Condensed Notes to the Unaudited Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS
GNC Holdings, Inc., a Delaware corporation (“Holdings,” and collectively with its subsidiaries and, unless the context requires otherwise, its and their respective predecessors, the “Company”), is a global health and wellness brand with a diversified, omni-channel business. The Company's assortment of performance and nutritional supplements, vitamins, herbs and greens, health and beauty, food and drink and other general merchandise features innovative private-label products as well as nationally recognized third-party brands, many of which are exclusive to GNC.
The Company's operations consist of three reportable segments, U.S. and Canada, International, and Manufacturing / Wholesale (refer to Note 13, "Segments" for more information). Corporate retail store operations are located in the United States, Canada, Puerto Rico, Ireland and, prior to the joint venture transaction with Harbin Pharmaceutical Group Co., Ltd ("Harbin") in February 2019, China. Franchise locations exist in the United States and approximately 50 other countries. Products can also be purchased through GNC.com, Amazon.com and other marketplaces and select wholesale partners. Additionally, the Company licenses the use of its trademarks and trade names. Prior to the formation of the manufacturing joint venture with International Vitamin Corporation ("IVC") (the "Manufacturing JV") in March 2019, the Company purchased raw materials, manufactured products and sold the finished products through its reportable segments. Refer to Note 8. "Equity Method Investments" for more information of the Company's joint ventures.
Going Concern
As further discussed below, the Company has an accelerated maturity payment due on May 16, 2020 (the “Springing Maturity Date”) that it does not have the ability to pay. Since the Company has not refinanced the $738.7 million of Tranche B-2 Term Loan (the "Tranche B-2 Term Loan), FILO Term Loan (the "FILO Term Loan") and Revolving Credit Facility (the "Revolving Credit Facility") that will become due on the Springing Maturity Date, management has concluded there is substantial doubt regarding the Company's ability to continue as a going concern within one year from the issuance date of the Company’s Consolidated Financial Statements. Failure to complete a refinancing or other restructuring, obtain an extension of the Springing Maturity Date as defined in the Credit Agreements, reach an agreement with required lender groups under the Credit Agreements prior to May 16, 2020 or to reach an agreement with the Company's stakeholders on the terms of an out-of-court restructuring would have a material adverse effect on the Company's liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan. As of March 31, 2020, the Company's outstanding indebtedness has been classified as current on the Company's Consolidated Balance Sheets. In addition, the Company accelerated the amortization of original issuance discount and deferred financing fees for the Tranche B-2 Term Loan, FILO Term Loan and the Revolving Credit Facility of $12.4 million to the Springing Maturity Date.
The Company has continued to experience negative same store sales and declining gross profit. The Company has closed underperforming stores under its store optimization strategy and implemented cost reduction measures to help mitigate the effect of these declines and improve its financial position and liquidity. At March 31, 2020, the Company has substantial indebtedness including $156.4 million of outstanding indebtedness under the Notes issued under that certain Indenture dated as of August 10, 2015, among the Company, certain of its subsidiaries, and The Bank of New York Mellon Trust Company, N.A, maturing on August 15, 2020 (the "Notes") and $434.8 million of outstanding indebtedness under the Amended and Restated Term Loan Credit Agreement, dated as of February 28, 2018, among GNC Corporation, GNC Nutrition Centers, Inc., as Borrower, the lenders and agents parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “Tranche B-2 Term Loan Credit Agreement" and the term loan thereunder, the "Tranche B-2 Term Loan"). The Company made an excess cash flow payment of $25.9 million that was due in April 2020 which reduced the outstanding amount of the Tranche B-2 Term Loan. The Tranche B-2 Term Loan becomes due on the earlier to occur of (i) the maturity date of March 4, 2021 or (ii) May 16, 2020 if more than $50 million of the Notes are outstanding on such date. Each of the Revolving Credit Facility under the Credit Agreement, dated as of February 28, 2018, among GNC Corporation, GNC Nutritional Centers, Inc., as Administrative Borrower, certain of its subsidiaries, as subsidiary borrowers, the lenders and agents parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “ABL Credit Agreement,” and together with the Tranche B-2 Term Loan Credit Agreement, the "Credit Agreements") and the FILO Term Loan under the ABL Credit Agreement, which otherwise mature in August 2022 and December 2022 respectively, also include an accelerated maturity date of May 16, 2020 if more than $50 million of the Notes are outstanding on such
date. The Company does not have the ability to reduce the outstanding balance on the Notes from $156.4 million to below $50 million with projected cash on hand and new borrowings under the Revolving Credit Facility, assuming such borrowings remain available.
The outbreak of novel strain of coronavirus COVID-19 ("COVID-19") caused business disruption in the International segment beginning in January 2020. In late February 2020, the situation escalated as the scope of the COVID-19 outbreak worsened to directly impact areas outside of the Asia-Pacific region, with Europe and the United States recognizing outbreaks of COVID-19. As of March 31, 2020, the Company had temporarily closed approximately 30% of the U.S. and Canada company-owned and franchise stores as a result of the COVID-19 pandemic. There is significant uncertainty on the Company’s business going forward due to various global macroeconomic, operational and supply chain risks as a result of COVID-19.
The Company was in compliance with the debt covenant reporting and compliance obligations under the Credit Agreements as of March 31, 2020. Management does not believe that the Company has the ability to comply with the financial covenants under the Senior Credit Facility Agreements over the next twelve months given the current circumstances stemming from the COVID-19 pandemic.
The Company is in the process of reviewing a range of refinancing options to refinance the Company’s outstanding indebtedness. The Company has been working with an independent committee of the Board supported by independent financial and legal advisors to conduct its review and has had a series of discussions with financing sources in the United States and Asia. The Company will continue to explore all options to refinance and restructure its indebtedness. While the Company continues to work through a number of refinancing alternatives to address its upcoming debt maturities, the Company cannot make any assurances regarding the likelihood, certainty or exact timing of any alternatives.
Reporting requirements under both the Tranche B-2 Term Loan and the Credit Agreement require the Company to provide annual audited financial statements accompanied by an opinion of an independent public accountant without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit (other than a “going concern” statement, explanatory note or like qualification or exception resulting solely from an upcoming maturity date under the Tranche B-2 Term Loan or the Notes). Management believes the Company satisfied this requirement in the 2019 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the "SEC") on March 25, 2020 (the "2019 10-K"). If the lenders take a contrary position, (a) they could decide to instruct the administrative agent under the Senior Credit Agreements to deliver a written notice thereof to the borrower, and if the alleged default continued uncured for 30 days thereafter it would become an alleged event of default (unless waived by the lenders) and (b) the Company intends to contest such position and any action the lenders may attempt to take as a result thereof. If the lenders were to prevail in any such dispute, the required lenders could instruct the administrative agent to exercise remedies under the Senior Credit Agreements, including accelerating the maturity of the loans, terminating commitments under the revolving credit facility under the ABL Credit Agreement and requiring the posting of cash collateral in respect of outstanding letters of credit issued under the Revolving Credit Facility ($4.5 million at March 31, 2020). If this were to occur, management would enter into discussions with the lenders to waive the default or forebear from the exercise of remedies. Failure to obtain such a waiver, complete a refinancing or other restructuring, obtain an extension of the Springing Maturity Date as defined in the Credit Agreements or to reach an agreement with required lender groups under the Credit Agreements prior to May 16, 2020 or to reach an agreement with the Company's stakeholders on the terms of an out-of-court restructuring would have a material adverse effect on the Company's liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan.
The Company’s Consolidated Financial Statements as of March 31, 2020 are being prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements, which have been prepared in accordance with the applicable rules of the Securities and Exchange Commission ("SEC"), include all adjustments (of a normal and recurring nature) that management considers necessary to fairly state the Company's results of operations, financial position and cash flows. The December 31, 2019 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the
United States of America (“U.S. GAAP”). These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Footnotes included in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 25, 2020 (the "2019 10-K"). Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2020.
The preparation of the financial statements in conformity with GAAP requires management to make estimates 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. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances, including considerations for the impact from the outbreak of the COVID-19 pandemic on the Company's business due to various global macroeconomic, operational and supply chain risks as a result of COVID-19. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-used software. This standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Accordingly, the Company has adopted this ASU in the first quarter of 2020, which did not have a material impact on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which introduces a new model to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company has adopted this ASU in the first quarter of 2020, which did not have a material impact on its Consolidated Financial Statements.
The majority of the Company's domestic store and e-commerce revenues are received as cash at the point of sales. The majority of the Company's franchise and wholesale revenues are billed with varying terms for payment. An allowance for credit losses is established based on the aging of the accounts receivable balances, financial condition of our franchisees and other third-party customers, historical write-off experience and current and future economic and market conditions.
