Condensed Notes to the Unaudited Consolidated Financial Statements
NOTE 1. NATURE OF BUSINESS
GNC Holdings, Inc., a Delaware corporation ("GNC," “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 14. "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. Following the establishment of the Manufacturing JV, the Company's operations consist of wholesale and retail sales. Refer to Note 9. "Equity Method Investments" for more information on the Company's joint ventures.
Voluntary Filing Under Chapter 11
On June 23, 2020 (the “Petition Date”), the Company and certain of its U.S. subsidiaries (collectively, the “Debtors”) filed a Restructuring Support Agreement (the "RSA") and commenced voluntary Chapter 11 proceedings (the “Chapter 11 Cases”) under Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). See Note 3. "Reorganization and Chapter 11 Proceedings" for listing of our non-Debtor subsidiaries. The Debtors have requested that the Chapter 11 proceedings be jointly administered under the caption In re GNC Holdings, Inc., et al., Case No. 20-11662. Documents and other information related to the Chapter 11 Cases is available online through Prime Clerk, our claims administrator for the Chapter 11 Cases. In addition, the Company’s Canadian subsidiary voluntarily commenced parallel proceedings under the Companies' Creditors Arrangement Act ("CCAA") in Canada in the Ontario Superior Court of Justice on June 24, 2020 (the “Canadian Petition Date”). As a result, we deconsolidated General Nutrition Centres Company (“GNC Canada”), our wholly owned subsidiary, subsequent to the Canadian Petition Date. As such, all amounts presented in these Consolidated Financial Statements and notes thereto exclude the operating results and cash flows of GNC Canada subsequent to June 24, 2020 and the assets, liabilities and equity of GNC Canada as of June 30, 2020. Prior period amounts have not been adjusted.
The Consolidated Financial Statements included herein have been prepared in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852, Reorganizations. See Note 3. "Reorganization and Chapter 11 Proceedings" for further details.
Going Concern
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. However, our business has been further adversely affected by the outbreak of the coronavirus, or COVID-19. Due to the COVID-19 pandemic, U.S. and Canada company-owned and franchise retail store temporary closures reached approximately 1,400 stores, or 40%, in April 2020 and have steadily re-opened since then. 551 of these stores have been permanently closed with an effective date in June 2020, in connection with the Chapter 11 Cases in which the Bankruptcy Court authorized the Debtors to reject certain unexpired U.S and Canada company-owned and franchise leases as discussed further in Note 3. "Reorganization and Chapter 11 Proceedings." As of June 30, 2020, the Company had over 100, or 4%, of the U.S. and Canada company-owned and franchise retail stores temporarily closed due to the COVID-19 pandemic. There is significant uncertainty relating to the impacts of COVID-19 on the Company’s business going forward due to various global macroeconomic, operational and supply chain risks.
Additionally, economic conditions and the risks and uncertainties associated with the Chapter 11 Cases, raise substantial doubt about our ability to continue as a going concern. We currently expect that the Company’s cash flows, cash on hand and financing obtained during the course of bankruptcy should provide sufficient liquidity for the Company during the Chapter 11 Cases. However, the significant risks and uncertainties related to the Company’s liquidity and the Chapter 11 Cases raise substantial doubt about the company’s ability to continue as a going concern within twelve months from the report release date of August 10, 2020.
The accompanying Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company's ability to continue as a going concern is dependent on many factors, including the consummation of the Chapter 11 Cases in a timely manner, the ability to reopen its stores as a result of the potential recovery from COVID-19 and its ability to restructure certain leasing arrangements pursuant to the provisions of the Bankruptcy Code. The Company filed a Plan of Reorganization (the "Plan") on July 15, 2020 with the Bankruptcy Court which supports our going concern assessment. However, the outcome of the Chapter 11 Cases is subject to significant uncertainty and depends upon factors outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. There can be no assurance that the Company will confirm and consummate the Plan as contemplated by the RSA entered into by the Debtors on June 23, 2020 or complete an alternative plan of reorganization.
Delisting of Common Units from NYSE
On June 30, 2020, the Company’s common stock was suspended from trading on the New York Stock Exchange (the “NYSE”) as a result of the Debtors’ filing of the Chapter 11 Cases. Effective July 1, 2020, trades in the Company’s common stock are quoted on the OTC Pink Marketplace under the symbol “GNCIQ.” On July 1, 2020, the NYSE filed a Form 25 to delist the Company’s common stock and to remove it from registration under Section 12(b) of the Exchange Act.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements, which have been prepared in accordance with the applicable rules of the SEC, include all adjustments 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 GAAP. These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes 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. Furthermore, while operating as debtors-in-possession ("DIP") under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to restrictions of the DIP financing and applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying unaudited Consolidated Financial Statements. Any such actions occurring during the Chapter 11 Cases confirmed by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in the unaudited Consolidated Financial Statements.
Restricted cash comprises current cash that is restricted as to withdrawal or usage. As of June 30, 2020, the Company had $15.7 million of restricted cash related to funds in escrow from the postpetition DIP financing obtained in the course of bankruptcy.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update ("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, and changes for the three and six months then ended June 30, 2020 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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Charged to costs and expenses
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Deduction
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Balance at June 30, 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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$
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2,698
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$
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—
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$
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15,463
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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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3,164
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(526)
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17,263
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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 records credit losses for vendor allowance reserves and trade accounts receivable for balances estimated to be uncollectible considering the aging of receivable balances and financial condition of our vendors and franchisees. Due to the estimated adverse impacts from COVID-19, the Company recognized an $8.7 million allowance for credit losses for its franchisees and other third-party customers and $4.6 million vendor allowance reserves during the first quarter of 2020. Refer to Note 16. "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. Reorganization and Chapter 11 Proceedings
On the Petition Date, the Chapter 11 Cases were filed. The Debtors filed certain motions and applications intended to limit the disruption of the Chapter 11 Cases on its operations. Since the commencement of the Chapter 11 Cases, the Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
Chapter 11 Accounting
The Company has applied ASC 852 in preparing our Consolidated Financial Statements. ASC 852 requires the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the Company's reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the unaudited Consolidated Statements of Operations. In addition, prepetition obligations that are unsecured or undersecured that may be impacted by the Chapter 11 Cases have been classified on the unaudited Consolidated Balance Sheet at June 30, 2020 as liabilities subject to compromise. These liabilities are reported at the amounts the Company currently anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Under the Bankruptcy Code, the Debtors may assume, assume and assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach subject, in the case of the rejection of unexpired leases of real property, to certain caps on damages. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtor’s estate for such damages. Generally, the assumption or assumption and assignment of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance thereunder. Accordingly, any description of an executory contract or unexpired lease with the Debtor in this quarterly report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.
Leases
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 negotiated with landlords for rent concessions. The Company had unpaid rent and other occupancy payments of approximately $47 million as of June 30, 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. We also intend to reject certain lease arrangements throughout the Chapter 11 Cases.
