Life Time Group Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements in this discussion and analysis are “forward-looking statements” within the meaning of federal securities regulations. Forward-looking statements in this discussion and analysis include, but are not limited to, our plans, possible or assumed future actions, strategies, both business and financial, results of operations and prospects. Generally, forward-looking statements are not based on historical facts but instead represent only our current beliefs and assumptions regarding future events. All forward-looking statements are, by nature, subject to risks, uncertainties and other factors. This discussion and analysis does not purport to identify factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements. You should understand that forward-looking statements are not guarantees of performance or results and are preliminary in nature. Statements preceded by, followed by or that otherwise include the words “believe,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may result,” “will result,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could” are generally forward-looking in nature and not historical facts. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking. Factors that could cause actual results to differ materially from those forward-looking statements included in this discussion and analysis include, but are not limited to, the impacts of COVID-19 or other future pandemics on our operations, members, employees, vendors, service providers, business and cash flows; our ability to attract and retain members; a deterioration in the quality or reputation of our brand or the health and wellness industry; competition in the health and wellness industry; our inability to anticipate and satisfy consumer preferences and shifting views of health and wellness; events such as severe weather conditions, natural disasters, global pandemics or health crises, hostilities and social unrest, among others; disruptions in the operations of our centers; and the other important factors discussed under the caption “Risk Factors” in the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission (the “SEC”) on September 13, 2021 (File No. 333-259495). Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive. Consequently, we caution investors not to place undue reliance on any forward-looking statements, as no forward-looking statement can be guaranteed and actual results may vary materially. All forward looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Forward looking statements speak only as of the date of this report. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Overview Initial Public Offering On October 12, 2021, Life Time Group Holdings, Inc. consummated its initial public offering (“IPO”) of 39.0 million shares of its common stock at a public offering price of $18.00 per share, resulting in total gross proceeds of $702.0 million before deducting the underwriting discounts and other offering expenses. The shares of its common stock began trading on The New York Stock Exchange under the symbol “LTH” on October 7, 2021. A registration statement on Form S-1 relating to the offering of these securities was declared effective by the SEC on October 6, 2021. Additionally, on November 1, 2021, Life Time Group Holdings, Inc. consummated the sale of nearly 1.6 million additional shares of its common stock at the IPO price of $18.00 per share pursuant to the partial exercise by the underwriters of their over-allotment option, resulting in total gross proceeds of approximately $28.4 million before deducting the underwriting discounts and commissions. Business Life Time, the “Healthy Way of Life Company,” is a leading lifestyle brand offering premium health, fitness and wellness experiences to a community of over 1.3 million individual members, who together comprise more than 750,000 memberships, as of September 30, 2021. Since our founding nearly 30 years ago, we have sought to continuously innovate ways for our members to lead healthy and happy lives by offering them the best places, programs and performers. We deliver high-quality experiences through our omni-channel physical and digital ecosystem that includes more than 150 centers—distinctive, resort-like athletic destinations—across 29 states in the United States and one province in Canada. Our track record of providing differentiated experiences to our members has fueled our strong, long-term financial performance. In 2019, prior to the COVID-19 pandemic, we generated $1.9 billion of revenue. In 2020, which was impacted by the COVID-19 pandemic, we generated $0.9 billion of revenue, and in the nine months ended September 30, 2021, we generated nearly $1.0 billion of revenue. Our luxurious athletic centers, which are located in both affluent suburban and urban locations, total more than 15 million square feet in the aggregate. As of September 30, 2021 we had 12 new centers under construction and we believe we have significant opportunities to continue expanding our portfolio of premium centers with 10 or more planned new centers annually for the foreseeable future in increasingly affluent markets. We offer ex pansive fitness floors with top-of-the-line equipment, spacious locker rooms, group fitness studios, indoor and outdoor pools and bistros, indoor and outdoor tennis courts, basketball courts, LifeSpa, LifeCafe and our childcare and Kids Academy learning spaces. Our premium service offering is delivered by approximately 29,000 Life Time team members, including over 7,500 certified fitness professionals, ranging from personal trainers to studio performers. Our members are highly engaged and draw inspiration from the experiences and community we have created. 26 We believe that no other company in the United States delivers the same quality and breadth of health, fitness and wellness experiences as we deliver, which has enabled us to consistently grow total revenue for 20 consecutive years, prior to the impact of the COVID-19 pandemic. As of December 31, 2019, December 31, 2020 and September 30, 2021, our recurring membership dues represented 63%, 69% and 68%, respectively, of our total revenue, while our in-center revenue, consisting of Life Time Training, LifeCafe, LifeSpa, Life Time Swim and Life Time Kids, among other services, represented 34%, 29% and 29%, respectively, of our total revenue. Between 2015 and 2019, we grew our average Center revenue per membership from $1,883 to $2,172, a testament to the significant value that our members place on engaging with Life Time. While average Center revenue per membership fell to $1,317 in 2020, we have seen a strong rebound in 2021, with $1,554 in average Center revenue per membership during the nine months ended September 30, 2021. As we have delivered these premium experiences, we have strategically increased our new join membership prices across most of our centers in early 2021. We believe we can continually refine our pricing as we deliver exceptional experiences and find the optimal balance among the number of memberships per center, the member experience and maximizing our return for each