The allowance for credit losses related to accounts receivable as of March 31, 2020 and changes for the three months then ended are as follows:
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(in thousands)
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Balance at December 31, 2019
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Charged to costs and expenses
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Deduction
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Balance at March 31, 2020
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Vendor allowance(1)
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$
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14,033
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$
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5,439
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$
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(6,707)
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$
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12,765
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Trade accounts receivable allowance (2)
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8,615
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9,224
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(3,214)
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14,625
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(1) Changes to vendor allowance reserves are recorded as cost of sales on the Consolidated Statement of Operations.
(2) Changes to trade accounts receivable allowance are recorded as selling, general and administrative on the Consolidated Statement of Operations
The Company recognized a $8.7 million allowance for credit losses for its franchisees and other third-party customers and $4.6 million vendor allowance reserves during the three months ended March 31, 2020 based on the current and estimated adverse impacts from the COVID-19. Refer to Note 15. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which simplifies accounting for income taxes by eliminating certain exceptions to ASC 740 related to the general approach for intraperiod tax allocation, methodology for calculating income taxes in an interim period and recognition of deferred taxes when there are investment ownership changes. The new guidance also simplifies aspects of accounting for franchise taxes and interim period effects of enacted changes in tax laws or rates. The new guidance provides clarification on accounting for transactions that result in a step-up in the tax basis of goodwill and allocation of consolidated income tax expense to separate financial statements of entities not subject to income tax. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company is evaluating the impact this standard will have on its Consolidated Financial Statements and related disclosures.
NOTE 3. REVENUE
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied. Generally, this occurs with the transfer of control of products or services. The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is measured as the amount of consideration expected to be received in exchange for transferring goods or providing services. Applicable sales tax collected concurrent with revenue-producing activities is excluded from revenue.
U.S. and Canada Revenue
The following is a summary of revenue disaggregated by major source in the U.S. and Canada segment:
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Three months ended March 31,
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2020
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2019
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U.S. company-owned product sales: (1)
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(in thousands)
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Protein
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$
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73,808
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$
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80,257
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Performance supplements
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67,992
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74,778
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Weight management
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20,516
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30,779
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Vitamins
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48,962
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47,056
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Herbs / Greens
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13,805
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15,873
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Wellness
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39,082
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47,200
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Health / Beauty
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39,485
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46,388
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Food / Drink
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19,199
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28,243
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General merchandise
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4,871
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6,800
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Total U.S. company-owned product sales
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$
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327,720
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$
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377,374
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Wholesale sales to franchisees
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51,056
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58,257
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Royalties and franchise fees
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7,327
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|
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8,472
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Sublease income
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10,242
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10,976
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Cooperative advertising and other franchise support fees
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4,408
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5,067
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Other (2)
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23,428
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29,011
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Total U.S. and Canada revenue
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$
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424,181
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$
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489,157
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(1)Includes e-commerce sales.
(2)Includes revenue primarily related to operations in Canada and the loyalty programs, myGNC Rewards and PRO Access.
International Revenues
The following is a summary of revenue disaggregated by major source in the International reportable segment:
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Three months ended March 31,
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2020
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2019
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(in thousands)
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Wholesale sales to franchisees
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$
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20,183
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$
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25,437
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Royalties and franchise fees
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6,508
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6,202
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Other (1)
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6,854
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9,284
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Total International revenue
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$
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33,545
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$
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40,923
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(1)Includes revenue related to China operations prior to the transfer of the China business to the HK JV and China JV, which was effective February 13, 2019, wholesale sales to the HK JV and China JV, and revenue from company-owned locations in Ireland.
Manufacturing / Wholesale Revenue
The following is a summary of revenue disaggregated by major source in the Manufacturing / Wholesale reportable segment:
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Three months ended March 31,
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2020
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2019
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(in thousands)
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Third-party contract manufacturing(1)
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$
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—
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$
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15,783
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Intersegment sales(1)
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—
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35,505
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Wholesale partner sales
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14,855
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18,901
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Total Manufacturing / Wholesale revenue
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$
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14,855
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$
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70,189
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(1)As a result of the transfer of the Nutra manufacturing business to the newly formed Manufacturing JV effective March 1, 2019, no third-party contract manufacturing and intersegment sales were recognized thereafter.
Revenue by Geography
The following is a summary of revenue by geography:
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Three months ended March 31,
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2020
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2019
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Total revenues by geographic areas(1):
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(in thousands)
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United States
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$
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452,873
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$
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535,943
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Foreign
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19,708
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28,821
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Total revenues
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$
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472,581
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$
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564,764
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(1) Geographic areas are defined based on legal entity jurisdiction.
Balances from Contracts with Customers
Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. The Company's PRO Access and loyalty program points are recorded within deferred revenue and other current liabilities on the Consolidated Balance Sheets. Deferred franchise and license fees are recorded within deferred revenue and other current liabilities and other long-term liabilities on the Consolidated Balance Sheets.
The following table presents changes in the Company’s contract liabilities:
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Three months ended March 31, 2020
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Balance at Beginning of Period
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Recognition of revenue included in beginning balance
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Contract liability, net of revenue, recognized during the period
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Balance at the End of Period
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(in thousands)
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Deferred franchise and license fees
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$
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28,293
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(2,722)
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|
1,303
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|
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$
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26,874
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PRO Access and loyalty program points (1)
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22,896
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(11,879)
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11,096
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|
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22,113
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Gift card liability (1)
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3,110
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(1,367)
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207
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1,950
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Three months ended March 31, 2019
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Balance at Beginning of Period
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Recognition of revenue included in beginning balance
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Contract liability, net of revenue, recognized during the period
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Balance at the End of Period
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(in thousands)
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Deferred franchise and license fees
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$
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33,464
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(2,861)
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|
|
668
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|
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$
|
31,271
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PRO Access and loyalty program points (1)
|
24,836
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(12,423)
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|
|
12,863
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|
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25,276
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Gift card liability (1)
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3,416
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(1,523)
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|
|
181
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|
2,074
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(1) Net of estimated breakage
As of March 31, 2020, the Company had deferred franchise fees with unsatisfied performance obligations extending throughout 2030 of $26.9 million, of which approximately $6.0 million is expected to be recognized over the next 12 months. The Company has elected to use the practical expedient allowed under the rules of adoption to not disclose the duration of the remaining unsatisfied performance obligations for contracts with an original expected length of one year or less.
NOTE 4. INVENTORY
The net realizable value of inventory consisted of the following:
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|
|
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|
|
March 31, 2020
|
|
December 31, 2019
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(in thousands)
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Finished product ready for sale
|
$
|
367,402
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|
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$
|
387,655
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Inventory
|
$
|
367,402
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|
|
$
|
387,655
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As a result of the COVID-19 pandemic, the Company has temporarily closed approximately 1,100, or 30%, of the U.S. and Canada company-owned and franchise stores as of March 31, 2020 and sales trends have significantly declined in the second half of March 2020. Some of the stores temporarily closed may be closed permanently in the future. Due to the store closures, decline in sales trends and estimated adverse impacts on the Company's business as a result of COVID-19, the Company recorded $18.2 million inventory obsolescence reserves during the quarter ended March 31, 2020, of which $17.8 million was recorded within the U.S. and Canada segment and $0.4 million was recorded within the Manufacturing and Wholesale segment.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT, NET
As previously disclosed, as a result of the COVID-19 pandemic, the Company has temporarily closed approximately 1,100, or 30%, of the U.S. and Canada company-owned and franchise stores as of March 31, 2020 and sales trends have significantly declined in the second half of March 2020. Some of the stores temporarily closed may be closed permanently in the future. Due to the store closures, decline in sales trends and estimated adverse impact from COVID-19, the Company recorded $40.3 million of impairment charges and other store closing costs, of which $21.2 million related to right-of-use asset impairments, $11.2 million related to property and equipment impairment and $7.9 million related to other store closing costs, presented as long-lived asset impairments and other store closing costs in the accompanying Consolidated Statement of Operations. Refer to Note 15. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19.
The impairment test was performed at the individual store level, as it is the lowest level in which identifiable cash flows are largely independent of other groups of assets and liabilities. If the undiscounted estimated cash flows were less than the carrying value of the asset group, an impairment charge was calculated by subtracting the estimated fair value of the asset group from its carrying value. Fair value for property, plant and equipment was estimated using a discounted cash flow method (income approach) utilizing the undiscounted cash flows computed in the first step of the test. Fair value for right-of-use asset was estimated using a discounted cash flow method (income approach) based on market participant assumptions.
During the three months ended March 31, 2020, the Company sold its owned location in Boston, MA and recorded a $2.1 million pre-tax gain from the sale recognized within other income, net on the Company's Consolidated Statements of Operations.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Due to the significant decline in the Company's share price in the first quarter of 2020 and current circumstances and estimated adverse impacts from the COVID-19 pandemic, management concluded a triggering event occurred in the first quarter requiring an impairment test of its definite-lived intangible assets, indefinite-lived intangible brand name asset and the goodwill of all reporting units. Refer to Note 15. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19. No impairment was recorded for the Company's definite-lived intangible assets.