On July 20, 2020, the Bankruptcy Court authorized the Debtors to reject certain unexpired U.S and Canada company-owned and franchise leases, 551 of which were rejected with an effective termination date in June 2020. As a result, for each rejected lease, we have extinguished the related right-of-use asset and lease liability, and recorded the expected allowed claim amount in liabilities subject to compromise ("LSTC") as of June 30, 2020, the effects of which were not material.
As of June 30, 2020, the Company identified a trigger event as it relates to the impairment of certain right-of-use assets. See further discussion in Note 6. "Property, Plant and Equipment, Net." For any leases not rejected by the Bankruptcy Court as of August 10, 2020, we have continued to account for these leases under ASC 842, amortizing the right-of-use assets and evaluating for impairment and/or revisions to the assets' useful lives. We anticipate rejecting additional leases in the course of bankruptcy. As of the Petition Date, we have classified all lease liabilities within LSTC.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.
Deconsolidation of GNC Canada
GNC Canada filed parallel proceedings in the Canadian Court. Any significant business decision which would impact our Canadian business requires the approval of both the U.S. and Canadian Courts as they have equal and plenary authority. As joint control by the U.S. and Canadian Courts does not constitute continued common control by the parent, the Company has deconsolidated GNC Canada effective as of the Canadian Petition Date consistent with ASC 810, Consolidation. Additionally, as the Company does not have significant influence over GNC Canada while in bankruptcy, GNC will record and account for its investment in GNC Canada using the cost method under ASC 321, Investments - equity securities, as of the date of deconsolidation. The operating results of GNC Canada are reflected in our Consolidated Statements of Operations through the date of deconsolidation.
We recorded a $5.0 million loss within Reorganization items, net related to the deconsolidation of GNC Canada during the three and six months ended June 30, 2020. The loss reflects the re-measurement of our net investment in GNC Canada to its estimated fair value of $13.6 million. Included in the loss was the reclassification of $5.6 million of cumulative foreign currency translation adjustments related to GNC Canada from Accumulated other comprehensive loss.
Subsequent to the deconsolidation, transactions with GNC Canada are no longer eliminated in consolidation and are considered related party transactions. Transactions between GNC and GNC Canada were not material during the 6 days ended June 30, 2020.
Prepetition professional fees
Expenses, gains and losses that are realized or incurred before the Petition Date and in relation to the Chapter 11 Cases are recorded under selling, general and administrative charges on our Consolidated Statements of Operations. Prepetition professional fees related to the Chapter 11 Cases were $34.2 million for the three and six months ended June 30, 2020.
Debtor-In-Possession (“DIP”) Financing
Debtor-in-Possession Credit Agreements
In connection with the Chapter 11 Cases, on June 24, 2020, GNC Corporation and General Nutrition Centers, Inc. (collectively, the “Borrower”) entered into the following DIP financing arrangements (collectively, the "DIP Credit Agreements"):
1. The Borrower entered into a Debtor-in-Possession Term Loan Credit Agreement (the “DIP Term Loan Credit Agreement”), with GLAS Trust Company, LLC, as administrative agent and collateral agent, and the lenders party thereto (collectively, the “TL DIP Lenders”), to obtain a senior secured super-priority DIP term loan (the “DIP Term Loan Facility”), consisting of:
(i) $100 million of new cash (the “New Money DIP”), which term loan shall accumulate interest based on an adjusted LIBOR rate plus an applicable margin of 13.00%, with a 1.00% LIBOR floor, and
(ii) $100 million in aggregate principal of the prepetition Tranche B-2 Term Loans which were converted into a separate tranche of DIP Facility loans (the “Rollup Term Loans”) on July 21, 2020. As of June 30, 2020, the prepetition Tranche B-2 Term Loans were classified in LSTC.
2. The Borrower entered into a Debtor-in-Possession Amended and Restated ABL Credit Agreement (the “DIP FILO Credit Agreement”), with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent,
and the lenders party thereto (collectively, the “FILO DIP Lenders”), to obtain a senior secured super-priority DIP FILO facility (the “DIP Rollover Facility”). The DIP Rollover Facility consists of the refinancing of all $275 million of the Debtors’ prepetition FILO term loan under its ABL Credit Agreement, dated as of February 28, 2018 (as amended, the “ABL Credit Agreement”). The DIP Rollover Facility is subject to interest based on an adjusted LIBOR rate plus an applicable margin of 9.00%, with a 1.00% LIBOR floor.
DIP Term Loan Facility
Amounts borrowed against the DIP Term Loan Facility as of June 30, 2020 were $30.0 million, of which $15.7 million was held in escrow in accordance with terms of the DIP Term Loan Credit Agreement. The amounts in escrow were recorded as restricted cash within the Consolidated Balance Sheets.
The TL DIP Lenders shall provide an additional $70 million in new money term loans in addition to the $30 million in new money term loans provided pursuant to the Interim DIP Order and $100 million in amounts outstanding pursuant to the Debtors’ prepetition term loan facility would be “rolled-up” into amounts outstanding under the DIP Term Loan Facility, which term loan shall accumulate interest based on an adjusted LIBOR rate plus an applicable margin of 13.00%, with a 1.00% LIBOR floor. The TL DIP Lenders are entitled to receive cash interest payments on the New Money DIP and Rollup Term Loans through the pendency of the Chapter 11 Cases. The associated fees and expenses under the New Money DIP include (i) a 6.00% backstop premium, (ii) a 4.00% upfront fee and (iii) a 3.00% exit fee.
Borrowings under the DIP Term Loan Facility are secured by (i) a super priority lien on the collateral under the existing term loan (the “Term Loan Facility”) under the Amended and Restated Term Loan Agreement, dated as of February 28, 2018 (the "Term Loan Agreement"), as well as the unencumbered collateral of the Debtors, and (ii) a second priority lien on the existing collateral under the existing ABL Facility, junior to the lien in favor of the lenders thereunder. The DIP Term Loan Credit Agreement has various customary covenants, as well as covenants mandating compliance by the Debtors with a 13-week budget, variance testing and reporting requirements, among others.
The scheduled maturity of the DIP Term Loan Facility will be the earlier of six months from June 24, 2020 or the date of consummation of the Plan approved in the RSA, after which consummation (i) the outstanding New Money DIP amounts under the DIP Term Loan Facility would convert into the Exit FLFO Facility (as defined below), and (ii) the Rollup Term Loans would convert into the Exit FLSO Facility (as defined below), in each case upon the consummation of the Plan and the conclusion of the Chapter 11 Cases.
DIP Rollover Facility
The DIP FILO Credit Agreement amends and restates the ABL Credit Agreement and provided Borrower with approximately $30 million of additional liquidity by (i) removing certain cash dominion blockers effective upon Borrower’s paydown of the revolving credit facility under the ABL Credit Agreement (which paydown Borrower completed immediately upon receipt of interim approval of the DIP Facilities from the Bankruptcy Court), (ii) and adding $17.5 million to the borrowing base.