center. We expect average revenue per membership and average monthly dues per membership to continue to increase as we acquire more new members, increase legacy member pricing and open new centers in increasingly affluent markets. We offer a variety of convenient month-to-month memberships with no long-term contracts. We define memberships in two ways: Center memberships and Digital On-hold memberships. A Center membership is defined as one or more adults 14 years of age or older, plus any juniors under the age of 14. Our base memberships provide individuals general access (with some amenities excluded) to a selected home center and all centers with the same or a lower base monthly dues rate. Our optimized pricing for a Center membership is determined center-by-center based on a variety of factors, including geography, competition, demographic nature, population density, initial investment in the center and available services and amenities. Digital On-hold memberships do not provide access to our centers and are for those members who want to maintain certain member benefits including our Life Time Digital membership and the right to convert to a Center membership without paying enrollment fees. We continue to evolve our premium lifestyle brand in ways that allow our members to more easily and regularly integrate health, fitness and wellness into their lives. We continue to enhance our digital platform to deliver a true omni-channel experience for our members. Our Life Time Digital offering delivers live streaming fitness classes, remote goal-based personal training, nutrition and weight loss support and curated award-winning health, fitness and wellness content. Through an agreement with Apple®, we also provide Apple Fitness+ to our members, which gives our members expanded content and wellness data monitoring on the go. In addition, our members are able to purchase a wide variety of equipment, wearables, apparel, beauty products and nutritional supplements via our digital health store. We are continuing to invest in our digital capabilities in order to strengthen our relationships with our members and more comprehensively address their health, fitness and wellness needs so that they can remain engaged and connected with Life Time at any time or place. We are also expanding our ecosystem in response to our members’ desire to more holistically integrate health and wellness into every aspect of their daily lives. In 2018, we launched Life Time Work, an asset-light branded co-working model that offers premium work spaces in close proximity to our centers and integrates ergonomic furnishings and promotes a healthy working environment. Life Time Work members also receive access to all of our resort-like athletic destinations across the United States and Canada. Additionally, we opened our first Life Time Living location in 2021, another asset-light extension of our “Healthy Way of Life” ecosystem, which offers luxury wellness-oriented residences. As we expand our footprint with new centers and nearby work and living spaces, as well as strengthen our digital capabilities, we expect to continue to grow our omni-channel platform to support the “Healthy Way of Life” journey of our members. Non-GAAP Financial Measures This discussion and analysis includes certain financial measures that are not presented in accordance with the generally accepted accounting principles in the United States (“GAAP”), including Adjusted EBITDA and free cash flow before growth capital expenditures and ratios related thereto. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of the Company’s non-GAAP financial measures to the corresponding GAAP measures should be carefully eva luated. We use Adjusted EBITDA as an important performance metric for the Company. In addition, free cash flow before growth capital expenditures is an important liquidity metric we use to evaluate our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Adjusted EBITDA We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, gain (loss) on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Management uses Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted EBITDA is an important metric for management, investors and analysts as it removes the impact of items that we do not believe are indicative of our core operating performance and allows for consistent comparison of our operating results over time and relative to our peers. We use Adjusted EBITDA to supplement GAAP measures of performance in evaluating the effectiveness of our business strategies, and to establish annual budgets and forecasts. We also use Adjusted EBITDA to establish short-term incentive compensation for management. 27 Free Cash Flow Before Growth Capital Expenditures We define free cash flow before growth capital expenditures as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. We believe free cash flow before growth capital expenditures assists investors and analysts in evaluating our liquidity and cash flows, including our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Our management considers free cash flow before growth capital expenditures to be a key indicator of our liquidity and we present this metric to our board of directors. Additionally, we believe free cash flow before growth capital expenditures is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that investors, analysts, and rating agencies consider free cash flow before growth capital expenditures as a useful means of measuring our ability to make principal payments on our indebtedness and evaluating our liquidity, and management uses this measurement for one or more of these purposes. Adjusted EBITDA and free cash flow before growth capital expenditures should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by operating activities as a measure of our liquidity and may not be comparable to other similarly titled measures of other businesses. Adjusted EBITDA and free cash flow before growth capital expenditures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Some of these limitations include that: • these measures do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; • not all of these measures reflect changes in, or cash requirements for, our working capital needs; • these measures do not reflect the cash requirements necessary to make principal payments on our indebtedness; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and not all of these measures reflect cash requirements for such replacements; • non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and • these measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations. Furthermore, we compensate for the limitations described above by relying primarily on our GAAP results and using Adjusted EBITDA and free cash flow before growth capital expenditures only for supplemental purposes. See our condensed consolidated financial statements included elsewhere in this report for our GAAP results. Non-GAAP Measurements and Key Performance Indicators We prepare and analyze various non-GAAP performance metrics and key performance indicators to assess the performance of our business and allocate resources. We analyze these key performance indicators to assess the performance of our business and allocated resources. For more information regarding our non-GAAP performance metrics, see “—Non-GAAP Financial Measures” above. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to any other performance measures derived in accordance with GAAP. 28 Set forth below are certain GAAP and non-GAAP measurements and key performance indicators for the three and nine months ended September 30, 2021 and 2020. The following information has been presented consistently for all periods presented. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 ($ in thousands, except for Average Center revenue per center membership data) Membership Data Center memberships 668,310 572,811 668,310 572,811 Digital On-hold memberships 85,045 234,381 85,045 234,381 Total memberships 753,355 807,192 753,355 807,192 Revenue Data Membership dues and enrollment fees 70.2% 74.3% 70.0% 69.5% In-center revenue 29.8% 25.7% 30.0% 30.5% Total Center revenue 100.0% 100.0% 100.0% 100.0% Membership dues and enrollment fees $ 261,033 $ 169,612 $ 653,584 $ 490,151 In-center revenue 110,967 58,737 280,106 214,768 Total Center revenue $ 372,000 $ 228,349 $ 933,690 $ 704,919 Average Center revenue per center membership (1) $ 555 $ 349 $ 1,554 $ 929 Comparable center sales (2) 58.7% (55.0)% 29.9% (52.2)% Center Data Net new center openings (3) 2 — 6 2 Total centers (end of period) (3) 155 148 155 148 Total center square footage (end of period) (4) 15,300,000 14,700,000 15,300,000 14,700,000 GAAP and Non-GAAP Financial Measures Net loss $ (45,442) $ (93,647) $ (274,599) $ (276,304) Net loss margin (5) (11.8) % (40.5) % (28.7) % (38.4) % Adjusted EBITDA (6) $ 47,031 $ (12,437) $ 32,277 $ (44,934) Adjusted EBITDA margin (6) 12.2 % (5.4) % 3.4 % (6.2) % Center operations expense $ 231,996 $ 165,572 $ 625,322 $ 515,350 Pre-opening expenses (7) 633 721 5,304 5,208 Rent 52,513 47,539 154,552 138,470 Non-cash rent expense (8) 5,327 8,181 11,546 34,489 Net cash used in operating activities (2,283) (11,789) (15,322) (56,165) Free cash flow before growth capital expenditures (9) (38,633) (31,567) (99,458) (145,266) (1) We define Average Center revenue per center membership as Center revenue less Digital On-hold revenue, divided by the average number of Center memberships for the period, where the average number of Center memberships for the period is an average derived from dividing the sum of the total Center memberships outstanding at the beginning of the period and at the end of each month during the period by one plus the number of months in each period. (2) We measure the results of our centers based on how long each center has been open as of the most recent measurement period. We include a center, for comparable center sales purposes, beginning on the first day of the 13th full calendar month of the center’s operation, in order to assess the center’s growth rate after one year of operation. (3) Net new center openings are the number of centers that opened for the first time to members during the period, less any centers that closed during the period. Total centers (end of period) is the number of centers operational as of the last day of the period. As of September 30, 2021, all of our 155 centers were open. (4) Total center square footage (end of period) reflects the aggregate fitness square footage, which we use as a metric for evaluating the efficiencies of a center as of the end of the period. The square footage figures exclude areas used for tennis courts, outdoor swimming pools, outdoor play areas and stand-alone Work, Sport and Swim locations. These figures are approximations. 29 (5) Net loss margin is calculated as net loss divided by total revenue. (6) We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, gain (loss) on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenue. The following table provides a reconciliation of net loss, the most directly comparable GAAP measure, to Adjusted EBITDA: Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2021 2020 2021 2020 Net loss $ (45,442) $ (93,647) $ (274,599) $ (276,304) Interest expense, net of interest income (a) 39,849 30,967 176,144 95,724 Benefit from income taxes (11,981) (28,079) (58,867) (99,096) Depreciation and amortization 57,977 61,359 177,005 188,483 Share-based compensation expense 4,078 — 6,959 — COVID-19 related expenses (b) (221) 17,029 (410) 49,312 Loss (gain) on sale-leaseback transactions (c) 2,227 — 3,057 (3,078) Capital transaction costs (d) 588 39 588 96 Legal settlements (e) (44) 313 (44) 345 Other (f) — (418) 2,444 (416) Adjusted EBITDA $ 47,031 $ (12,437) $ 32,277 $ (44,934) (a) For the nine months ended September 30, 2021, we incurred a non-cash expense of $41.0 million related to the extinguishment of our related party secured loan. In June 2020, we closed on an approximate $101.5 million secured loan from an investor group comprised solely of our stockholders or their affiliates. The secured loan carried an interest rate of 12.0% and was scheduled to mature in June 2021. In January 2021, we extinguished the secured loan plus accrued interest with a book value of $108.6 million by converting the loan into approximately 5.4 million shares of our Series A Preferred Stock, which had a fair value of $149.6 million, as determined by an independent third party valuation, at the time of conversion. Accordingly, we booked a $41.0 million loss upon conversion. (b) Represents the incremental net (credits) expenses we recognized related to the COVID-19 pandemic. We adjust for these costs as they do not represent costs associated with our normal ongoing operations. We believe that adjusting for these costs provides a more accurate and consistent representation of our actual operating performance from period to period. The net credits we recognized during the three and nine months ended September 30, 2021 consist primarily of the recovery of certain qualifying expenses recovered under the CARES Act, partially offset by COVID-19 legal-related costs. For the three months ended September 30, 2020, COVID-19 related expenses consisted of $9.5 million for project cost write-offs for sites no longer deemed viable as a result of the economic downturn caused by COVID-19, $5.5 million for the employee portion of health care coverage which is normally paid by employees but was paid by us during this period on behalf of our employees, and $2.0 million of emergency leave and non-working payroll, which includes subsequent recovery of certain expenses under the CARES Act, severance and charitable contributions made to support our employees who were directly impacted by COVID-19. For the nine months ended September 30, 2020, COVID-19 related expenses consisted of $14.6 million for project cost write-offs for sites no longer deemed viable as a result of the economic downturn caused by COVID-19, $12.0 million for the employee portion of health care coverage which is normally paid by employees but was paid by us during this period on behalf of our employees, and $22.7 million of emergency leave and non-working payroll, which includes subsequent recovery of certain expenses under the CARES Act, severance and charitable contributions made to support our employees who were directly impacted by COVID-19. (c) We adjust for the impact of gains or losses on the sale-leaseback of our properties as they do not reflect costs associated with our ongoing operations. (d) Represents one-time costs related to capital transactions, including debt and equity offerings that are non-recurring in nature. (e) We adjust for the impact of large class action and unusual legal settlements paid or recoveries received. These are non-recurring in nature and do not reflect costs associated with our normal ongoing operations. 