Brand Name
Management performed an impairment test for its brand intangible asset, and concluded that the estimated fair value under the relief from royalty method (income approach) was less than its carrying value, which resulted in an impairment charge of $111.7 million. The brand name impairment test was performed in totality as it represents a single unit of account and $88.6 million of the charge was allocated to the U.S. and Canada and the remaining amount was allocated to the International segment. Key assumptions included in the estimation of the fair value include the following:
•Future cash flow assumptions - Future cash flow assumptions include retail sales from the Company’s corporate retail store operations, GNC.com retail sales, wholesale partner sales, China JV and HK JV retail sales, and domestic and international franchise retail sales. Sales were based on organic growth and were derived from historical experience and assumptions regarding future growth, including considerations for the impact from the outbreak of the COVID-19 pandemic on the Company's business. The Company's analysis incorporated an assumed period of cash flows of 10 years with a terminal value.
•Royalty rate - The royalty rates utilized consider external market evidence and internal financial metrics including a review of available returns after the consideration of property, plant and equipment, working capital and other intangible assets. The royalty rate used to estimate the fair values of the Company's reporting units was within a range of 0% - 3%.
•Discount rate - The discount rate was based on an estimated weighted average cost of capital ("WACC") for each business supported by the GNC brand name. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The Company developed its cost of equity estimate based on perceived risks and predictability of future cash flows. The WACC used to estimate the fair values of the Company's reporting units was within a range of 20% to 22%. Any difference
between the WACC among reporting units is primarily due to the precision with which management expects to be able to predict the future cash flows of each reporting unit.
Goodwill
Management performed an impairment test of the Company's goodwill. The results of the impairment test indicated no impairments for GNC.com, International Franchise and Wholesale reporting units. However, The Health Store reporting unit had a fair value below its carrying value, which resulted in a $5.5 million goodwill impairment charge, which was recorded within the International segment.
The Company estimated the fair values of its reporting units in the first quarter of 2020 using a discounted cash flow method (income approach) weighted 50% and a guideline company method (market approach) weighted 50%. The key assumptions used under the income approach include the following:
•Future cash flow assumptions - The Company's projections for its reporting units were based on organic growth and were derived from historical experience and assumptions regarding future growth and profitability trends, including considerations for the impact from the outbreak of the COVID-19 pandemic on the Company's business. The Company's analysis incorporated an assumed period of cash flows of 10 years with a terminal value.
•Discount rate - The discount rate was based on an estimated weighted average cost of capital ("WACC") for each reporting unit. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The Company developed its cost of equity estimate based on perceived risks and predictability of future cash flows. The WACC used to estimate the fair values of the Company's reporting units was within a range of 20% to 22%. Any difference between the WACC among reporting units is primarily due to expectation of achieving the future cash flows of each reporting unit.
The guideline company method involves analyzing transaction and financial data of publicly-traded companies to develop multiples, which are adjusted to account for differences in growth prospects and risk profiles of the reporting unit and comparable.
Goodwill Roll-Forward
The following table summarizes the Company's goodwill activity by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
International
|
|
Manufacturing / Wholesale
|
|
Total
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Goodwill at December 31, 2019
|
|
|
|
|
|
|
|
|
Gross
|
$
|
389,895
|
|
|
$
|
43,330
|
|
|
$
|
141,299
|
|
|
$
|
574,524
|
|
|
Accumulated impairments
|
(380,644)
|
|
|
—
|
|
|
(114,771)
|
|
|
(495,415)
|
|
|
Goodwill
|
9,251
|
|
|
|
43,330
|
|
|
26,528
|
|
|
79,109
|
|
|
2020 Activity:
|
|
|
|
|
|
|
|
|
Impairment
|
—
|
|
|
(5,451)
|
|
|
—
|
|
|
(5,451)
|
|
|
Translation effect of exchange rates
|
—
|
|
|
(106)
|
|
|
—
|
|
|
(106)
|
|
|
Total 2020 activity
|
—
|
|
|
(5,557)
|
|
|
—
|
|
—
|
|
(5,557)
|
|
|
Balance at March 31, 2020
|
|
|
|
|
|
|
|
|
Gross
|
389,895
|
|
|
43,224
|
|
|
141,299
|
|
|
574,418
|
|
|
Accumulated impairments
|
(380,644)
|
|
|
(5,451)
|
|
|
(114,771)
|
|
|
(500,866)
|
|
|
Goodwill
|
$
|
9,251
|
|
|
|
$
|
37,773
|
|
|
$
|
26,528
|
|
|
$
|
73,552
|
|
Intangible Assets
The following table reflects the gross carrying amount and accumulated amortization for each major definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Weighted-Average Life
|
|
Cost
|
|
Accumulated Amortization/Impairment
|
|
Carrying Amount
|
|
Cost
|
|
Accumulated Amortization/Impairment
|
|
Carrying Amount
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name
|
Indefinite
|
|
$
|
720,000
|
|
|
$
|
(531,000)
|
|
|
$
|
189,000
|
|
|
$
|
720,000
|
|
|
|
$
|
(419,280)
|
|
|
$
|
300,720
|
|
|
Retail agreements
|
30.3
|
|
31,000
|
|
|
(13,882)
|
|
|
17,118
|
|
|
31,000
|
|
|
(13,619)
|
|
|
17,381
|
|
|
Franchise agreements
|
25
|
|
70,000
|
|
|
(36,517)
|
|
|
33,483
|
|
|
70,000
|
|
|
(35,817)
|
|
|
34,183
|
|
|
Manufacturing agreements
|
25
|
|
40,000
|
|
|
(20,867)
|
|
|
19,133
|
|
|
40,000
|
|
|
(20,467)
|
|
|
19,533
|
|
|
Other intangibles
|
6.8
|
|
627
|
|
|
(541)
|
|
|
86
|
|
|
639
|
|
|
(529)
|
|
|
110
|
|
|
Franchise rights
|
3
|
|
$
|
7,566
|
|
|
$
|
(7,495)
|
|
|
$
|
71
|
|
|
$
|
7,566
|
|
|
$
|
(7,475)
|
|
|
$
|
91
|
|
|
Total
|
|
|
$
|
869,193
|
|
|
|
$
|
(610,302)
|
|
|
$
|
258,891
|
|
|
$
|
869,205
|
|
|
$
|
(497,187)
|
|
|
$
|
372,018
|
|
NOTE 7. DEBT / INTEREST EXPENSE
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
|
(in thousands)
|
|
|
|
Tranche B-2 Term Loan (net of $2.0 million and $7.0 million discount)
|
434,773
|
|
|
441,500
|
|
|
FILO Term Loan (net of $1.1 million and $8.2 million discount)
|
273,898
|
|
|
266,814
|
|
|
|
|
|
|
|
Notes (net of $2.4 million and $3.9 million conversion feature and $0.3 million and $0.5 million discount)
|
156,427
|
|
|
154,675
|
|
|
Revolving Credit Facility
|
30,000
|
|
|
—
|
|
|
Debt issuance costs
|
(76)
|
|
|
(424)
|
|
|
Total debt
|
895,022
|
|
|
862,565
|
|
|
Less: current debt
|
(895,022)
|
|
|
(180,566)
|
|
|
Long-term debt
|
$
|
—
|
|
|
$
|
681,999
|
|
On February 28, 2018, the Company amended and restated its Senior Credit Facility (the "Amendment", and the Senior Credit Facility as so amended, the "Term Loan Agreement"), which included an extension of the maturity date of the Tranche B-2 Term Loan. In the event that all outstanding amounts under the convertible senior notes exceeding $50 million are not repaid, refinanced, converted or effectively discharged prior to May 16, 2020, the Springing Maturity Date, the maturity date of the Tranche B-2 Term Loan will become the Springing Maturity Date, subject to certain adjustments. As of March 31, 2020, the Company had $434.8 million, net of discount, outstanding under the Tranche B-2 Term Loan. On February 28, 2018, the Company also entered into the ABL Credit Agreement, consisting of:
•a $275.0 million asset-based Term Loan Facility advanced on a “first-in, last-out” basis (the "FILO Term Loan") with a maturity date of December 2022 (which maturity date will become May 2020, subject to certain adjustments, should the Springing Maturity Date be triggered); and
•a $100 million asset-based Revolving Credit Facility (the "Revolving Credit Facility") with a maturity date of August 2022 (which maturity date will become May 2020, subject to certain adjustments, should the Springing Maturity Date be triggered). In connection with the transfer of the Nutra manufacturing and Anderson facility net assets to the manufacturing joint venture (the "Manufacturing JV") with International Vitamin Corporation ("IVC"), the Revolving Credit Facility commitment was reduced from $100 million to $81 million effective March 2019. As of March 31, 2020, there were $30.0 million borrowings outstanding on the Revolving Credit Facility. At March 31, 2020, the Company had $19.9 million available under the Revolving Credit Facility, after giving effect to $30.0 million borrowing outstanding, $4.5 million utilized to secure letters of credit and a $26.6 million reduction to borrowing ability as a result of decrease in net collateral.
