Tivity Health, Inc. (the “Company”) was founded and incorporated in Delaware in 1981. Through our four programs, SilverSneakers^®senior fitness, Prime^® Fitness, WholeHealth Living^TMand Wisely Well^TM, we are focused on becoming the modern destination for healthy living, especially for seniors and older adults.

Beginning in February 2020, the Board of Directors engaged in a comprehensive review of the Company’s long-term strategy, including reviewing the Company’s core capabilities and ability to best deliver increased shareholder value through actions that would improve our balance sheet and best focus management on the creation of value. On May 6, 2020, we announced that our Board had commenced a process to explore strategic alternatives with respect to the Nutrition business, including a possible transaction.

On October 18, 2020, we entered into a Stock Purchase Agreement (“Purchase Agreement”) with Kainos NS Holdings LP, a Delaware limited partnership (“Parent”), and KNS Acquisition Corp., a Delaware corporation and indirect wholly owned subsidiary of Parent (“Purchaser,” and collectively with Parent, “Kainos”) to sell to Kainos all of the issued and outstanding capital stock of Nutrisystem, Inc. (“Nutrisystem”), a wholly owned subsidiary of the Company that included the Nutrisystem^® and South Beach Diet^® programs, which would result in the disposition of our Nutrition business. Because management did not have the authority to commit to a plan to sell the Nutrition business at September 30, 2020, we concluded that the held for sale criteria were not met in the third quarter of 2020. Upon obtaining Board approval to sell the Nutrition business on October 18, 2020, we met all of the criteria to classify the Nutrition business as held for sale. We concluded that the disposition of the Nutrition business represents a strategic shift that will have a major effect on our operations and financial results. Accordingly, results of operations for Nutrisystem have been classified as discontinued operations for all periods presented in the accompanying consolidated financial statements, and all related assets and liabilities have been classified as discontinued operations at December 31, 2019. Effective as of December 9, 2020, we completed the sale of Nutrisystem to Kainos pursuant to the terms of the Purchase Agreement. At the closing (the “Closing”) of the transactions contemplated by the Purchase Agreement, Nutrisystem and its subsidiaries were acquired by, and became wholly owned subsidiaries of, Kainos.

Our results from continuing operations also do not include the results of MeYou Health, LLC (“MeYou Health”), which we sold in June 2016. Results of operations for MeYou Health have been classified as discontinued operations for all periods presented in the accompanying consolidated financial statements.

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In our opinion, the accompanying consolidated financial statements of Tivity Health, Inc. and its wholly owned subsidiaries (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. We have reclassified certain items in prior periods to conform to current classifications.

In addition, we have recorded a correction to deferred revenue as of January 1, 2018, the earliest date presented in the consolidated financial statements, to reflect additional performance obligations that were unsatisfied at such time. Such adjustment resulted in a $3.2 million increase to deferred revenue, with a related decrease to retained earnings as of January 1, 2018. We concluded that this adjustment was not material to any prior annual or interim period.

Accounts Receivable, net - Accounts receivable includes billed and unbilled amounts. Billed receivables represent fees that are contractually due for services performed or products sold, net of allowances for doubtful accounts (reflected as selling, general and administrative expenses). Allowances for doubtful accounts were $0 at December 31, 2020 and 2019, respectively. Historically, we have experienced minimal instances of customer non-payment and therefore consider our accounts receivable to be collectible; however, we provide reserves, when appropriate, for doubtful accounts on a specific identification basis. Unbilled receivables were $5.7 million and $29.1 million at December 31, 2020 and 2019, respectively, and primarily represent fees recognized for monthly member utilization of fitness facilities under our SilverSneakers fitness solution, billed one month in arrears.

Property and Equipment - Property and equipment is carried at cost and includes expenditures that increase value or extend useful lives. We recognize depreciation using the straight-line method over useful lives of three to seven years for computer software and hardware and four to seven years for furniture and office equipment, and three to five years for equipment. Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the life of the lease, which ranges from two to fifteen years. Depreciation expense, including depreciation of assets recorded under finance leases, for the years ended December 31, 2020, 2019, and 2018 was $9.9 million, $7.1 million, and $4.7 million, respectively.

Other Assets - Other assets consist primarily of 159,309 shares of common stock of Sharecare, Inc. which have a carrying value of $10.8 million and are accounted for as a cost method investment, and customer incentives. We have elected the measurement alternative to measure cost method investments that do not have a readily determinable fair value at cost less impairment, adjusted by observable price changes, with any fair value changes recognized in earnings.

Leases – On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02 using the modified retrospective approach. We recognize right-of-use assets and lease liabilities for leases with contractual terms longer than twelve months, and we categorize such leases as either operating or finance. Finance leases are generally those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. All other leases are categorized as operating leases. Our leases generally have remaining lease terms of one to 45 months, some of which include options to extend the lease for additional periods. Such extension options were not considered in the value of the asset or liability since it is not probable that we will exercise the options to extend. If applicable, allocations among lease and non-lease components would be achieved using relative fair values.

Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.

Costs associated with right-of-use assets are recognized on a straight-line basis within operating expenses over the term of the lease. Finance lease assets are amortized within operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term. See Note 9 for further information on leases.

Intangible Assets - Intangible assets subject to amortization include acquired technology and distributor and provider networks, which we amortized on a straight-line basis over estimated useful lives ranging from three to ten years. All intangible assets related to continuing operations and subject to amortization were fully amortized at December 31, 2020 and 2019.

We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset's fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.

Intangible assets related to continuing operations and not subject to amortization at December 31, 2020 and 2019 consist of a trade name of $29.0 million.

We review indefinite-lived intangible assets for impairment on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. We estimate the fair value of our indefinite-lived tradename using the relief-from-royalty method, which requires us to estimate significant assumptions such as the long-term growth rates of future revenues associated with the tradename, the royalty rate for such revenue, the terminal growth rate of revenue, the tax rate, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradename. See Note 6 for further information on intangible assets.

We review goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. Following the sale of our Nutrition business in December 2020, we have a single reporting unit.

As part of the annual impairment test, we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If we elect not to perform a qualitative assessment or we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative review as described below.

During a quantitative review of goodwill, we estimate the fair value of the reporting unit based on a discounted cash flow model or a combination of a discounted cash flow model and market-based approaches, and we reconcile the fair value of the reporting unit to our consolidated market capitalization. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value. Estimating fair value requires significant judgments, including management's estimate of future cash flows of each reporting unit (which is dependent on internal forecasts of projected income), estimation of the long-term growth rates of future revenues for our reporting units, the terminal growth rate of revenue, the tax rate, and determination of our weighted average cost of capital, as well as relevant comparable company revenue and earnings multiples and market participant acquisition premium for the market-based approaches. Changes in these estimates and assumptions could materially affect the estimate of fair value and potential goodwill impairment for each reporting unit. See Note 6 for further information on goodwill.

Accrued Liabilities – Accrued liabilities primarily include amounts owed for estimated member visits to fitness network locations (which actual visit data is typically received approximately one month in arrears. Estimated amounts accrued for member visits at December 31, 2020 and 2019 were $10.5 million and $28.8 million, respectively.

Income Taxes - We file a consolidated federal income tax return that includes all of our wholly owned subsidiaries. U.S. GAAP generally requires that we record deferred income taxes for the tax effect of differences between the book and tax bases of our assets and liabilities. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income.

l.	Revenue Recognition - On January 1, 2018, we adopted ASU No. 2014-09 using the modified retrospective transition method applied to contracts that were not completed as of January 1, 2018. See Note 4 for a further discussion of revenue recognition.

Marketing Expense – Marketing expense includes media, advertising production, marketing, and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense from continuing operations was $7.2 million, $7.1 million, and $1.0 million in 2020, 2019, and 2018, respectively. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. All other advertising costs are charged to expense as incurred or, in the case of production costs, the first time the advertising takes place. At December 31, 2020 and 2019, $0 million and $1.7 million, respectively, of costs have been prepaid for future advertisements and promotions within continuing operations.

Earnings (Loss) Per Share – Beginning in 2019, we use the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock awards outstanding under our equity incentive plan were participating shares with nonforfeitable rights to dividends. Under the two-class method, we compute earnings per share of common stock by dividing the sum of distributed earnings to common stockholders (not applicable as we do not pay dividends) and undistributed earnings allocated to common stockholders by the weighted average number of outstanding shares of common stock for the period. In applying the two-class method, we allocate undistributed earnings to both shares of common stock and participating securities based on the number of weighted average shares outstanding during the period. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. See Note 15 for a reconciliation of basic and diluted earnings (loss) per share.

o.	Share-Based Compensation – We recognize all share-based payments to employees in the consolidated statements of operations over the required vesting period based on estimated fair values at the date of grant. See Note 7 for a further discussion of share-based compensation.

Derivative Instruments and Hedging Activities – We generally use derivative instruments to add stability to interest expense and to manage our exposure to interest rate movements. We account for derivatives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 815, which establishes accounting and reporting standards requiring that certain derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative’s fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. For derivatives that are designated and qualify as effective cash flow hedges, the unrealized gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as interest expense when the hedged transaction affects earnings. If a derivative instrument ceases to be a highly effective hedge, we will discontinue hedge accounting prospectively for the affected derivative instrument. The application of the authoritative guidance could impact the volatility of earnings. See Note 13 for further information on derivative instruments and hedging activities.

Management Estimates – In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.