The scheduled maturity of the DIP Rollover Facility will be the earlier of six months from June 24, 2020 or the date of consummation of the Plan approved in the RSA, after which consummation the outstanding amounts under the DIP Rollover Facility would convert into a new FILO exit facility (the “FILO Exit Facility”) to the DIP FILO Credit Agreement upon the consummation of the Plan. The FILO Exit Facility contemplates a four-year maturity with an initial interest rate of LIBOR plus 9.00% with a 1% LIBOR floor, with the ability to step down to LIBOR plus 7.00% with a 1.00% LIBOR floor if certain conditions are satisfied, with mandatory prepayments required in certain circumstances. Other terms are customary and/or consistent with the DIP Rollover Facility or the ABL Credit Agreement.
The DIP Rollover Facility is subject to any additional fees, or to budget reporting covenants beyond those required under the Term Loan DIP Credit Agreement.
DIP Backstop Commitment Letter
On June 23, 2020, prior to commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries received a DIP Backstop Commitment Letter (the “Commitment Letter”) from the TL DIP Lenders for financing of (i) the New Money DIP and (ii) the Rollup Term Loans.
If the Plan is consummated, the Commitment Letter contemplates that the New Money DIP will convert on a dollar-for-dollar basis into a first-lien-first-out term loan exit facility (the “Exit FLFO Facility”). The Exit FLFO Facility is contemplated to have a 4-year maturity and an interest rate of LIBOR plus an applicable margin of 10.00%, with a 1.00% LIBOR floor, with the borrowings thereunder secured by the same liens as the borrowings under the DIP Term Loan Facility. The Rollup Term Loans, together with an additional $50 million converted from the amounts outstanding under the Term Loan Facility, will convert on a dollar-for-dollar basis into a first-lien-second-out term loan exit facility (the “Exit FLSO Facility”). The Exit FLSO Facility is contemplated to have a 4.25-year term and an interest rate of, at the option of the borrower, LIBOR plus 9.00% cash interest (with a 1.00% LIBOR floor) plus an additional 3.00% interest paid-in-kind or LIBOR plus 11.50% cash interest (with a 1.00% LIBOR floor), with the borrowings thereunder secured by the same liens as the borrowings under the DIP Term Loan Facility, but with second-out payment priority.
Restructuring Support Agreement
On June 23, 2020, the Debtors entered into the RSA with creditors holding, in the aggregate, approximately (a) 92% of the aggregate outstanding principal amount of the Company’s Tranche B-2 Term Loan (the TL DIP Lenders), and (b) 87% of the aggregate outstanding principal amount of the Company’s ABL FILO Term Loan (the FILO DIP Lenders, and collectively with the TL Creditors, the “Consenting Creditors”).
The RSA incorporates the economic terms agreed to by the parties for the Plan. The RSA also contemplates that a significant majority of the Consenting Creditors have agreed that the Company will pursue on a parallel path basis a going concern sale of the business of the Debtors pursuant to Section 363 of the Bankruptcy Code the highest and best sale offer pursuant to this sale process, the “Sale Transaction”). As further discussed in Note 16. "Subsequent Events," on August 7, 2020, the Company reached an agreement for a stalking horse bid with Harbin Pharmaceutical Group Holding Co., Ltd ("Harbin Buyer") ("the Bid") and the Debtors will seek the Bankruptcy Court’s approval of the Bid and any related bid protections. Any such Sale Transaction would be executed through an auction process supervised by the Bankruptcy Court at which higher and better bids may be presented.
The DIP financing will provide the Debtors with at least $130 million in liquidity during the Chapter 11 Cases. If the Plan is consummated in exchange for providing the liquidity offered by the DIP Credit Agreements and in consideration for converting $100 million of prepetition Tranche B-2 Term Loans into the Exit FLSO Facility (as defined and described above), the holders of the prepetition Tranche B-2 Term Loans will also own 100% of the common stock in the reorganized Debtors (the “New Common Shares”), subject to dilution by a management incentive plan providing for 10% of the New Common Shares to be awarded to management and employees as well as a proposed equity distribution to general unsecured creditors. If the Plan is approved and the class of unsecured creditors votes to accept the approved Plan, they will have a choice to receive 3-year warrants for 5% of the pro forma equity of the reorganized Debtors or elect to receive their pro rata share of $250,000 in cash.
Pursuant to the RSA, each of the Debtors and Consenting Creditors has made certain customary commitments to each other. The Debtors have agreed to, among other things, use commercially reasonable efforts to implement the restructuring contemplated by the RSA; implement the Plan in a timely manner if the Sale Transaction is not consummated; respond to diligence and status update requests from certain of the Consenting Creditors’ representatives; and satisfy certain other covenants. The Consenting Creditors have committed to support and vote for the Plan and have agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support. Certain of the Consenting Creditors have also agreed to provide debtor-in-possession financing pursuant to the DIP Credit Agreements.
The RSA contains milestones for the progress of the Chapter 11 Cases (the “Milestones”), which include the dates by which the Debtors are required to, among other things, obtain certain orders of the Bankruptcy Court and consummate the Debtors’ emergence from bankruptcy. Among other dates set forth in the RSA, the agreement contemplates that the Bankruptcy Court shall have entered the Interim DIP order no later than three business days after the Petition Date, the Final DIP Order no later than 35 days after the Petition Date and the Disclosure Statement Order no later than 45 days after the Petition Date and that the Company shall have emerged from
bankruptcy no later than 141 days after the Petition Date, subject in each case to an extension or waiver of such dates by the requisite Consenting Creditors under the terms of the RSA. As of August 10, 2020, GNC has achieved or extended all Milestones required up to the report release date of August 10, 2020.
The transactions contemplated by the RSA are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated.
Plan of Reorganization
On July 15, 2020, the Debtors filed a joint plan of reorganization (the “Plan of Reorganization”) and a related disclosure statement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. On August 7, 2020, the Debtors filed an amended Plan of Reorganization. On August 19, 2020, the Bankruptcy Court will hold a hearing to consider approval of the Disclosure Statement.
Reorganization Items, net
The accounting standards require that the Consolidated Financial Statements, for the periods incurred after the Petition Date as a direct result of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the Chapter 11 Cases from the ongoing operations of the business. Accordingly, certain expenses (including professional fees), realized gains and losses, and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded in reorganization items, net in the Consolidated Statements of Operations. Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Bankruptcy and are consisted of the following for the three and six months ended June 30, 2020:
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Three months ended June 30, 2020
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Six months ended June 30, 2020
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(in thousands)
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Debtor-in-possession financing costs
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$
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7,300
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$
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7,300
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Professional fees
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2,043
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2,043
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Prepetition debt issuance costs and debt discount
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1,039
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1,039
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Loss on deconsolidation of GNC Canada
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5,047
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5,047
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Total reorganization items, net
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$
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15,429
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$
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15,429
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Six months ended June 30,
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2020
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2019
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Cash paid during the period for:
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Reorganization items, net
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$
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7,532
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$
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—
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Claims and Claims Resolution Process
To the best of our knowledge, after making reasonable efforts, we have notified all of our known current or potential creditors that the Debtors have filed the Chapter 11 Cases. On July 21, 2020 each of the Debtors filed their respective Schedules of Assets and Liabilities (the “Schedules”) and Statements of Financial Affairs (the “Statements”) (collectively, the “Schedules and Statements”) with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the Debtors, the unexpired leases of the Debtors, including executory contracts to which each of the Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or modification as our Chapter 11 Cases proceed. The Schedules and Statements may be subject to further amendment or modification after filing.
Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wish to assert prepetition claims against us and whose claim (i) is not listed in the Schedules and Statements or (ii) is listed in the Schedules and Statements as disputed, contingent, or unliquidated, must file a proof of claim with the Bankruptcy Court prior to the bar date set by the court. The general bar date for creditors to file claims or contest claim amounts is scheduled for August 28, 2020 and the governmental bar date is scheduled for December 21, 2020 (collectively, the "Bar Dates").
As of August 7, 2020, approximately 763 claims totaling $62.7 million have been filed with the Bankruptcy Court against the Debtors by approximately 633 claimants. We expect additional claims to be filed prior to the Bar Dates. In addition, creditors who have already filed claims may amend or modify their claims in ways we cannot reasonably predict. The amounts of these additional claims and/or amendments or modifications to claims already filed may be material. We anticipate the claims filed against the Debtors in the Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the Chapter 11 Cases. As part of the process, we will work to resolve differences in amounts scheduled by the Debtors and the amounts claimed by creditors, including through the filing of objections with the Bankruptcy Court where necessary. Accordingly, the ultimate number and amount of claims that will be allowed against the Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated.
See Note 12. "Mezzanine Equity," for further details discussing classification of mezzanine equity.
Liabilities Subject to Compromise
The accompanying unaudited Consolidated Balance Sheet as of June 30, 2020 includes amounts classified as liabilities subject to compromise, which represent unsecured or undersecured prepetition liabilities. These amounts include the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust estimates as necessary. Liabilities subject to compromise consisted of the following:
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
(in thousands)
|
|
Accounts payable
|
$
|
61,128
|
|
|
Accrued interest
|
3,744
|
|
|
Lease liabilities
|
329,790
|
|
|
Other liabilities
|
188,971
|
|
|
Tranche B-2 Term Loan
|
410,834
|
|
|
Notes
|
159,097
|
|
|
Total Liabilities subject to compromise
|
$
|
1,153,564
|
|
The principal balance on the Tranche B-2 Term Loan and Notes of $410.8 million and $159.1 million, respectively, has been reclassified from long-term debt to LSTC as of June 30, 2020. See also Note 8. "Debt / Interest Expense" for further details.
Effective as of the Petition Date, we ceased recording interest expense on outstanding prepetition debt subject to compromise. Contractual interest expense represents amounts due under the contractual terms of outstanding prepetition debt classified as LSTC. For the quarter ended June 30, 2020, contractual interest expense of $0.8 million related to LSTC has not been recorded in the Consolidated Financial Statements.
Accrued interest on the prepetition debt subject to compromise was also reclassified from accrued liabilities to LSTC as of June 30, 2020. We have not made any interest payments on our prepetition debt subject to compromise since the commencement of the Chapter 11 Cases.
Employee Retention Program
On July 20, 2020, the Bankruptcy Court approved the Debtors' Key Employee Retention Program ("KERP"). The KERP is designed to enhance retention of key employees and provides a maximum award pool of approximately $3.1 million.
Debtor Financial Statements
Debtors Condensed Combined Financial Statements
The Company has seventeen wholly-owned entities that are considered non-debtors (“Non-Debtors”).
•Nutra Insurance Company
•GNC Korea Limited
•GNC Hong Kong Limited
•GNC (Shanghai) Trading Co., Ltd.
•GNC China JV Holdco Limited
•GNC (Shanghai) Food Technology Limited
•GNC South Africa (Pty) Ltd.
•GNC Jersey One Limited
•GNC Jersey Two Unlimited
•THSD Unlimited Company
•GNC Live Well Ireland
•GNC Colombia SAS
•GNC Newco Parent, LLC
•Nutra Manufacturing, LLC
•GNC Supply Purchaser, LLC
•GNC Intermediate IP Holdings, LLC
•GNC Intellectual Property Holdings, LLC
With the exception of cash and cash equivalents, brand name and equity method investments in the amounts of $5.1 million, $24.8 million and $42.1 million, respectively, the balance sheet, results of operations and cash flow activity of the Non-Debtors is not material to the consolidated financial statements of GNC as of and for the period ended June 30, 2020. See Note 9. "Equity Method Investments" for more information on the Company's equity method investments.
NOTE 4. 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.
Due to the deconsolidation of GNC Canada, as further discussed in Note 1. "Nature of Business," all amounts presented in this footnote exclude the operating results of GNC Canada subsequent to June 24, 2020.
U.S. and Canada Revenue
The following is a summary of revenue disaggregated by major source in the U.S. and Canada segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
U.S. company-owned product sales: (1)
|
(in thousands)
|
|
|
|
|
|
|
|
Protein
|
$
|
51,509
|
|
|
$
|
77,160
|
|
|
$
|
125,317
|
|
|
$
|
157,345
|
|
|
Performance supplements
|
42,694
|
|
|
73,083
|
|
|
110,685
|
|
|
147,824
|
|
|
Weight management
|
16,122
|
|
|
29,607
|
|
|
36,639
|
|
|
60,373
|
|
|
Vitamins
|
36,866
|
|
|
44,936
|
|
|
85,828
|
|
|
91,944
|
|
|
Herbs / Greens
|
10,699
|
|
|
15,536
|
|
|
24,504
|
|
|
31,391
|
|
|
Wellness
|
26,185
|
|
|
46,370
|
|
|
65,267
|
|
|
93,515
|
|
|
Health / Beauty
|
29,869
|
|
|
46,535
|
|
|
69,354
|
|
|
92,888
|
|
|
Food / Drink
|
11,370
|
|
|
26,259
|
|
|
30,569
|
|
|
54,483
|
|
|
General merchandise
|
3,218
|
|
|
5,519
|
|
|
8,089
|
|
|
12,318
|
|
|
Total U.S. company-owned product sales
|
228,532
|
|
|
365,005
|
|
|
556,252
|
|
|
742,081
|
|
|
Wholesale sales to franchisees
|
36,444
|
|
|
59,869
|
|
|
87,500
|
|
|
118,126
|
|
|
Royalties and franchise fees
|
6,907
|
|
|
8,175
|
|
|
14,234
|
|
|
16,647
|
|
|
Sublease income
|
9,738
|
|
|
10,498
|
|
|
19,980
|
|
|
21,474
|
|
|
Cooperative advertising and other franchise support fees
|
2,605
|
|
|
4,754
|
|
|
7,013
|
|
|
9,821
|
|
|
Other (2)
|
15,980
|
|
|
27,759
|
|
|
39,408
|
|
|
57,067
|
|
|
Total U.S. and Canada revenue
|
$
|
300,206
|
|
|
$
|
476,060
|
|
|
$
|
724,387
|
|
|
$
|
965,216
|
|
(1)Includes e-commerce sales.