The Tranche B-2 Term Loan requires annual aggregate principal payments of at least $43 million and bears interest at a rate of, at the Company's option, LIBOR plus a margin of 8.75% per annum subject to change under certain circumstances (with a minimum and maximum margin of 8.25% and 9.25%, respectively, per annum), or prime plus a margin of 7.75% per annum subject to change under certain circumstances (with a minimum and maximum margin of 7.25% and 8.25%, respectively, per annum). Any mandatory repayments as defined in the credit agreement shall be applied to the remaining annual aggregate principal payments in direct order of maturity. The Company paid $100 million on the Tranche B-2 Term Loan in November 2018 and elected to use the payment to satisfy the scheduled amortization payments on the Term Loan Facility through December 2020. The Term Loan Agreement is secured by a (i) first lien on certain assets of the Company primarily consisting of capital stock issued by General Nutrition Centers, Inc. ("Centers") and its subsidiaries, intellectual property and equipment (“Term Priority Collateral”) and (ii) second lien on certain assets of the Company primarily consisting of inventory and accounts receivable (“ABL Priority Collateral”). The Term Loan Agreement is guaranteed by all material, wholly-owned domestic subsidiaries of the Company (the “U.S. Guarantors”) and by General Nutrition Centres Company, an unlimited liability company organized under the laws of Nova Scotia (together with the U.S. Guarantors, the “Guarantors”).
There are no scheduled amortization payments associated with the FILO Term Loan, which bears interest at a rate of, at the Company's option, LIBOR plus a margin of 7.00% per annum subject to decrease under certain circumstances (with a minimum possible interest rate of LIBOR plus a margin of 6.50% per annum) or prime plus a margin of 6.00% per annum subject to decrease under certain circumstances (with a minimum possible interest rate of prime plus a margin of 5.50% per annum). Outstanding borrowings under the Revolving Credit Facility bear interest at a rate of LIBOR plus 1.50% per annum (subject to an increase of 0.25% or 0.50% based on the amount available to be drawn under the Revolving Credit Facility) or prime plus a margin of 0.50% per annum (subject to an increase of 0.25% or 0.50% based on the amount to be drawn under the Revolving Credit Facility). The Company is also required to pay an annual fee to revolving lenders equal to 1.5% per annum (subject to an increase of 0.25% or 0.50% based on the amount available to be drawn under the Revolving Credit Facility) on outstanding letters of credit and an annual commitment fee of 0.375% on the undrawn portion of the Revolving Credit Facility, which is subject to an increase to 0.5% based on the amount available to be drawn under the Revolving Credit Facility. The FILO Term Loan and Revolving Credit Facility are secured by a (i) first lien on ABL Priority Collateral and (ii) second lien on Term Priority Collateral. The FILO Term Loan and Revolving Credit Facility are guaranteed by the Guarantors.
Under the Company’s Credit Agreements, the Company is required to make certain mandatory prepayments, including a requirement to prepay first the Tranche B-2 Term Loan (until repaid in full) and second the FILO Term Loan (until repaid in full, but only if such prepayment is permitted under the ABL Credit Agreement) in each case annually with amounts based on excess cash flow, as defined in the Company’s Credit Facilities, based on the results of the Company for the prior fiscal year. The payment will be 75% of excess cash flow for each such fiscal year, subject to a reduction to 50% based on the attainment of a certain Consolidated Net First Lien Leverage Ratio, and will be reduced by certain scheduled debt payment amounts. Based on the Company's results for the year ended December 31, 2019, the Company made an excess cash flow payment of $25.9 million in April 2020. The Company made an excess cash flow payment of $9.8 million in April 2019 with respect to the year ending December 31, 2018.
At March 31, 2020, the Company's contractual interest rates under the Tranche B-2 Term Loan, the FILO Term Loan and the Revolving Credit Facility were 10.1%, 8.0% and 4.0%, respectively, which consist of LIBOR plus the applicable margin rate and in the case of Revolving Credit Facility at Prime rate plus the applicable margin rate. At December 31, 2019, the interest rates under the Tranche B-2 Term Loan and the FILO Term Loan were 10.6%, and 8.8%, respectively.
The Company’s Credit Facilities contain customary covenants, including limitations on the ability of GNC Corporation, Centers, and Centers' subsidiaries to, among other things, incur debt, grant liens on their assets, enter into mergers or liquidations, sell assets, make investments or acquisitions, make optional payments in respect of, or modify, certain other debt instruments, pay dividends or other payments on capital stock, or enter into arrangements that restrict their ability to pay dividends or grant liens. Despite these limitations, the Company has the ability to discharge the liabilities of GNC Holdings, Inc. in the ordinary course of business through a variety of alternatives, including a restricted payment basket, a junior lien debt incurrence basket, and repayment of intercompany debt.
In addition, the Term Loan Agreement requires compliance, as of the end of each fiscal quarter of the Company, with a maximum Consolidated Net First Lien Leverage Ratio currently set at 4.25 to 1.00. If the Company’s availability under the Revolving Credit Facility is less than the greater of (i) 12.5% of the borrowing base
or (ii) $12.5 million, then the ABL Credit Agreement requires compliance as of the end of each fiscal quarter with a minimum Fixed Charge Coverage Ratio of 1.00 to 1.00. The Company is currently in compliance with the terms of its Credit Agreements. Given current circumstances around the COVID-19 pandemic as discussed further in Note 15, "Subsequent Events", there can be no assurances as our ability to remain in compliance with the financial covenants under the Senior Credit Facility Agreements over the next twelve months.
As of March 31, 2020, the Company maintains $159.1 million in principal amount of its 1.5% convertible Notes. The Notes consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
|
|
Liability component
|
|
|
|
|
|
Principal
|
$
|
159,097
|
|
|
$
|
159,097
|
|
|
Conversion feature
|
(2,356)
|
|
|
(3,898)
|
|
|
Discount related to debt issuance costs
|
(314)
|
|
|
(524)
|
|
|
Net carrying amount
|
$
|
156,427
|
|
|
$
|
154,675
|
|
As mentioned in Note 1, "Nature of Business," substantial doubt exists concerning the Company's ability to reduce the outstanding balance on the Notes to below $50.0 million. Given this, if we cannot reduce the outstanding balance under the Notes prior to May 16, 2020, the Springing Maturity Date, the Tranche B-2 Term Loan, the Revolving Credit Facility and the FILO Term Loan maturity will accelerate. While the Company continues to work through a number of refinancing alternatives to address its upcoming debt maturities, the Company cannot make any assurances regarding the likelihood, certainty or exact timing of any alternatives. As of March 31, 2020, all debt has been reclassified to current on the Consolidated Balance Sheets. In addition, the Company accelerated the amortization of original issuance discount and deferred financing fees for the Tranche B-2 Term Loan, FILO Term Loan and the Revolving Credit Facility of $12.4 million to the Springing Maturity Date.
Interest Rate Swaps
On June 13, 2018, the Company entered into two interest rate swaps with notional amounts of $275 million and $225 million to limit the exposure of its variable interest rate debt by effectively converting it to a fixed interest rate. The Company receives payments based on the one-month LIBOR and makes payments based on a fixed rate. The Company receives payments with a floor of 0.00% and 0.75%, respectively, on the $275 million and $225 million interest rate swaps, which aligns with the related debt instruments. The interest rate swap agreements had an effective date of June 29, 2018. The $225 million interest rate swap expires on February 28, 2021, and the $275 million interest rate swap expires on June 30, 2021. The notional amount of the $225 million interest rate swap has scheduled decreases to $175 million on June 30, 2019, $125 million on June 30, 2020 and $75 million on December 31, 2020. The Company designated these instruments as cash flow hedges deemed effective upon initiation. The interest rate swaps are recognized on the balance sheet at fair value. When the cash flow hedges are deemed effective, changes in fair value are recorded within other comprehensive loss on the Consolidated Balance Sheets and reclassified into the Consolidated Statement of Operations as interest expense in the period in which the underlying transaction affects earnings.
