final amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
(f) Other assets - Reflects the preliminary net adjustment based on the purchase price allocation including security deposits as of the acquisition date as shown in Note 3, as well as the elimination of amounts not acquired by TSI of $92.
(g) Certain current and long-term liabilities - Reflects the preliminary adjustment for current and long-term liabilities of Total Woman not assumed by the Company, as well as the sales tax liability assumed as shown in Note 3.
(h) Deferred revenue - Represents the estimated adjustment to decrease the assumed deferred revenue obligations to a fair value of approximately $4,221, a $66 decrease from the carrying value. The calculation of fair value is preliminary and subject to change. The fair value was determined based on the estimated costs to fulfill the remaining membership contracts and spa services. After the Acquisition, this adjustment will have a continuing impact and will reduce revenue related to the assumed performance obligations as the services are provided over the next 12 months.
(i) Stockholder’s deficit - Adjustment reflects the elimination of Total Woman common stock and additional paid-in-capital which were not acquired by TSI. Transaction costs related to this acquisition were not material.
(j) Interest expense - Adjustment reflects the elimination of Total Woman’s interest expense as TSI did not acquire any debt as part of the Acquisition.
(k) (Benefit) provision for corporate income taxes - Adjustment reflects the tax effects of the pro forma adjustments made to the pro forma statement of operations calculated at the combined federal and state statutory rate of 41%. This rate does not reflect Total Woman’s effective tax rate which includes other tax charges or benefits and does not take into account any historical or possible future tax events that may impact the combined company.