(2)Includes revenue primarily related to operations in Canada through deconsolidation date of June 24, 2020, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Wholesale sales to franchisees
|
$
|
15,637
|
|
|
$
|
27,019
|
|
|
$
|
35,820
|
|
|
$
|
52,456
|
|
|
Royalties and franchise fees
|
4,001
|
|
|
6,332
|
|
|
10,509
|
|
|
12,319
|
|
|
Other (1)
|
9,295
|
|
|
6,097
|
|
|
16,149
|
|
|
15,596
|
|
|
Total International revenue
|
$
|
28,933
|
|
|
$
|
39,448
|
|
|
$
|
62,478
|
|
|
$
|
80,371
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Third-party contract manufacturing(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,783
|
|
|
Intersegment sales(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
35,505
|
|
|
Wholesale partner sales
|
14,399
|
|
|
18,489
|
|
|
29,254
|
|
|
37,390
|
|
|
Total Manufacturing / Wholesale revenue
|
$
|
14,399
|
|
|
$
|
18,489
|
|
|
$
|
29,254
|
|
|
$
|
88,678
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Total revenues by geographic areas(1):
|
(in thousands)
|
|
|
|
|
|
|
|
United States
|
$
|
334,411
|
|
|
$
|
510,762
|
|
|
$
|
787,284
|
|
|
$
|
1,048,805
|
|
|
Foreign
|
9,127
|
|
|
23,235
|
|
|
28,835
|
|
|
49,955
|
|
|
Total revenues
|
$
|
343,538
|
|
|
$
|
533,997
|
|
|
$
|
816,119
|
|
|
$
|
1,098,760
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Recognition of revenue included in beginning balance
|
|
Contract liability, net of revenue, recognized during the period
|
|
Balance at End of Period
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Deferred franchise and license fees
|
$
|
28,293
|
|
|
$
|
(4,934)
|
|
|
$
|
2,168
|
|
|
$
|
25,527
|
|
|
PRO Access and loyalty program points (1)
|
22,896
|
|
|
(16,909)
|
|
|
12,194
|
|
|
18,181
|
|
|
Gift card liability (1)
|
3,110
|
|
|
(1,502)
|
|
|
274
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
Recognition of revenue included in beginning balance
|
|
Contract liability, net of revenue, recognized during the period
|
|
Balance at End of Period
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Deferred franchise and license fees
|
$
|
33,464
|
|
|
$
|
(5,533)
|
|
|
$
|
2,247
|
|
|
$
|
30,178
|
|
|
PRO Access and loyalty program points (1)
|
24,836
|
|
|
(18,093)
|
|
|
19,207
|
|
|
25,950
|
|
|
Gift card liability (1)
|
3,416
|
|
|
(1,793)
|
|
|
343
|
|
|
1,966
|
|
(1) Net of estimated breakage
As of June 30, 2020, the Company had deferred franchise fees with unsatisfied performance obligations extending throughout 2030 of $25.5 million, of which $5.7 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 5. INVENTORY
The net realizable value of inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
|
|
Finished product ready for sale
|
$
|
275,170
|
|
|
$
|
387,655
|
|
|
Inventory
|
$
|
275,170
|
|
|
$
|
387,655
|
|
As a result of the COVID-19 pandemic, the Company temporarily closed up to 40% company-owned and franchise stores from March through June 2020, and sales trends have significantly declined beginning in the second half of March 2020. 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 first quarter of 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. As a result of filing the Chapter 11 Cases on June 23, 2020, the Company expects vendors may withhold payment to GNC for certain allowances/credits in order to satisfy certain allowed claims that we have classified within LSTC and therefore recorded $12.6 million in inventory reserves during the three months ended June 30, 2020 within the U.S and Canada segment. Refer to Note 3. "Reorganization and Chapter 11 Proceedings" for more information on the Chapter 11 Cases.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
The following is a summary of impairment charges and other store closing costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Right-of-use asset
|
$
|
18,199
|
|
|
$
|
—
|
|
|
$
|
39,422
|
|
|
$
|
—
|
|
|
Property and equipment
|
2,002
|
|
|
—
|
|
|
13,227
|
|
|
—
|
|
|
Other store closing costs
|
—
|
|
|
—
|
|
|
7,897
|
|
|
—
|
|
|
Total impairment and other store closing costs
|
$
|
20,201
|
|
|
$
|
—
|
|
|
$
|
60,546
|
|
|
$
|
—
|
|
As a result of the COVID-19 pandemic, the Company temporarily closed up to 40% of its company-owned and franchise stores from March through June 2020, and sales trends have significantly declined beginning in the second half of March 2020. During the first quarter of 2020, 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. Refer to Note 16. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19.
In connection with the Chapter 11 Cases, the Company launched liquidation sales in June 2020 in approximately 500 U.S and Canada company-owned stores which are expected to close during the third quarter of 2020. As a result of the liquidation sales and planned store closures, the Company recorded $20.2 million impairment charges, of which $18.2 million related to right-of use asset impairments and $2.0 million related to property and equipment impairment. Refer to Note 3. "Reorganization and Chapter 11 Proceedings" for more information on the Chapter 11 Cases.
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 assets was estimated using a discounted cash flow method (income approach) based on market participant assumptions.
During the first quarter of 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 Statement of Operations.
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Due to the significant decline in the Company's share price in the first quarter of 2020 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. No impairment was recorded for the Company's definite-lived intangible assets.
Brand Name
In the first quarter of 2020, 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.
No impairment was recorded during the second quarter of 2020 for brand name.
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 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.
No impairment was recorded during the second quarter of 2020 for goodwill.
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 June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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
|
|
|
(14,145)
|
|
|
16,855
|
|
|
31,000
|
|
|
(13,619)
|
|
|
17,381
|
|
|
Franchise agreements
|
25
|
|
70,000
|
|
|
(37,217)
|
|
|
32,783
|
|
|
70,000
|
|
|
(35,817)
|
|
|
34,183
|
|
|
Manufacturing agreements
|
25
|
|
40,000
|
|
|
(21,267)
|
|
|
18,733
|
|
|
40,000
|
|
|
(20,467)
|
|
|
19,533
|
|
|
Other intangibles
|
7
|
|
640
|
|
|
(581)
|
|
|
59
|
|
|
639
|
|
|
(529)
|
|
|
110
|
|
|
Franchise rights
|
3
|
|
7,566
|
|
|
(7,503)
|
|
|
63
|
|
|
7,566
|
|
|
(7,475)
|
|
|
91
|
|
|
Total
|
|
|
$
|
869,206
|
|
|
$
|
(611,713)
|
|
|
$
|
257,493
|
|
|
$
|
869,205
|
|
|
$
|
(497,187)
|
|
|
$
|
372,018
|
|
NOTE 8. DEBT / INTEREST EXPENSE
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
(in thousands)
|
|
|
|
DIP Financing:
|
|
|
|
|
DIP Financing - New Money DIP
|
$
|
30,000
|
|
|
$
|
—
|
|
|
DIP Financing - DIP FILO
|
275,000
|
|
|
—
|
|
|
Total DIP Financing
|
305,000
|
|
|
—
|
|
|
Liabilities subject to compromise:
|
|
|
|
|
Tranche B-2 Term Loan
|
410,834
|
|
|
—
|
|
|
|
|
|
|
|
Notes
|
159,097
|
|
|
—
|
|
|
Total liabilities subject to compromise
|
569,931
|
|
|
—
|
|
|
Long-term debt, including the current portion:
|
|
|
|
|
Tranche B-2 Term Loan (net of $7.0 million discount)
|
—
|
|
|
441,500
|
|
|
FILO Term Loan (net of $8.2 million discount)
|
—
|
|
|
266,814
|
|
|
Notes (net of $3.9 million conversion feature and $0.5 million discount)
|
—
|
|
|
154,675
|
|
|
Debt issuance costs
|
—
|
|
|
(424)
|
|
|
Total long-term debt, including the current portion
|
—
|
|
|
862,565
|
|
|
Total debt
|
$
|
874,931
|
|
|
$
|
862,565
|
|
DIP Financing
As described further in Note 3. "Reorganization and Chapter 11 Proceedings," in connection with the Chapter 11 Cases, the Company entered into the DIP Credit Agreements on June 24, 2020.