The fair values of the derivative financial instruments included in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Balance Sheet Classification
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
(in thousand)
|
|
|
|
Other current liabilities
|
|
$
|
9,080
|
|
|
$
|
5,013
|
|
|
Other long-term liabilities
|
|
1,730
|
|
|
1,927
|
|
|
Total liabilities
|
|
$
|
10,810
|
|
|
$
|
6,940
|
|
As mentioned above, if the Company cannot reduce the outstanding balance on the Notes to below $50 million before the Springing Maturity date, the maturity date of the Tranche B-2 and the FILO Term Loan will accelerate. Management does not expect to have sufficient cash flows from operations to repay the indebtedness before the Springing Maturity date. As such, the Company deemed the cash flow hedges as ineffective as the forecasted hedging transactions will not occur by the end of the originally specified time period. The Company reclassified a $10.8 million pre-tax loss previously deferred within accumulated other comprehensive loss to interest expense during the three months ended March 31, 2020.
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Tranche B-1 Term Loan coupon
|
$
|
—
|
|
|
$
|
928
|
|
|
|
|
|
|
Tranche B-2 Term Loan coupon
|
12,339
|
|
|
16,468
|
|
|
|
|
|
|
FILO Term Loan coupon
|
6,826
|
|
|
6,751
|
|
|
|
|
|
|
Revolving Credit Facility
|
149
|
|
|
123
|
|
|
|
|
|
|
Amortization of discount and debt issuance costs
|
15,055
|
|
|
6,043
|
|
|
|
|
|
|
Subtotal
|
34,369
|
|
|
30,313
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
Coupon
|
596
|
|
|
707
|
|
|
|
|
|
|
Amortization of conversion feature
|
1,542
|
|
|
1,701
|
|
|
|
|
|
|
Amortization of discount and debt issuance costs
|
217
|
|
|
244
|
|
|
|
|
|
|
Total Notes
|
2,355
|
|
|
2,652
|
|
|
|
|
|
|
Loss on interest rate swap
|
10,810
|
|
|
—
|
|
|
|
|
|
|
Other
|
(90)
|
|
|
(9)
|
|
|
|
|
|
|
Interest expense, net
|
$
|
47,444
|
|
|
$
|
32,956
|
|
|
|
|
|
NOTE 8. EQUITY METHOD INVESTMENTS
The Company's interests in the Manufacturing, HK and China joint ventures are accounted for as equity method investments due to the Company’s ability to exercise significant influence over management decisions of the joint ventures. Under the equity method, the Company's share of profits and losses from the joint ventures is recorded within income from equity method investments on the Consolidated Statement of Operations. The following table provides a reconciliation of equity method investments on the Company’s Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
|
|
Manufacturing JV
|
$
|
56,684
|
|
|
$
|
75,434
|
|
|
Manufacturing JV capital contribution
|
10,714
|
|
|
10,714
|
|
|
HK JV and China JV
|
10,200
|
|
|
10,342
|
|
|
Income from equity method investments
|
4,618
|
|
|
5,296
|
|
|
Distributions received from equity method investments
|
(3,856)
|
|
|
(3,856)
|
|
|
Manufacturing JV other-than-temporary impairment
|
(35,840)
|
|
|
—
|
|
|
Total Equity method investments
|
$
|
42,520
|
|
|
$
|
97,930
|
|
In February 2019, the Company contributed its China business in exchange for 35% ownership of each of the formed joint ventures with Harbin, the HK JV and China JV. The HK JV includes the operation of the cross-border China e-commerce business, and has an exclusive right to use the Company’s trademarks to manufacture and distribute the Company’s products in China (excluding Hong Kong, Taiwan and Macau) via e-commerce channels. The China JV is a retail-focused joint venture to operate GNC's brick-and-mortar retail business in China and it will have an exclusive right to use the Company's trademarks to manufacture and distribute the Company's products in China (excluding Hong Kong, Taiwan and Macau) via retail stores and pharmacies. The HK JV closed in February 2019 and the China JV agreement is expected to be completed in the second quarter of 2020, following the satisfaction of certain routine regulatory and legal requirements.
In March 2019, the Company entered into a strategic joint venture with IVC regarding the Company's manufacturing business. The Manufacturing JV is responsible for the manufacturing of the products previously produced by the Company at the Nutra manufacturing facility. The Company received $99.2 million from IVC and contributed the net assets of the Nutra manufacturing and Anderson facilities in exchange for an initial 43% equity interest in the Manufacturing JV. In addition, the Company made a capital contribution of $10.7 million to the Manufacturing JV to fund its share of short-term working capital needs. Under the terms of the agreement, IVC has the ability to pay an additional $75.0 million over a four year period from the effective date of the transaction as IVC's ownership of the joint venture increases to 100%. The subsequent purchase price for each year is $18.8 million, adjusted up or down based on the the Company's future purchases from the Manufacturing JV. The Company received the first subsequent purchase price of $15.6 million during the first quarter of 2020. As a result, the Company's ownership of the Manufacturing JV decreased to 32% in March 2020.
Gain (loss) from the net asset exchange
In connection with the formation of the joint ventures effective in the first quarter of 2019, the Company deconsolidated its China business and its Nutra manufacturing business which resulted in a pre-tax gain of $5.8 million and loss of $27.1 million, respectively, recorded within loss on net asset exchange for the formation of the joint ventures on the Consolidated Statements of Operations. The $5.8 million gain from the Harbin transaction was calculated based on the difference between the fair value of the 35% equity interest in the HK JV and China JV, less the carrying value of the contributed China business, including $2.4 million of cash, and third-party closing fees. The $27.1 million loss from the Manufacturing JV transaction was calculated based on the fair value of the 43% equity interest retained in the Manufacturing JV and the $101 million in cash received, less a $1.8 million working capital purchase price adjustment in the second quarter of 2019, less the carrying value of the contributed Nutra and Anderson facilities and third-party closing fees.
As mentioned above, the Company received $15.6 million from IVC in connection with the subsequent purchase of the ownership of the Manufacturing JV in the first quarter of 2020, which resulted in a pre-tax loss of $3.1 million on net asset exchange calculated based on the difference between the cash receipt and the purchase price of $18.8 million. The loss was recorded in (loss) income from equity method investment within the Consolidated Statement of Operations. Additionally, in the first quarter of 2020, the Company recognized a $1.7 million purchase price adjustment related to the Harbin transaction, which was recorded as a loss on net asset exchange within the Consolidated Statements of Operations during the three months ended March 31, 2020.
Other-Than-Temporary Impairment
Due to the current and estimated adverse impacts from the COVID-19 pandemic and the Company's store closures, management expects a decrease in future purchases from the Manufacturing JV resulting in a decline in the value of its equity method investment in the Manufacturing JV. The decline in value was determined to be other-than-temporary which required the equity method investment to be written down to its fair value. The Company recognized $35.8 million other-than-temporary impairment related to its equity method investment in the Manufacturing JV, which was recorded within (loss) income from equity method investment on the Consolidated Statement of Operations during the three months ended March 31, 2020. This impairment charge was derived using Level 3 inputs and was primarily driven by the projected future purchase price of the equity interest in the Manufacturing JV from IVC under the terms of the agreement. As a result of the impairment, the carrying amount of the Company's equity method investment in the Manufacturing JV was $35.8 million less than its share of underlying equity in net assets as of March 31, 2020.
Related Party transactions
The Company purchased approximately $36.4 million and $21.0 million of finished goods from the Manufacturing JV during the three months ended March 31, 2020 and March 31, 2019, respectively, and had approximately $21.1 million and $11.7 million accounts payable outstanding as of March 31, 2020 and December 31, 2019, respectively. In connection with the HK JV, the Company recognized revenue, primarily from wholesale sales and royalties, of $3.8 million and $2.2 million for the three months ended March 31, 2020 and March 31, 2019, respectively, and had $6.5 million and $8.9 million accounts receivable outstanding as of March 31, 2020 and December 31, 2019, respectively.
NOTE 9. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
Accounting Standards Codification 820, Fair Value Measurements and Disclosures defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
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Level 1 — observable inputs such as quoted prices in active markets for identical assets and liabilities;
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Level 2 — observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other inputs that are observable, or can be corroborated by observable market data; and
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Level 3 — unobservable inputs for which there are little or no market data, which require the reporting entity to develop its own assumptions.
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The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued liabilities and the Revolving Credit Facility approximate their respective fair values. Based on the interest rates currently available and their underlying risk, the carrying value of franchise notes receivable recorded in other long-term assets approximates its fair value.