30 (f) Includes costs associated with large corporate restructuring charges, executive level involuntary terminations and other transactions which are unusual and non-recurring in nature. For the nine months ended September 30, 2021, other expenses consisted of $1.6 million of incremental expenses related to a winter storm resulting in historical freezing temperatures affecting our Texas region, and $0.8 million of executive level severance. (7) Represents non-capital expenditures associated with opening new centers which are incurred prior to the commencement of a new center opening. The number of centers under construction or development, the types of centers and our costs associated with any particular center opening can vary significantly from period to period. (8) Reflects the non-cash portion of our annual GAAP operating lease expense that is greater or less than the cash operating lease payments. (9) Free cash flow before growth capital expenditures, a non-GAAP financial measure, is calculated as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. The following table provides a reconciliation from net cash provided by (used in) operating activities to free cash flow before growth capital expenditures: Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2021 2020 2021 2020 Net cash used in operating activities $ (2,283) $ (11,789) $ (15,322) $ (56,165) Center maintenance capital expenditures (18,078) (4,823) (43,045) (29,075) Corporate capital expenditures (18,272) (14,955) (41,091) (60,026) Free cash flow before growth capital expenditures $ (38,633) $ (31,567) $ (99,458) $ (145,266) Factors Affecting the Comparability of our Results of Operations Impact of COVID-19 on our Business On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus that causes COVID-19 a pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, the United States declared a National Public Health Emergency with respect to COVID-19. On March 16, 2020, in compliance with orders and advisories from federal, state and local governmental authorities regarding COVID-19, we closed all of our centers. Throughout this report, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when we refer to “COVID-19,” such as when we describe the “impact of COVID-19” on our operations, we mean the coronavirus-related orders issued by governmental authorities affecting our operations and/or the presence of coronavirus in our centers, including COVID-19 positive members or team members. While our centers were closed, in consultation with an epidemiologist (MD/PhD) with a wide range of experience in clinical, occupational and environmental medicine, we developed processes and protocols for the operation of our centers in the COVID-19 environment. These protocols, which have varied at our centers across the United States and Canada, have included physical distancing, restricting certain equipment and amenities, occupancy limits, required appointments, touchless interactions, facial coverings, cleaning, sanitation, hygiene, air circulation and filtering, screening, contact tracing and educational awareness. We may take further actions as government authorities require or recommend or as we determine to be in the interests of our members, team members, vendors and service providers, including in response to emerging variants of the COVID-19 virus, such as the Delta variant. We continue to refine these processes and protocols as we operate in the evolving COVID-19 environment. On May 8, 2020, we re-opened our first center in Oklahoma City, Oklahoma. With a focus on providing a healthy and clean environment for our members and team members, we continued to re-open our centers as governmental authorities permitted. As of June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021 we had 105, 148, 141, 151, 150 and 155 of our centers opened, respectively. However, many of our centers remained closed or were required to be closed again after re-opening for some period of time during each of these quarters as a result of the COVID-19 pandemic and related restrictions. For instance, during the three months ended June 30, 2020, September 30, 2020 and December 31, 2020, 149, 43 and 31 of our centers, respectively, were closed for some period of time. The performance of our centers after we were able to re-open them has varied depending on various factors, including how early we were able to re-open them in 2020, whether we were required to close them again, their geographic location and applicable governmental restrictions. We have experienced a slightly faster recovery in our membership dues revenue compared to our in-center revenue as our centers have re-opened. We expect membership dues revenue to remain a higher percentage of our total revenue in the near term and return to more historical levels over time. While we are encouraged by the trends of increased vaccination rates, reduced COVID-19 infections and hospitalizations and reduced operating restrictions in many of the regions where our centers operate, the full extent of the impact of COVID-19, including the Delta variant, remains uncertain and is dependent on future developments that cannot be accurately predicted at this time. Considering this uncertainty, the extent of the impact of COVID-19 on our financial position, results of operations, liquidity and cash flows is uncertain at this time. 31 Operations As of September 30, 2021, all of our 155 centers were open. As of September 30, 2021, total memberships were 753,355, a decrease of 20.7% compared to 950,183 at March 31, 2020. Center memberships were 668,310, a decrease of 21.1% compared to 847,161 at March 31, 2020. Digital On-hold memberships were 85,045, a decrease of 17.4% compared to 103,022 at March 31, 2020. We continue to monitor governmental orders regarding the operations of our centers, as well as our center operating processes and protocols. We expect we may need to continue to adjust such processes and protocols as facts and circumstances change, including as a result of variants of the COVID-19 virus, including the Delta variant. We also expect our centers and in-center businesses will continue to be impacted differently based upon considerations such as their geographic location, vaccination rates, impacts of variants, applicable government restrictions and guidance, and team member and member sentiment with respect to our center operating processes and protocols and working in and/or using our centers. For example, we are seeing an increase in Center memberships and center utilization in