Goodwill and Intangible Assets

Goodwill was allocated to reporting units that closely reflect the regions served by the Company: New York, Boston, Washington, D.C., Philadelphia and Switzerland, with certain more remote clubs that do not benefit from a regional cluster being considered single reporting units (“Outlier Clubs”). In the second half of 2017, the Company acquired the Lucille Roberts Health Club business (“Lucille Roberts”) and a single existing club under the TMPL trade name. In connection with these acquisitions, $5,158 of goodwill was added to the Company’s goodwill balance in the New York region. For more information on the Lucille Roberts and the TMPL Gym acquisitions, refer to Note 6 - Acquisitions. As of December 31, 2017, only the New York and Switzerland regions had a goodwill balance.

The Company early adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” in the first quarter of 2017. This standard eliminated the second step of the goodwill impairment test, where a determination of the fair value of individual assets and liabilities of a reporting unit was needed to measure the goodwill impairment. As a result of the updated guidance, the Company’s annual goodwill impairment test as of February 28, 2017 was performed by comparing the fair value of the Company’s reporting unit with its carrying amount and then recognizing an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

Prior to the adoption of ASU 2017-04, the impairment test required a two-step quantitative evaluation. Step 1 involved comparing the estimated fair value of the Company’s reporting units to their carrying amounts. If the estimated fair value of the reporting unit was greater than its carrying amount, there was no requirement to perform Step 2 of the impairment test, and there was no impairment. If the reporting unit’s carrying amount was greater than the estimated fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculated the implied fair value of goodwill by deducting the estimated fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the estimated fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step was compared to the carrying value of goodwill. If the implied fair value of goodwill was less than the carrying value of goodwill, an impairment charge was recognized equal to the difference.

For the years ended December 31, 2017 and 2016, the estimated fair value was determined using an income approach. For the year ended December 31, 2015, the estimated fair value was determined using a combined income and market approach with equal weighting on each approach. The income approach was based on discounted future cash flows and required significant assumptions, including estimates regarding revenue growth rates, operating margins, weighted average cost of capital, and future economic and market conditions. Under the market approach, the Company utilized information regarding the Company, the Company’s industry as well as publicly available industry information to determine earnings multiples and sales multiples that are used to value the Company’s reporting units.

The annual impairment tests as of the last day of February in 2017, 2016 and 2015 supported the goodwill balance and as such no impairment of goodwill was required. As a result of the significant decrease in market capitalization and a decline in our performance primarily due to existing members downgrading their memberships to those with lower monthly dues and new members enrolling at lower rates between February 28, 2015 and May 31, 2015, the Company performed an interim impairment test as of May 31, 2015. The Company concluded that there would be no remaining implied fair value of goodwill attributable to the New York and Boston regions. Accordingly, as of May 31, 2015, the Company wrote off $31,558 of goodwill associated with these reporting units. The Company did not have a goodwill impairment charge in the Switzerland region as a result of the interim test given the profitability of this unit.

The Company has historically performed goodwill impairment test annually as of the last day of February and in the interim if a triggering event occurs. During the fourth quarter of 2017, the Company established the date of its annual goodwill impairment test for the New York region from the last day of February to August 1. The Company believes that performing the test annually on August 1 will alleviate the information and resource constraints that historically existed during the first quarter and will more closely align with the timing of related forecasts, reports and analysis. The Company will perform a goodwill impairment test on the Switzerland region as of February 28, 2018.

The goodwill in the New York region was acquired in connection with the Lucille Roberts and TMPL acquisitions in the third and fourth quarters of 2017, respectively. As such, these intangible assets were recorded at fair value at the time of acquisitions. The next goodwill impairment test for the New York region will be August 1, 2018 which is within 12 months of the acquisitions. The Company believes that the resulting change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. The Company has also determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of August 1 for periods prior to August 1, 2018 without the use of hindsight. As such, the Company will prospectively apply the change in the annual goodwill impairment assessment date beginning August 1, 2018.

The changes in the carrying amount of goodwill from December 31, 2016 through December 31, 2017 are detailed in the charts below.



	New York			Boston			Switzerland			Outlier Clubs			Total
Goodwill, net of accumulated amortization	$	31,549		$	15,775		$	1,175		$	3,982		$	52,481
Changes due to foreign currency exchange rate fluctuations	—			—			(167		)	—			(167		)
Less: accumulated impairment of goodwill	(31,549		)	(15,775		)	—			(3,982		)	(51,306		)
Balance as of December 31, 2016	—			—			1,008			—			1,008
Acquired goodwill	5,158			—			—			—			5,158
Changes due to foreign currency exchange rate fluctuations	—			—			51			—			51
Balance as of December 31, 2017	$	5,158		$	—		$	1,059		$	—		$	6,217

Intangible assets were acquired in connection with the Lucille Roberts and TMPL acquisitions in 2017. Amortization expense of intangible assets for the years ended December 31, 2017, 2016 and 2015 was $550, $36 and $223 respectively. Intangible assets are as follows:



	As of December 31, 2017							As of December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Intangibles		Gross Carrying Amount		Accumulated Amortization			Net Intangibles
Membership lists	$	12,744	$	(11,577	)	$	1,167	$	11,344	$	(11,344	)	$	—
Favorable lease commitments	2,350		(136		)	2,214		—		—			—
Trade names	900		(47		)	853		40		(9		)	31
Non-compete agreement	900		—			900		—		—			—
Management contracts	—		—			—		250		(146		)	104
	$	16,894	$	(11,760	)	$	5,134	$	11,634	$	(11,499	)	$	135

The aggregate amortization expense for the next five years and thereafter of the acquired intangible assets is as follows:



Year Ending December 31,
2018	$	1,377
2019	1,251
2020	731
2021	731
2022	506
2023 and thereafter	538
	$	5,134