The carrying value and estimated fair value of the forward contracts for the issuance of convertible preferred stock, the Term Loan Facility, net of discount, Notes (net of the equity component classified in stockholders' equity and discount) and the interest rate swaps were as follows:
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March 31, 2020
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December 31, 2019
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Carrying
Amount
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Fair
Value
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Carrying
Amount
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Fair
Value
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(in thousands)
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Liabilities:
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Tranche B-2 Term Loan
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$
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434,773
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|
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$
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239,125
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|
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$
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441,500
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|
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$
|
414,321
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FILO Term Loan
|
273,898
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231,786
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|
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266,814
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265,851
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Notes
|
156,427
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148,606
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154,675
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|
|
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148,488
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Interest rate swaps
|
10,810
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|
|
10,810
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|
|
6,940
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6,940
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The fair values of the term loans were determined using the instruments' trading value in markets that are not active, which are considered Level 2 inputs. The fair value of the Notes was determined based on quoted market prices and bond terms and conditions, which are considered Level 2 inputs. The Company's interest rate
swaps are carried at fair value, which is based primarily on Level 2 inputs utilizing readily observable market data, such as LIBOR forward rates, for all substantial terms of the interest rate swap contracts and the assessment of nonperformance risk.
As described in Note 5, "Property, Plant and Equipment, Net," and Note 6, "Goodwill and Intangible Assets, Net," the Company recorded long-lived asset impairments during the three months ended March 31, 2020. This resulted in the following assets being measured at fair value on a non-recurring basis using Level 3 inputs:
•the indefinite-lived brand name intangible asset at March 31, 2020;
•goodwill at March 31, 2020 for the Health Store reporting unit;
•property and equipment and right-of-use assets at certain of the Company's stores at March 31, 2020;
•equity method investment in the Manufacturing JV at March 31, 2020.
NOTE 10. CONTINGENCIES
The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including claims related to breach of contracts, product liability matters, intellectual property matters and employment-related matters resulting from the Company's business activities.
The Company's contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, except as otherwise noted below with regard to a particular matter, the Company cannot predict with any reasonable certainty the timing or outcome of the legal matters described below, and the Company is unable to estimate a possible loss or range of loss for such matters. If the Company ultimately is required to make any payments in connection with an adverse outcome in any of the matters discussed below, it is possible that it could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.
As a manufacturer, prior to the formation of the Manufacturing JV, and retailer of nutritional supplements and other consumer products that are ingested by consumers or applied to their bodies, the Company has been and is currently subjected to various product liability claims. Although the effects of these claims to date have not been material to the Company, it is possible that current and future product liability claims could have a material adverse effect on its business or financial condition, results of operations or cash flows. The Company currently maintains product liability insurance with a deductible/retention of $4.0 million per claim with an aggregate cap on retained loss of $10.0 million per policy year. The Company typically seeks and has obtained contractual indemnification from most parties that supply raw materials for its products or that manufacture or market products it sells. The Company also typically seeks to be added, and has been added, as an additional insured under most of such parties' insurance policies. However, any such indemnification or insurance is limited by its terms and any such indemnification, as a practical matter, is limited to the creditworthiness of the indemnifying party and its insurer, and the absence of significant defenses by the insurers. Consequently, the Company may incur material product liability claims, which could increase its costs and adversely affect its reputation, revenue and operating income.
Litigation
DMAA / Aegeline Claims. Prior to December 2013, the Company sold products manufactured by third parties that contained derivatives from geranium known as 1.3-dimethylpentylamine/ dimethylamylamine/ 13-dimethylamylamine, or "DMAA," which were recalled from the Company's stores in November 2013, and/or Aegeline, a compound extracted from bael trees. As of March 31, 2020, the Company was named in 27 personal injury lawsuits involving products containing DMAA and/or Aegeline.
These matters are currently stayed pending final resolution.
The Company is contractually entitled to indemnification by its third-party vendors with regard to these matters, although the Company’s ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of the vendors and/or their insurance coverage and the absence of any significant defenses available to their insurers.
California Wage and Break Claims. On February 29, 2012, former Senior Store Manager, Elizabeth Naranjo, individually and on behalf of all others similarly situated, sued General Nutrition Corporation in the Superior Court of the State of California for the County of Alameda. The complaint contains eight causes of action, alleging, among other matters, meal, rest break and overtime violations for which indeterminate money damages for wages, penalties, interest, and legal fees are sought. In June 2018, the Court granted in part and denied in part the Company's Motion for Decertification. In August 2018, the plaintiff voluntarily dismissed the class action claims alleging overtime violations. In November 2019, GNC filed a renewed Motion for Decertification, which was denied by the Court in January 2020. Trial is currently scheduled for July 2020. As of March 31, 2020, an immaterial liability has been accrued in the accompanying financial statements. The Company intends to vigorously defend against the remaining class action claims asserted in this action.
Pennsylvania Fluctuating Workweek. On September 18, 2013, Tawny Chevalier and Andrew Hiller commenced a class action in the Court of Common Pleas of Allegheny County, Pennsylvania. Plaintiff asserted a claim against the Company for a purported violation of the Pennsylvania Minimum Wage Act ("PMWA"), challenging the Company's utilization of the "fluctuating workweek" method to calculate overtime compensation, on behalf of all employees who worked for the Company in Pennsylvania and who were paid according to the fluctuating workweek method. In October 2014, the Court entered an order holding that the use of the fluctuating workweek method violated the PMWA. In September 2016, the Court entered judgment in favor of Plaintiffs and the class in an immaterial amount, which has been recorded as a charge in the accompanying Consolidated Financial Statements. Plaintiffs subsequently filed a petition for an award of attorney's fees, costs and incentive payment. The court awarded an immaterial amount in legal fees. The Company appealed the adverse judgment and the award of attorney's fees. On December 22, 2017, the Pennsylvania Superior Court held that the Company correctly determined the "regular rate" by dividing weekly compensation by all hours worked (rather than 40), but held that the regular rate must be multiplied by 1.5 (rather than 0.5) to determine the amount of overtime owed. Taking accumulated interest into account, the net result of the Superior Court's decision was to reduce the Company's liability by an immaterial amount, which has been reflected in the accompanying Consolidated Financial Statements. The Company filed a petition for appeal to the Pennsylvania Supreme Court on January 22, 2018. The Pennsylvania Supreme Court accepted the Company's petition for appeal and the Company filed its appellant’s brief on August 27, 2018. The Pennsylvania Supreme Court ruled in favor of Plaintiffs. The case has been remanded to the trial court for final resolution.
Oregon Attorney General. On October 22, 2015, the Attorney General for the State of Oregon sued the Company in Multnomah County Circuit Court for alleged violations of Oregon’s Unlawful Trade Practices Act, in connection with its sale in Oregon of certain third-party products. The Company is vigorously defending itself against these allegations. Along with its Amended Answer and Affirmative Defenses, the Company filed a counterclaim for declaratory relief, asking the court to make certain rulings in favor of the Company, and adding USPlabs, LLC and SK Laboratories as counterclaim defendants. In March 2018, the Oregon Attorney General filed a motion for summary judgment relating to its first claim for relief, which the Company contested. The Company filed a cross motion for summary judgment on the first claim for relief, which the Oregon Attorney General contested. Following oral argument in August 2018, the Court denied the State’s motion for summary judgment and granted in part and denied in part the Company’s motion for summary judgment. The parties are in the process of exchanging discovery. Trial is currently scheduled to begin in September 2020.
As any losses that may arise from this matter are not probable or reasonably estimable at this time, no liability has been accrued in the accompanying Consolidated Financial Statements. Moreover, the Company does not anticipate that any such losses are likely to have a material impact on the Company, its business or results of operations. The Company is contractually entitled to indemnification and defense by its third-party vendors. Ultimately, however, the Company's ability to obtain full recovery in respect of any such claims against it is dependent upon the creditworthiness of its vendors and/or their insurance coverage and the absence of any significant defenses available to their insurers.
E-Commerce Pricing Matters. In April 2016, Jenna Kaskorkis, et al. filed a complaint against General Nutrition Centers, Inc. followed by similar cases brought forth by Ashley Gennock in May 2016 and Kenneth Harrison in December 2016. Plaintiffs allege that the Company's promotional pricing on its website was misleading and did not fairly represent promotions based on average retail prices over a trended period of time being consistent with prices advertised as promotional. A tentative agreement was reached in the third quarter of 2017 on many of the key terms of a settlement. In December 2019, the Court approved the settlement agreement. The Company currently expects any settlement to be in a form that does not require the recording of a contingent liability.
Government Regulation
In November 2013, the Company received a subpoena from the U.S. Department of Justice ("DOJ") for information related to its investigation of a third party product vendor, USPlabs, LLC. The Company fully cooperated with the investigation of the vendor and the related products, all of which were discontinued in 2013. In December 2016, the Company reached agreement with the DOJ in connection with the Company's cooperation, which agreement acknowledges the Company relied on the representations and written guarantees of USPlabs and the Company's representation that it did not knowingly sell products not in compliance with the Federal Food, Drug and Cosmetic Act (the "FDCA"). Under the agreement, which included an immaterial payment to the federal government, the Company will take a number of actions to broaden industry-wide knowledge of prohibited ingredients and improve compliance by vendors of third party products. These actions are in keeping with the leadership role the Company has taken in setting industry quality and compliance standards, and the Company's commitment over the course of the agreement (60 months) to support a combination of its own and the industry's initiatives. Some of these actions include maintaining and continuously updating a list of restricted ingredients that will be prohibited from inclusion in any products that are sold by the Company. Vendors selling products to the Company for the sale of such products by the Company will be required to warrant that the products sold do not contain any of these restricted ingredients. In addition, the Company will develop and maintain a list of ingredients that the Company believes comply with the applicable provisions of the FDCA.