various regions where government restrictions have been lifted. Given increasing demand for online engagement with consumers, we have increased our focus on delivering a digitized in-center experience through our omni-channel ecosystem. In December 2020, we expanded our Digital membership offering, bringing our “Healthy Way of Life” programs, services and content to consumers virtually. This omni-channel experience is designed to deliver health, fitness and wellness where, when and how members want it by offering online reservations registrations, virtual training, live streaming and on-demand classes, virtual events and more. Cash Flows and Liquidity In response to the impact of COVID-19 on our business, we took swift cash management actions to reduce our operating costs and preserve liquidity. These actions included: initially furloughing over 95% of our employees; undertaking two corporate restructuring events to right size overhead relative to the current business; initially suspending virtually all construction capital spending; negotiating rent reductions and deferrals with many of our landlords; evaluating the CARES Act and receiving the employee retention credit, the deferment of the employer’s portion of social security tax payments and the various income tax-related benefits; and completing sale-leaseback transactions associated with six properties. During the nine months ended September 30, 2021, we refinanced a significant portion of our outstanding debt. Specifically, we: (i) refinanced in full the outstanding balances associated with our then existing senior secured credit facility as well as our then existing senior unsecured notes; and (ii) converted our related party secured loan into Series A Preferred Stock. Additionally, we completed sale-leaseback transactions associated with two properties. For information regarding the refinancing actions we took during the nine months ended September 30, 2021, see Note 6, Debt, to our unaudited condensed consolidated financial statements included elsewhere in this report. For more information regarding the sale-leaseback transactions that were consummated during the nine months ended September 30, 2021, see Note 7, Leases, to our unaudited condensed consolidated financial statements included elsewhere in this report. On October 13, 2021, we paid down $575.7 million (including a $5.7 million pre-payment penalty) of our Term Loan Facility with a portion of the net proceeds we received from the IPO. We intend to use the remaining net proceeds from the IPO, along with the additional net proceeds of approximately $27.1 million from the sale of the additional 1.6 million shares of common stock pursuant to the partial exercise by the underwriters of their over-allotment option, for general corporate purposes. Although there is uncertainty related to the impact of COVID-19 on our financial position, results of operations, liquidity and cash flows, much of which is dependent on the length and severity of the pandemic and the related measures taken, we believe that the combination of our current cash position, our availability under the Revolving Credit Facility, the recent actions we have taken to refinance our debt, complete the IPO and strengthen our balance sheet, as well as the actions we have taken to reduce our cash outflows, leave us well-positioned to manage our business through this pandemic. If our available liquidity were not sufficient to meet our operating and debt service obligations as they come due, we would need to pursue alternative arrangements through additional debt, additional sale-leaseback transactions or equity financing to meet our cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. There may be developments outside of our control requiring us to adjust our operating plan, including additional required center closures. As such, given the dynamic nature of our current operating environment, we cannot reasonably estimate the impacts of COVID-19 on our financial position, results of operations or cash flows in the future. Share-Based Compensation As of September 30, 2021, total unrecognized share-based compensation expense associated with stock options, restricted Series A Preferred Stock and restricted stock units was $362.5 million. The estimated fair value associated with each of the applicable share-based compensation awards outstanding at September 30, 2021 will be recognized as share-based compensation expense if and when the related recognition conditions, for accounting purposes, are met. As a result of the consummation of the IPO, a significant portion of this total unrecognized share-based compensation expense amount will be recognized during the fourth quarter of 2021. 32 Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We revise the recorded estimates when better information is available, facts change, or we can determine actual amounts. These revisions can affect operating results. Management has evaluated the development and selection or our critical accounting policies and estimates used in the preparation of the Company’s unaudited condensed financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. Our most significant estimates and assumptions that materially affect the Company's unaudited condensed financial statements involve difficult, subjective or complex judgments which management used while performing goodwill, intangible and long-lived asset impairment analyses. Given the additional effects from the COVID-19 pandemic, these estimates can be more challenging, and actual results could differ materially from our estimates. As it relates to the long-lived asset impairment analyses that we have performed d uring both the three and nine months ended September 30, 2021 and 2020, we determined that certain projects were no longer deemed viable for construction, and that the previously-capitalized site development costs associated with these projects were impaired. Accordingly, as it relates to these long-lived assets, we recognized impairment charges of $0.7 million and $9.9 million for the three months ended September 30, 2021 and 2020, respectively, and we recognized impairment charges of $2.5 million and $16.9 million for the nine months ended September 30, 2021 and 2020, respectively. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” to our audited consolidated financial statements included in the Company’s Registration Statement on Form S-1 filed with the SEC on September 13, 2021 (File No. 333-259495) and the section of such Registration Statement on Form S-1 entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in such Registration Statement on Form S-1. 