Prepetition Debt
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 $50.0 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 became the Springing Maturity Date, subject to certain adjustments. 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 $100.0 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 JV with IVC, the Revolving Credit Facility commitment was reduced from $100.0 million to $81.0 million effective March 2019. As of March 31, 2020, there were $30.0 million borrowings outstanding on the Revolving Credit Facility. At June 30, 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. 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 GNC Canada, 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.
As discussed in Note 3, “Reorganization and Chapter 11 Proceedings,” the Chapter 11 Cases automatically stayed actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to prepetition debt. All of the Debtors’ prepetition debt excluding those amounts converted into DIP financing, are included in liabilities subject to compromise as of June 30, 2020.
At June 30, 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 the Borrower 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.
Prior to the issuance of our Form 10-Q for the quarter ended March 31, 2020, we determined that we did not have the ability to pay the accelerated maturity payment due on the Springing Maturity Date and therefore obtained an extension for the accelerated maturity payment to June 30, 2020. On the Petition Date, the filing of the Chapter 11 Cases constituted an event of default that accelerated obligations under the following debt instruments and agreements:
•the Amended and Restated Term Loan Agreement, dated as of February 28, 2018 (as amended), among the Borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto with respect to approximately $410.8 million of borrowings outstanding, plus accrued and unpaid interest thereon;
•the ABL Credit Agreement, dated as of February 28, 2018 (as amended), among the Borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto with respect to approximately $335 million of borrowings outstanding, plus accrued and unpaid interest thereon; and
•the indenture, dated August 10, 2015, by and among the Company, as issuer, certain other subsidiaries of the Company, as guarantors, and BNY Mellon Trust Company, N.A., as the trustee with respect to an aggregate principal amount of approximately $157.6 million of 1.5% convertible senior unsecured notes due 2020 (the "Indenture").
As of June 30, 2020, the Company maintains $159.1 million in principal amount of its 1.5% convertible Notes outstanding. The Notes, classified within LSTC at June 30, 2020 and debt at December 31, 2019, consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
|
|
Liability component
|
|
|
|
|
Principal
|
$
|
159,097
|
|
|
$
|
159,097
|
|
|
Conversion feature
|
—
|
|
|
(3,898)
|
|
|
Discount related to debt issuance costs
|
—
|
|
|
(524)
|
|
|
Net carrying amount
|
$
|
159,097
|
|
|
$
|
154,675
|
|
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.
As of March 31, 2020, the Company's expectation was that it could not reduce the outstanding balance on the Notes to below $50 million before the Springing Maturity date, which would result in acceleration of the maturity date of the Tranche B-2 and the FILO Term Loan. As such, the Company deemed the cash flow hedges as ineffective as the forecasted hedging transactions were not expected to 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.
In connection with the closing of the debtor-in-possession financing, the Company agreed to settle and terminate the outstanding swap agreements for $9.8 million on June 29, 2020, of which $9.0 million was classified in the Consolidated Statement of Cash Flows as cash flows from investing activities for the settlement of the liability and $0.8 million classified as cash flows from operating activities for settlement of the interest.
The fair values of the derivative financial instruments included in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
5,013
|
|
|
Other long-term liabilities
|
|
—
|
|
|
1,927
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
6,940
|
|
Interest Expense
As discussed in Note 3. "Reorganization and Chapter 11 Proceedings," upon the Petition Date, GNC ceased recording interest expense on prepetition debt subject to compromise. For the quarter ended June 30, 2020, contractual interest expense of $0.8 million related to LSTC has not been recorded in the Consolidated Financial Statements. Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
DIP Financing
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
Tranche B-1 Term Loan coupon
|
—
|
|
|
—
|
|
|
—
|
|
|
928
|
|
|
Tranche B-2 Term Loan coupon
|
10,310
|
|
|
12,954
|
|
|
22,649
|
|
|
29,422
|
|
|
FILO Term Loan coupon
|
6,861
|
|
|
6,826
|
|
|
13,687
|
|
|
13,578
|
|
|
Revolving Credit Facility
|
534
|
|
|
96
|
|
|
683
|
|
|
219
|
|
|
Amortization of discount and debt issuance costs
|
3,499
|
|
|
2,522
|
|
|
18,554
|
|
|
8,565
|
|
|
Subtotal
|
21,262
|
|
|
22,398
|
|
|
55,631
|
|
|
52,712
|
|
|
Notes:
|
|
|
|
|
|
|
|
|
Coupon
|
551
|
|
|
729
|
|
|
1,147
|
|
|
1,436
|
|
|
Amortization of conversion feature
|
1,442
|
|
|
1,611
|
|
|
2,984
|
|
|
3,312
|
|
|
Amortization of discount and debt issuance costs
|
200
|
|
|
242
|
|
|
417
|
|
|
486
|
|
|
Total Notes
|
2,193
|
|
|
2,582
|
|
|
4,548
|
|
|
5,234
|
|
|
Loss on interest rate swap
|
(1,356)
|
|
|
—
|
|
|
9,454
|
|
|
—
|
|
|
Other
|
(42)
|
|
|
(16)
|
|
|
(131)
|
|
|
(26)
|
|
|
Interest expense, net
|
$
|
22,057
|
|
|
$
|
24,964
|
|
|
$
|
69,502
|
|
|
$
|
57,920
|
|
During the first quarter, 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.
NOTE 9. EQUITY METHOD INVESTMENTS
The Company's interests in the Manufacturing, HK and China joint ventures, which are Non-Debtors as discussed in Note 3. "Reorganization and Chapter 11 Proceedings," 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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
|
10,206
|
|
|
10,342
|
|
|
Income from equity method investments
|
5,567
|
|
|
5,296
|
|
|
Distributions received from equity method investments
|
(5,254)
|
|
|
(3,856)
|
|
|
Manufacturing JV other-than-temporary impairment
|
(35,840)
|
|
|
—
|
|
|
Total equity method investments
|
$
|
42,077
|
|
|
$
|
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 Company anticipates completing the formation of a second, retail-focused joint venture located in China (the “China JV”) with Harbin in the second half 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 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 June 30, 2020. No impairment triggers were identified as it relates to our equity method investments as of June 30, 2020.