Environmental Compliance
As part of soil and groundwater remediation conducted at the Nutra manufacturing facility pursuant to an investigation conducted in partnership with the South Carolina Department of Health and Environmental Control (the "DHEC"), the Company completed additional investigations with the DHEC's approval, including the installation and operation of a pilot vapor extraction system under a portion of the facility in the second half of 2016, which was an immaterial cost to the Company. After an initial monitoring period, in October of 2017 the DHEC approved a work plan for extended monitoring of such system and the contamination into 2021. While the Company contributed the net assets of the Nutra manufacturing and Anderson facilities to the Manufacturing JV in March of 2019 (refer to Note 8 “Equity Method Investments” for additional information), we retained certain liabilities, including historical environmental liabilities, related to the facilities. As such, the Company and the Manufacturing JV will continue to consult with the DHEC on the next steps in the work after their review of the results of the extended monitoring is complete. At this stage of the investigation, however, it is not possible to estimate the timing and extent of any additional remedial action that may be required, the ultimate cost of remediation, or the amount of our potential liability. Therefore, no liability has been recorded in the Company's Consolidated Financial Statements.
In addition to the foregoing, the Company is subject to numerous federal, state, local and foreign environmental and health and safety laws and regulations governing its operations, including the handling, transportation and disposal of non-hazardous and hazardous substances and wastes, as well as emissions and discharges from its operations into the environment, including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could result in costs for remedial actions, penalties or the imposition of other liabilities, including certain historic liabilities retained by the Company pursuant to the terms of the Manufacturing JV. New laws, changes in existing laws or the interpretation thereof, or the development of new facts or changes in their processes could also cause the Company to incur additional capital and operating expenditures to maintain compliance with environmental laws and regulations and environmental permits. The Company is also subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties, or for properties to which substances or wastes that were sent in connection with current or former operations at its facilities.
From time to time, the Company has incurred costs and obligations for correcting environmental and health and safety noncompliance matters and for remediation at or relating to certain of the Company's current or former properties or properties at which the Company's waste has been disposed. However, compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the Company's capital expenditures, earnings, financial position, liquidity or competitive position. The Company believes it has complied with, and is currently complying with, its environmental obligations pursuant to environmental and health and safety laws and regulations and that any liabilities for noncompliance will not have a material adverse effect on its business, financial performance or cash flows. However, it is difficult to predict future liabilities and obligations, which could be material.
NOTE 11. MEZZANINE EQUITY
Holdings is authorized to issue up to 60.0 million shares of preferred stock, par value $0.001 per share. On February 13, 2018, the Company entered into a Securities Purchase Agreement (as amended from time to time, the “Securities Purchase Agreement”) by and between the Company and Harbin Pharmaceutical Group Holdings Co., Ltd. (the “Investor”), pursuant to which the Company agreed to issue and sell to the Investor, and the Investor agreed to purchase from the Company, 299,950 shares of a newly created series of convertible preferred stock of the Company, designated the “Series A Convertible Preferred Stock” (the “Convertible Preferred Stock”), for a purchase price of $1,000 per share, or an aggregate of approximately $300 million (the “Securities Purchase”). The Convertible Preferred Stock is convertible into 56.1 million shares of the Company's Common Stock at an initial conversion price of $5.35 per share, subject to customary anti-dilution adjustments. On November 7, 2018, The Company entered into an Amendment to the Securities Purchase Agreement with the Investor. Pursuant to the terms of the Securities Purchase Agreement, the Investor assigned its interest in the Securities Purchase Agreement to Harbin and funded the $300 million investment in three separate tranches. The shares of Convertible Preferred Stock were issued as follows: (i) 100,000 shares of Convertible Preferred Stock issued on November 8, 2018 for a total purchase price of $100 million (the "Initial Issuance"), (ii) 50,000 shares of Convertible Preferred Stock issued on January 2, 2019 for a total purchase price of $50 million (the "Second Issuance") and (iii) 149,950 shares of Convertible Preferred Stock issued on February 13, 2019 for a total purchase price of approximately $150 million (the “Third Issuance”).
Holders of shares of Convertible Preferred Stock are entitled to receive cumulative preferential dividends, payable quarterly in arrears, at an annual rate of 6.5% of the stated value of $1,000 per share, subject to increase in connection with the payment of dividends in kind. Dividends are payable, at the Company's option, in cash from legally available funds or in kind by issuing additional shares of Convertible Preferred Stock with such stated value equal to the amount of payment being made or by increasing the stated value of the outstanding Convertible Preferred Stock by the amount per share of the dividend or in a combination thereof.
As of March 31, 2020, the Company had issued a total of 299,950 shares of Convertible Preferred Stock. The Convertible Preferred Stock was recorded as Mezzanine Equity, net of issuance cost, on the Consolidated Balance Sheets because the shares are redeemable at the option of the holder if a fundamental change occurs, which includes change in control or delisting (a "Fundamental Change"). The guaranteed Second Issuance and Third Issuance were considered forward contracts that represented an obligation to both parties until the shares were issued. The forward contracts were recorded at fair value on the Consolidated Balance Sheets as of December 31, 2018, with any changes in fair value recorded in earnings in the Consolidated Statements of Operations. The Company recorded a $16.8 million loss on forward contracts for the issuance of Convertible Preferred Stock during the first quarter of 2019. Upon issuance of the shares associated with the forward contracts, the carrying value of the forward contracts were recorded to Mezzanine Equity.
The Convertible Preferred Stock is not currently redeemable and is only redeemable upon a Fundamental Change at the stated value plus any accumulated and unpaid dividends on such shares on the fundamental change date. The Company does not believe a Fundamental Change is considered probable until it occurs. Subsequent adjustment of the amount presented in temporary equity is unnecessary if it is not probable that the instrument will become redeemable. As the Convertible Preferred Stock is only redeemable upon a Fundamental Change, the occurrence of which is not probable, we will not accrete the Convertible Preferred Stock to its redemption value until it occurs. As such, the Company will recognize changes in the redemption value to the Convertible Preferred Stock as they occur and adjust the carrying value to the redemption value at the end of each reporting period as if the end of the reporting period were also the redemption date for the Convertible Preferred Stock. As of March 31, 2020, the stated value of the Convertible Preferred Stock is $300.0 million (299,950 shares at $1,000 per share) and there are accumulated and unpaid dividends on such shares of $25.0 million. As of December 31, 2019, the stated value of the Convertible Preferred Stock was $300.0 million (299,950 shares at $1,000 per share) and there were accumulated and unpaid dividends on such share of $19.8 million.
NOTE 12. EARNINGS PER SHARE
The following table represents the Company's basic and dilutive weighted-average shares:
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|
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Three months ended March 31,
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|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
83,897
|
|
|
83,510
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
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|
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Effect of dilutive stock-based compensation awards
|
—
|
|
|
—
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|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
83,897
|
|
|
83,510
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|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2020 and 2019, all 6.8 million and 4.0 million, respectively, outstanding stock-based awards were excluded from the computation of diluted earnings per shares ("EPS") because the Company was in a net loss position and as a result, inclusion of the awards would have been anti-dilutive.
The Company has applied the if-converted method to calculate dilution on the Convertible Preferred Stock and the Notes in the current quarter, which has resulted in all 59.9 million and 2.4 million shares underlying the Convertible Preferred Stock and the Notes, respectively, being anti-dilutive.