33 Results of Operations Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the three months ended September 30, 2021 and 2020: Three Months Ended September 30, As a Percentage of Total Revenue 2021 2020 2021 2020 Revenue: Center revenue $ 372,000 $ 228,349 96.6 % 98.8 % Other revenue 13,040 2,681 3.4 % 1.2 % Total revenue 385,040 231,030 100.0 % 100.0 % Operating expenses: Center operations 231,996 165,572 60.3 % 71.7 % Rent 52,513 47,539 13.6 % 20.6 % General, administrative and marketing 45,304 32,204 11.8 % 13.9 % Depreciation and amortization 57,977 61,359 15.1 % 26.6 % Other operating 14,796 15,152 3.8 % 6.5 % Total operating expenses 402,586 321,826 104.6 % 139.3 % Loss from operations (17,546) (90,796) (4.6) % (39.3) % Other (expense) income: Interest expense, net of interest income (39,849) (30,967) (10.3) % (13.4) % Equity in earnings of affiliate (28) 37 — % — % Total other expense (39,877) (30,930) (10.3) % (13.4) % Loss before income taxes (57,423) (121,726) (14.9) % (52.7) % Benefit from income taxes (11,981) (28,079) (3.1) % (12.2) % Net loss $ (45,442) $ (93,647) (11.8) % (40.5) % Total revenue. The $154.0 million increase in Total revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 reflects the adverse economic impact that our center closures had on our business during the three months ended September 30, 2020 and the timing of the subsequent reopening of our centers, as well as pricing initiatives we implemented at the majority of our centers during the three months ended September 30, 2021, which have resulted in higher average Center membership dues being charged to new members during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. With respect to the $143.6 million increase in Center revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020: • 63.6% was from membership dues and enrollment fees, which increased $91.4 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. This increase reflects the adverse economic impact that our center closures, which resulted from COVID-19, had on our business during the three months ended September 30, 2020 and the timing of the subsequent reopening of our centers, as we ll as pricing initiatives we implemented at the majority of our centers during the three months ended September 30, 2021, which have resulted in higher average Center membership dues being charged to new members during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 ; and • 36.4% was from in-center revenue, which increased $52.2 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 . This increase was recognized across all of our primary in-center businesses and reflects the adverse economic impact that our center closures, which resulted from COVID-19, had on our business during the three months ended September 30, 2020 as well as the timing of the subsequent reopening of our centers. The $10.4 million increase in Other revenue for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily driven by our athletic events business, as we were able to produce several of our iconic events during the third quarter of 2021 compared to the third quarter of 2020 when COVID-19 restrictions forced the cancellation of most of our events . 34 Center operations expenses . The $66.4 million increase in Center operations expenses for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was driven by increased staffing requirements resulting from the subsequent reopening of our centers and the addition of seven new centers. Rent expense . The $5.0 million increase in Rent expense for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily driven by the sale leaseback of five centers occurring since September 30, 2020 , and our taking possession of five sites since September 30, 2020 for future centers where we started incurring GAAP rent expense, most of which is non-cash. General, administrative and marketing expenses. The $13.1 million increase in General, administrative and marketing expenses for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily driven by a $4.1 million increase in share-based compensation, a $3.5 million increase in marketing expenses and a $3.4 million increase in general and administrative costs due to the return of Corporate team members who remained furloughed during the third quarter of 2020, partially offset by $2.6 million of corporate COVID-19-related expenses incurred during the three months ended September 30, 2020 . Depreciation and amortization . The $3.4 million decrease in Depreciation and amortization for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 consists of $3.1 million and $0.3 million lower depreciation and amortization, respectively . Other operating expenses . The $0.4 million decrease in Other operating expenses for the three months ended September 30, 2021 as compar ed to the three months ended September 30, 2020 was primarily attributable to project cost write-offs recognized during the three months ended September 30, 2020 for sites that were no longer deemed viable for construction as a result of COVID-19, partially offset by higher costs associated with our athletic events business during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 , as we were able to produce several of our iconic events during the third quarter of 2021 as compared to the third quarter of 2020 when COVID-19 restrictions forced the cancellation of most of our events . Interest expense, net . The $8.8 million increase in Interest expense, net of interest income for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 reflects a relatively higher effective weighted average interest rate on an increased average level of outstanding borrowings during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 . Benefit from income taxes . The benefit from income taxes was $12.0 million for the three months ended September 30, 2021 compared to $28.1 million for the three months ended September 30, 2020 . The effective tax rate was 20.9% and 23.1% for those same periods, respectively. The change in benefit from income taxes was primarily attributable to a decrease in our loss before income taxes for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, as well as the recognition during the three months ended September 30, 2021 of an increase in the valuation allowance to reduce the deferred tax asset associated with our state net operating loss carryforwards. Net loss . As a result of the factors described above, net loss decreased by $48.2 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 . 35 Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, As a Percentage of Total Revenue 2021 2020 2021 2020 Revenue: Center revenue $ 933,690 $ 704,919 97.5 % 97.9 % Other revenue 23,835 14,991 2.5 % 2.1 % Total revenue 957,525 719,910 100.0 % 100.0 % Operating expenses: Center operations 625,322 515,350 65.3 % 71.6 % Rent 154,552 138,470 16.1 % 19.2 % General, administrative and marketing 126,896 119,665 13.3 % 16.6 % Depreciation and amortization 177,005 188,483 18.5 % 26.2 % Other operating 30,660 37,412 3.2 % 5.2 % Total operating expenses 1,114,435 999,380 116.4 % 138.8 % Loss from operations (156,910) (279,470) (16.4) % (38.8) % Other (expense) income: Interest expense, net of interest income (176,144) (95,724) (18.4) % (13.3) % Equity in earnings of affiliate (412) (206) — % — % Total other expense (176,556) (95,930) (18.4) % (13.3) % Loss before income taxes (333,466) (375,400) (34.8) % (52.1) % Benefit from income taxes (58,867) (99,096) (6.1) % (13.7) % Net loss $ (274,599) $ (276,304) (28.7) % (38.4) % Total revenue. The $237.6 million increase in Total revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 primarily reflects the