Related Party Transactions
The Company's related party transactions with the Manufacturing, HK and China joint ventures are as follows:
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Three months ended June 30,
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Six months ended June 30,
|
|
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|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Manufacturing JV finished goods purchases
|
$
|
39,783
|
|
|
$
|
51,632
|
|
|
$
|
76,220
|
|
|
$
|
72,392
|
|
|
HK JV revenue, primarily wholesale and royalties
|
6,537
|
|
|
2,087
|
|
|
10,349
|
|
|
4,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
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|
December 31, 2019
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(in thousands)
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|
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Manufacturing JV accounts payable1
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$
|
18,714
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|
|
$
|
11,720
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HK JV accounts receivable
|
10,094
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|
8,946
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1 On Petition Date, all prepetition Manufacturing JV accounts payable has been classified in LSTC.
NOTE 10. FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
ASC 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, restricted cash, 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 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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June 30, 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 not subject to compromise:
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|
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Tranche B-2 Term Loan
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
441,500
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|
|
$
|
414,321
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|
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FILO Term Loan
|
—
|
|
|
—
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|
|
266,814
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|
|
265,851
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Notes
|
—
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|
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—
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|
|
154,675
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|
|
148,488
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|
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DIP Financing - New Money DIP
|
30,000
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|
|
30,000
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|
|
—
|
|
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—
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|
|
DIP Financing - DIP FILO
|
275,000
|
|
|
275,000
|
|
|
—
|
|
|
—
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|
|
Interest rate swaps
|
—
|
|
|
—
|
|
|
6,940
|
|
|
6,940
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|
|
Liabilities subject to compromise:
|
|
|
|
|
|
|
|
|
Tranche B-2 Term Loan
|
$
|
410,834
|
|
|
$
|
292,033
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|
|
$
|
—
|
|
|
$
|
—
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|
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Notes
|
159,097
|
|
|
795
|
|
|
—
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|
|
—
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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 a result of the Debtors filing for relief under Chapter 11 as further discussed in Note 3. "Reorganization and Chapter 11 Proceedings," GNC’s prepetition debt, except for the FILO Term Loan which rolled into the DIP ABL FILO Facility, is classified as liabilities subject to compromise as of June 30, 2020. As of June 30, 2020, the estimated carrying amount and fair value of GNC’s DIP Term Loan is $275.0 million and is classified as Level 2 within the fair value hierarchy. The fair values of debt instruments classified as Level 2 instruments are valued using market prices we obtain from external third parties.
As described in Note 6. "Property, Plant and Equipment, Net," and Note 7. "Goodwill and Intangible Assets, Net," the Company recorded long-lived asset impairments during the six months ended June 30, 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 June 30, 2020;
•goodwill at June 30, 2020 for the Health Store reporting unit;
•property and equipment and right-of-use assets at certain of the Company's stores at June 30, 2020;
•equity method investment in the Manufacturing JV at June 30, 2020.
NOTE 11. CONTINGENCIES
On June 23, 2020, the Debtors filed the Chapter 11 Cases seeking relief under the Bankruptcy Code. The commencement of the Chapter 11 Cases automatically stayed all of the proceedings and actions against the Debtors. See Note 3. "Reorganization and Chapter 11 Proceedings" for a description of the Chapter 11 Cases.
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. GNC was granted an automatic stay order by the Bankruptcy Court continuing the provisions under existing insurance arrangements. 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 June 30, 2020, the Company was named in 27 personal injury lawsuits involving products containing DMAA and/or Aegeline. On July 22, 2020, all matters pending in the United States District Court for the District of Hawaii were dismissed.
The remaining 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. There is no trial date currently scheduled. As of June 30, 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. There is no trial date currently scheduled.
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.
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 9. “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 12. 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, pursuant to which the Company agreed to issue and sell to Harbin, and Harbin 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 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 Harbin. Pursuant to the terms of the Securities Purchase Agreement, Harbin 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 June 30, 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, where the common stock ceases to be listed or quoted on a national securities exchange, (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.
As a result of the delisting of our common stock from the NYSE on June 30, 2020, a Fundamental Change occurred. Subsequent adjustment of the amount presented in temporary equity is unnecessary if it is not probable that the instrument will become redeemable. With the triggering of the Fundamental Change, under the Convertible Preferred Stock Agreement, the holders could request redemption of their shares at the stated value plus any accumulated and unpaid dividends. However, an automatic stay has been granted to GNC that prohibits among other things, sales or transfers of equity securities. The commencement of the Chapter 11 Cases automatically stayed all of the proceedings and actions against the Debtors and specified that holders of Convertible Preferred Stock are not entitled to dividends during the course of bankruptcy and there is no current option to redeem the shares.
As of June 30, 2020, the Company has not accrued for dividends on the Convertible Preferred Stock; however, the Company has continued the accumulation of dividends through June 30, 2020.
As of June 30, 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 $30.2 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 13. 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 June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Basic weighted average shares
|
83,936
|
|
|
83,663
|
|
|
83,916
|
|
|
83,587
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive Convertible Preferred Stock
|
—
|
|
|
57,093
|
|
|
—
|
|
|
—
|
|
|
Effect of dilutive stock-based compensation awards
|
—
|
|
|
186
|
|
|
—
|
|
|
—
|
|
|
Diluted weighted average shares
|
83,936
|
|
|
140,942
|
|
|
83,916
|
|
|
83,587
|
|
The following awards and convertible stock were excluded from the computation of diluted EPS because the impact was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based awards
|
6,018
|
|
|
3,768
|
|
|
6,398
|
|
|
4,292
|
|
|
Convertible Preferred Stock
|
60,896
|
|
|
—
|
|
|
60,409
|
|
|
49,979
|
|
|
Total excluded from diluted EPS
|
66,914
|
|
|
3,768
|
|
|
66,807
|
|
|
54,271
|
|
The Company applied the if-converted method to calculate dilution on the Notes, which has resulted in all the 2.4 million underlying convertible shares in all periods being anti-dilutive.
The computations for basic and diluted loss per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
(Loss) earnings per common share - Basic
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(83,669)
|
|
|
$
|
16,058
|
|
|
$
|
(283,755)
|
|
|
$
|
796
|
|
|
Cumulative undeclared convertible preferred stock dividend
|
5,280
|
|
|
4,950
|
|
|
10,475
|
|
|
8,667
|
|
|
Net (loss) income attributable to common shareholders
|
(88,949)
|
|
|
11,108
|
|
|
(294,230)
|
|
|
(7,871)
|
|
|
Weighted average common shares outstanding - basic
|
83,936
|
|
|
83,663
|
|
|
83,916
|
|
|
83,587
|
|
|
(Loss) earnings per common share - basic
|
$
|
(1.06)
|
|
|
$
|
0.13
|
|
|
$
|
(3.51)
|
|
|
$
|
(0.09)
|
|
|
(Loss) earnings per common share - Diluted
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(83,669)
|
|
|
$
|
16,058
|
|
|
$
|
(283,755)
|
|
|
$
|
796
|
|
|
Cumulative undeclared convertible preferred stock dividends
|
5,280
|
|
|
—
|
|
|
10,475
|
|
|
8,667
|
|
|
Net (loss) earnings attributable to common shareholders
|
(88,949)
|
|
|
16,058
|
|
|
(294,230)
|
|
|
(7,871)
|
|
|
Weighted average common shares outstanding - diluted
|
83,936
|
|
|
140,942
|
|
|
83,916
|
|
|
83,587
|
|
|
(Loss) earnings per common share - diluted
|
$
|
(1.06)
|
|
|
$
|
0.11
|
|
|
$
|
(3.51)
|
|
|
$
|
(0.09)
|
|
NOTE 14. SEGMENTS
The Company aggregates its operating segments into three reportable segments, which include U.S. and Canada (until GNC Canada was deconsolidated on June 24, 2020), 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.