The computations for basic and diluted loss per common share are as follows:
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Three months ended March 31,
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|
|
2020
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|
2019
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|
|
|
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(in thousands, except per share data)
|
|
|
|
|
|
|
|
Loss per common share - Basic
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(200,086)
|
|
|
$
|
(15,262)
|
|
|
|
|
|
|
Cumulative undeclared convertible preferred stock dividend
|
5,195
|
|
|
3,716
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
(205,281)
|
|
|
(18,978)
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
83,897
|
|
|
83,510
|
|
|
|
|
|
|
Loss per common share - basic
|
$
|
(2.45)
|
|
|
$
|
(0.23)
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|
|
|
|
|
|
Loss per common share - Diluted
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(200,086)
|
|
|
$
|
(15,262)
|
|
|
|
|
|
|
Cumulative undeclared convertible preferred stock dividends
|
5,195
|
|
|
3,716
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
(205,281)
|
|
|
(18,978)
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted
|
83,897
|
|
|
83,510
|
|
|
|
|
|
|
Loss per common share - diluted
|
$
|
(2.45)
|
|
|
$
|
(0.23)
|
|
|
|
|
|
NOTE 13. SEGMENTS
The Company aggregates its operating segments into three reportable segments, which include U.S. and Canada, International and Manufacturing / Wholesale. Warehousing and distribution costs have been allocated to each reportable segment based on estimated utilization and benefit. The Company's chief operating decision maker (its chief executive officer) evaluates segment operating results based primarily on operating income. Operating income of each reportable segment excludes certain items that are managed at the consolidated level, such as corporate costs. The Manufacturing / Wholesale segment, prior to the formation of the Manufacturing JV, manufactured and sold product to the U.S. and Canada and International segments at cost with a markup, which was eliminated at consolidation.
Due to the current and estimated adverse impacts from the COVID-19 pandemic, during the three months ended March 31, 2020, the Company recorded $157.5 million long-lived asset impairments and other store closing costs ($128.9 million within U.S. and Canada; $28.6 million within International), $22.8 million reserves related to inventory obsolescence and vendor allowances ($22.4 million within U.S. and Canada; $0.4 million within Manufacturing / Wholesale), and $8.7 million allowance for doubtful accounts ($7.9 million within U.S. and Canada; $0.8 million within International). Refer to Note 15. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19.
The following table represents key financial information for each of the Company's reportable segments:
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|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
424,181
|
|
|
$
|
489,157
|
|
|
|
|
|
|
International
|
33,545
|
|
|
40,923
|
|
|
|
|
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
—
|
|
|
35,505
|
|
|
|
|
|
|
Third-party contract manufacturing
|
—
|
|
|
15,783
|
|
|
|
|
|
|
Wholesale partner sales
|
14,855
|
|
|
18,901
|
|
|
|
|
|
|
Subtotal Manufacturing / Wholesale
|
14,855
|
|
|
70,189
|
|
|
|
|
|
|
Total reportable segment revenues
|
472,581
|
|
|
600,269
|
|
|
|
|
|
|
Elimination of intersegment revenues
|
—
|
|
|
(35,505)
|
|
|
|
|
|
|
Total revenue
|
$
|
472,581
|
|
|
$
|
564,764
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
(131,200)
|
|
|
$
|
52,100
|
|
|
|
|
|
|
International
|
(17,382)
|
|
|
14,050
|
|
|
|
|
|
|
Manufacturing / Wholesale
|
6,931
|
|
|
15,344
|
|
|
|
|
|
|
Total reportable segment operating income
|
(141,651)
|
|
|
81,494
|
|
|
|
|
|
|
Corporate costs
|
(24,835)
|
|
|
(26,261)
|
|
|
|
|
|
|
Loss on net asset exchange for the formation of the joint ventures
|
(1,655)
|
|
|
(19,514)
|
|
|
|
|
|
|
Other
|
2,107
|
|
|
(237)
|
|
|
|
|
|
|
Unallocated corporate costs, loss on net asset exchange and other
|
(24,383)
|
|
|
(46,012)
|
|
|
|
|
|
|
Total operating (loss) income
|
(166,034)
|
|
|
35,482
|
|
|
|
|
|
|
Interest expense, net
|
47,444
|
|
|
32,956
|
|
|
|
|
|
|
Loss on forward contracts for the issuance of convertible preferred stock
|
—
|
|
|
16,787
|
|
|
|
|
|
|
Loss before income taxes
|
$
|
(213,478)
|
|
|
$
|
(14,261)
|
|
|
|
|
|
Refer to Note 3, "Revenue" for more information on the Company's reportable segments.
NOTE 14. INCOME TAXES
The Coronavirus Aid, Relief, and Economic Security Act ("CARES" Act) signed into law on March 27, 2020 in response to the COVID-19 pandemic, provides additional avenues of financial relief and assistance to individuals and businesses, including tax relief. The CARES Act includes, among other items, provisions relating to payroll tax credits and deferrals, net operating loss carry back periods, alternative minimum tax credits, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also temporarily and retroactively increases the limitation on the deductibility of interest expense under Internal Revenue Code Section 163(j)(1) from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020. The Company is currently evaluating the impact of the provisions of the CARES Act.
The Company recognized $53.0 million of income tax benefit during the three months ended March 31, 2020 compared with $2.0 million of income tax expense in the prior year quarter. The Company's income tax expense is based on income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. The Company’s year-to-date tax provision is calculated by applying the most recent annualized effective tax rate to year-to-date pre-tax ordinary income. The Company’s 2020 annual effective tax rate was impacted by a $27.6 million partial valuation allowance for attributes expected to be generated in 2020 that may not be realizable, the other-than-temporary impairment of the Manufacturing JV, and the benefit of the federal tax rate differential related to federal net operating losses generated during the current year that are expected to be carried back to prior years at a 35% rate. The 2019 effective tax rate was significantly impacted by a gain for tax purposes resulting from the transfer of the Nutra manufacturing net assets to the Manufacturing JV and the establishment of a partial valuation allowance for attributes generated in the 2019 year that may not be realizable. The tax impacts of unusual or infrequent items are recorded discretely in the interim period in which they occur. During the three months ended March 31, 2020, the Company discretely recorded a permanent $4.8 million benefit related to the release of valuation allowances on the Federal interest expense limitation generated in 2019, resulting from the passage of the CARES Act which retroactively changed the 2019 Federal interest expense limitation from 30% to 50% of adjusted taxable income.
During the fourth quarter of the year ended December 31, 2019, as further discussed in Note 1, "Nature of Business," management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern. Management considered this in concluding that certain deferred tax assets were no longer more likely than not realizable. As a result, increase in valuation allowance of $27.6 million and $27.1 million on the Company’s deferred tax assets were recorded as of March 31, 2020 and December 31, 2019, respectively, which related principally to Federal deferred tax assets, state NOL carryforwards, and other state tax attributes. These increases were partially offset by valuation allowance decreases of $4.8 million as of March 31, 2020 and December 31, 2019.
At March 31, 2020 and December 31, 2019, the Company had $10.8 million and $10.7 million of unrecognized tax benefits, respectively, excluding interest and penalties, which if recognized, would affect the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company accrued $2.8 million at March 31, 2020 and $2.1 million at December 31, 2019, for potential interest and penalties associated with uncertain tax positions. To the extent interest and penalties are not assessed with respect to the ultimate settlement of uncertain tax positions, amounts previously accrued will be reversed as a reduction to income tax expense.
Holdings files a consolidated federal tax return and various consolidated and separate tax returns as prescribed by the tax laws of the state, local and international jurisdictions in which it and its subsidiaries operate. The statutes of limitation for the Company’s U.S. federal income tax returns are closed for years through 2013. The Company has various state and local jurisdiction tax years open to examination (the earliest open period is generally 2011).
NOTE 15. SUBSEQUENT EVENTS
The Company is closely monitoring the current and future potential impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. The Company incurred significant disruptions during the three months ended March 31, 2020 from COVID-19, and the Company's estimates on the future impact that COVID-19 will have on the Company's financial position and operating results is subject to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on our operations), impacts on the Company's supply chain, the effect on customer
demand, store closures or changes to our operations. The health of the Company's workforce, and the ability to meet staffing needs in stores, distribution facilities, wholesale operations and other critical functions cannot be predicted and is vital to our operations. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. As of May 6, 2020, approximately 1,300, or 40%, of the U.S. and Canada company-owned and franchise retail stores were closed due to the COVID-19 pandemic.
In addition, the Company cannot predict with certainty the impact that COVID-19 will have on its customers, vendors, suppliers and other business partners; however, any material effect on these parties could adversely impact the Company. The situation surrounding COVID-19 remains fluid, and the Company is actively managing its response in collaboration with customers, government officials, team members and business partners and assessing potential impacts to its financial position and operating results, as well as adverse developments in the business.
Due to the adverse impacts of COVID-19, the Company withheld rent and other occupancy payments beginning in April 2020 for certain of its retail locations as management negotiates with landlords for rent concessions. The Company withheld rent and other occupancy payments of approximately $19 million in April 2020 and approximately $16 million in May 2020. In the event that withholding these rent payments would constitute an event of default per the lease agreement, management intends to negotiate resolution with the landlord. If such negotiations are not successful, the lease liabilities associated with those leases could become immediately due and payable. The Company has elected FASB's modification guidance to account for rent concessions related to the effects of the COVID-19 pandemic. The Company will not apply the lease modification guidance under ASC 842 to rent concessions that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract. If other terms of the lease are changed or renegotiated in connection with the concession process, then the changes will be treated as a modification in accordance with ASC 842.