adverse economic impact that our center closures had on our business during the nine months ended September 30, 2020 and the timing of the subsequent reopening of our centers, as well as pricing initiatives we implemented at the majority of our centers during the nine months ended September 30, 2021, which have resulted in higher average Center membership dues being charged to new members during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. With respect to the $228.8 million increase in Center revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020: • 71.4% was from membership dues and enrollment fees, which increased $163.5 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. This increase reflects the adverse economic impact that our center closures, which resulted from C OVID-19, had on our business during the nine months ended September 30, 2020 and the timing of the subsequent reopening of our centers, as well as pricing initiatives we implemented at the majority of our centers during the nine months ended September 30, 2021, which have resulted in higher average Center membership dues being charged to new members during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 ; and • 28.6% was from in-center revenue, which increased $65.3 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 . This increase was recognized across all of our primary in-center businesses and reflects the adverse economic impact that our center closures, which resulted from COVID-19, had on our business during the nine months ended September 30, 2020 as well as the timing of the subsequent reopening of our centers. The $8.8 million increase in Other revenue for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by our athletic events business, as we were able to produce several of our iconic events during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 when COVID-19 restrictions forced the cancellation of most of our events . 36 Center operations expenses . The $109.9 million increase in Center operations expenses for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by increased staffing requirements resulting from the subsequent reopening of our centers and the addition of seven new centers. Rent expense . The $16.1 million increase in Rent expense for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by the sale leaseback of five centers occurring since September 30, 2020 , and our taking possession of five sites since September 30, 2020 for future centers where we started incurring GAAP rent expense, most of which is non-cash General, administrative and marketing expenses. The $7.2 million increase in General, administrative and marketing expenses for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by an $7.4 million increase in general and administrative costs due to the return of Corporate team members who remained furloughed during the nine months ended September 30, 2020, a $7.0 million increase in share-based compensation , and a $4.9 million increase in marketing expenses , partially offset by $12.4 million of corporate COVID-19-related expenses that were recognized during the nine months ended September 30, 2020 . Depreciation and amortization . The $11.5 million decrease in Depreciation and amortization for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 consists of $7.7 million and $3.8 million lower depreciation and amortization, respectively. Other operating expenses . The $6.7 million decrease in Other operating expenses for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily attributable to project cost write-offs recognized during the nine months ended September 30, 2020 for sites that were no longer deemed viable for construction as a result of COVID-19, partially offset by higher costs associated with our athletic events business during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 , as we were able to produce several of our iconic events during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 when COVID-19 restrictions forced the cancellation of most of our events. Interest expense, net . The $80.4 million increase in Interest expense, net of interest income for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by debt issuance costs and original issuance discount costs associated with extinguished debt instruments that were written off during the nine months ended September 30, 2021 , including a $41.0 million non-cash expense recognized related to the conversion of our related party secured loan into Series A Preferred Stock. Additionally, the increase also reflects a relatively higher effective weighted average interest rate on an increased average level of outstanding borrowings during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 . Benefit from income taxes . The benefit from income taxes was $58.9 million for the nine months ended September 30, 2021 compared to $99.1 million for the nine months ended September 30, 2020 . The effective tax rate was 17.7% and 26.4% for those same periods, respectively. The change in benefit from income taxes was primarily attributable to: (i) a decrease in our loss before income taxes for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020; (ii) a $41.0 million loss related to the extinguishment of our related party secured loan that we recognized for GAAP purposes during the nine months ended September 30, 2021 that is not recognized for tax purposes; (iii) the recognition during the nine months ended September 30, 2021 of an increase in the valuation allowance to reduce the deferred tax asset associated with our state net operating loss carryforwards; and (iv) the favorable federal tax rate differential from our net operating loss carryback claims filed in 2020 under the CARES Act. The favorable federal tax rate differential was due to our net operating losses generated in tax years with a federal tax rate of 21% whereas the losses were carried back to tax years with a federal tax rate of 35%. Liquidity and Capital Resources Liquidity Our principal liquidity needs include the development of new centers, debt service and lease requirements, investments in technology and expenditures necessary to maintain and update our centers and associated fitness equipment. We have primarily satisfied our historical liquidity needs with cash flow from operations, drawing on the Revolving Credit Facility and through sale-leaseback transactions. We have taken significant action to improve our liquidity. See “—Impact of COVID-19 on Our Business.” We believe the steps we have taken to strengthen our balance sheet and to reduce our cash outflows leave us well-positioned to manage our business including through this pandemic. As the opportunity arises or as our business needs require, we may seek to raise capital through additional debt financing or through equity financing. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, we have not experienced difficulty accessing the credit and capital markets; however, volatility in these markets, particularly in light of the impacts of COVID-19, may increase costs associated with issuing debt instruments or affect our ability to access those markets, which could have an adverse impact on our ability to raise additional capital, to refinance existing debt and/or to react to changing economic and business conditions. In addition, it is possible that our ability to access the credit and capital markets could be limited at a time when we would like, or need, to do so. 37 As of September 30, 2021 , there were no outstanding borrowings on the Revolving Credit Facility and there were $40.1 million of outstanding letters of credit. As of September 30, 2021 , total cash and revolver availability was $262.6 million, consisting of total cash and cash equivalents of $44.8 million and total revolver availability, subject to a $100.0 million minimum liquidity requirement (discussed in —“Debt Covenants” below), of $217.8 million. The following table sets forth certain data included in our condensed consolidated statements of cash flows (in thousands): Nine Months Ended September 30, 2021 2020 Net cash used in operating activities $ (15,322) $ (56,165) Capital expenditures (201,741) (213,876) Net cash used in investing activities (138,190) (62,662) Net cash provided by financing activities 165,129 111,118 Operating Activities The $40.8 million decrease in cash used in operating activities for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily the result of lower profitability during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2021 resulting from the adverse impact that COVID-19 has had on our business. Investing Activities Investing activities consist primarily of purchasing real property, constructing new centers, acquisitions and purchasing new fitness equipment. In addition, we invest in capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment through operating cash flows, draws on our Revolving Credit Facility, tenant allowances and proceeds from sale-leaseback transactions. The $75.5 million increase in cash used in investing activities for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by a relatively higher amount of proceeds that we received from landlords for sale-leaseback transactions during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2021 and proceeds we received from the sale of land held for sale during nine months ended September 30, 2020. Cash used in investing activities for the nine months ended September 30, 2021 also includes a $9.1 million payment we made in connection with the acquisition of the assets associated with an outdoor bicycling event. Of the $10.2 million total purchase price associated with the acquisition of these assets, $1.1 million had yet to be paid as of September 30, 2021 . The following schedule reflects capital expenditures, net by type of expenditure (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Growth capital expenditures (New center land and construction, growth initiatives, major remodels of acquired centers and the purchase of previously-leased centers), net of tenant allowances $ 43,418 $ 25,806 $ 117,605 $ 124,775 Center maintenance capital expenditures 18,078 4,823 43,045 29,075 Corporate capital expenditures 18,272 14,955 41,091 60,026 Total capital expenditures, net $ 79,768 $ 45,584 $ 201,741 $ 213,876 The $12.1 million decrease in total capital expenditures, net for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by lower corporate capital expenditures for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 , reflecting our strong operating discipline and continued effort to control expenditures, partially offset by higher center maintenance capital expenditures for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 , primarily driven by the timing of the subsequent reopening of our centers . Our contracts with construction subcontractors contain clauses that allow us to terminate any project. Therefore, we have the ability to cancel any project and, in the event of such a cancellation, we will only be obligated to pay for work actually performed up to the date of cancellation. Our unpaid obligations to construction subcontractors for work performed up through September 30, 2021 is recognized in Construction accounts payable on our September 30, 2021 condensed consolidated balance sheet. 38 Financing Activities Financing activities for the nine months ended September 30, 2021 and 2020 include net proceeds from and repayments of debt, including those associated with our senior secured credit facility. In addition, financing activities for the nine months ended September 30, 2020 include proceeds from equity transactions. The $54.0 million increase in cash provided by financing activities for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily driven by net proceeds we received from new borrowings during the nine months ended September 30, 2021 in connection with debt refinancing transactions, partially offset by proceeds we received from the issuance of the Company’s common stock during the nine months ended September 30, 2020 . Debt Covenants Our senior secured credit facility as well as the indentures governing our outstanding senior secured notes and senior unsecured notes contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on us include limitations on our ability to: • incur or guarantee additional indebtedness; • make certain investments; • pay dividends or make distributions on our capital stock; • sell assets, including capital stock of restricted subsidiaries; • agree to payment restrictions affecting our restricted subsidiaries; • consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; • enter into transactions with our affiliates; • incur liens; and • designate any of our subsidiaries as unrestricted subsidiaries. We are also required to comply with a first lien net leverage ratio covenant under the Revolving Credit Facility. However, the Amended Senior Secured Credit Facility includes a covenant modification period ending on the earlier of (i) January 1, 2022 or (ii) the date we provide notice of our intention to terminate the Covenant Modification Period. During the Covenant Modification Period, we are not obligated to comply with the first lien net leverage ratio covenant; however, we are required to maintain a minimum liquidity balance of $100.0 million, which is tested monthly. As of both September 30, 2021 and December 31, 2020, we were either in compliance in all material respects with our debt covenants or the covenants were not applicable. Effective as of the end of the first fiscal quarter following the Covenant Modification Period and continuing throughout the remaining term of the Revolving Credit Facility, we will be required to maintain a first lien net leverage ratio, if 30% or more of the Revolving Credit Facility commitments are outstanding shortly after the end of any fiscal quarter (excluding all cash collateralized undrawn letters of credit and other undrawn letters of credit up to $20.0 million). During the first three quarterly test periods following the Covenant Modification Period, certain financial measures used in the calculation of the first lien net leverage ratio will be calculated on a pro forma basis by annualizing the respective financial measures recognized during those test periods.