In connection with the Chapter 11 Cases, the Company launched liquidation sales in June 2020 in approximately 500 U.S and Canada company-owned stores which are expected to close during the third quarter of 2020. As a result, during the three and six months ended June 30, 2020, GNC recorded $20.2 million impairment charges within U.S. and Canada and recorded $12.6 million inventory reserves within U.S. and Canada as the Company expects vendors may withhold payment to GNC for certain allowances/credits in order to satisfy certain allowed claims that we have classified within LSTC. During the six months ended June 30, 2020, due to the estimated adverse impacts from the COVID-19 pandemic, the Company recorded $177.7 million long-lived asset impairments and other store closing costs ($149.1 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 3. "Reorganization and Chapter 11 Proceedings" for more information on the Chapter 11 Cases and Note 16. "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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
300,206
|
|
|
$
|
476,060
|
|
|
$
|
724,387
|
|
|
$
|
965,216
|
|
|
International
|
28,933
|
|
|
39,448
|
|
|
62,478
|
|
|
80,371
|
|
|
Manufacturing / Wholesale:
|
|
|
|
|
|
|
|
|
Intersegment revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
35,505
|
|
|
Third-party
|
—
|
|
|
—
|
|
|
—
|
|
|
15,783
|
|
|
Wholesale partner sales
|
14,399
|
|
|
18,489
|
|
|
29,254
|
|
|
37,390
|
|
|
Subtotal Manufacturing / Wholesale
|
14,399
|
|
|
18,489
|
|
|
29,254
|
|
|
88,678
|
|
|
Total reportable segment revenues
|
343,538
|
|
|
533,997
|
|
|
816,119
|
|
|
1,134,265
|
|
|
Elimination of intersegment revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,505)
|
|
|
Total revenue
|
$
|
343,538
|
|
|
$
|
533,997
|
|
|
$
|
816,119
|
|
|
$
|
1,098,760
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
$
|
(19,675)
|
|
|
$
|
49,202
|
|
|
$
|
(150,875)
|
|
|
$
|
101,302
|
|
|
International
|
8,231
|
|
|
14,269
|
|
|
(9,151)
|
|
|
28,319
|
|
|
Manufacturing / Wholesale
|
6,730
|
|
|
12,118
|
|
|
13,661
|
|
|
27,462
|
|
|
Total reportable segment operating income
|
(4,714)
|
|
|
75,589
|
|
|
(146,365)
|
|
|
157,083
|
|
|
Corporate costs
|
(53,804)
|
|
|
(25,079)
|
|
|
(78,638)
|
|
|
(51,340)
|
|
|
Loss on net asset exchange for the formation of the joint ventures
|
—
|
|
|
(1,779)
|
|
|
(1,655)
|
|
|
(21,293)
|
|
|
Other
|
—
|
|
|
(13)
|
|
|
2,107
|
|
|
(250)
|
|
|
Unallocated corporate costs, loss on net asset exchange and other
|
(53,804)
|
|
|
(26,871)
|
|
|
(78,186)
|
|
|
(72,883)
|
|
|
Total operating (loss) income
|
(58,518)
|
|
|
48,718
|
|
|
(224,551)
|
|
|
84,200
|
|
|
Interest expense, net
|
22,057
|
|
|
24,964
|
|
|
69,502
|
|
|
57,920
|
|
|
Reorganization items, net
|
15,429
|
|
|
—
|
|
|
15,429
|
|
|
—
|
|
|
Gain on purchase of convertible debt
|
—
|
|
|
(3,214)
|
|
|
—
|
|
|
(3,214)
|
|
|
Loss on forward contracts for the issuance of convertible preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
16,787
|
|
|
(Loss) income before income taxes
|
$
|
(96,004)
|
|
|
$
|
26,968
|
|
|
$
|
(309,482)
|
|
|
$
|
12,707
|
|
Refer to Note 4. "Revenue" for more information on the Company's reportable segments.
NOTE 15. 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 $11.4 million of income tax benefit during the three months ended June 30, 2020 compared with $13.0 million of income tax expense in the prior year quarter. The Company's income tax benefit/expense is based on income, statutory tax rates and the available carryback of net operating losses. 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 $40.8 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 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, increases in valuation allowance of $40.8 million and $27.1 million on the Company’s deferred tax assets were recorded as of June 30, 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 June 30, 2020 and December 31, 2019. The Company’s deferred tax assets of $26.5 million as of June 30, 2020 are considered realizable, as the majority of the deferred tax assets are related to federal net operating losses generated in the current year that are expected to be carried back to prior years at a 35% federal income tax rate based on the new CARES Act legislation.
At June 30, 2020 and December 31, 2019, the Company had $11.6 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 June 30, 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 16. SUBSEQUENT EVENTS
COVID-19
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 and six months ended June 30, 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 August 5, 2020, the Company had less than 100, or 3%, of the U.S. and Canada company-owned and franchise retail stores 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.
Stalking Horse Agreement
On August 7, 2020, the Debtors entered into a Stalking Horse Agreement (the “Stalking Horse Agreement”) with Harbin Buyer. Pursuant to the terms of the Stalking Horse Agreement, the Debtors have agreed to sell substantially all of their assets (the “Assets,” and such sale, the “Sale”) to Harbin Buyer, and Harbin Buyer has agreed to assume from the Debtors certain specified liabilities as further set forth in the Stalking Horse Agreement (the “Assumed Liabilities”). The Stalking Horse Agreement contemplates that the Company will form (a) a new Delaware limited liability company as a wholly owned subsidiary (“GNC Newco”) and (b) a new Nova Scotia unlimited liability company as a wholly owned subsidiary of GNC Newco (“GNC Canada Newco”). At the closing (the “Closing”) of the transactions contemplated by the Stalking Horse Agreement, (i) the Debtors will transfer all of the Assets and Assumed Liabilities to GNC Newco (other than those Assets and Assumed Liabilities in Canada, which will be transferred to GNC Canada Newco), (ii) GNC Newco will redeem and cancel all of the issued and outstanding equity capital of GNC Newco held by the Company or its affiliates, and (iii) GNC Newco will issue all of the equity capital of GNC Newco to Harbin Buyer or its designated affiliate, such that, following such issuance, Harbin Buyer or its designated affiliate (as applicable) will hold 100% of the issued and outstanding equity capital of GNC Newco.
The purchase price under the Stalking Horse Agreement will comprise (a) indebtedness under the Second Lien Credit Agreement (as defined in the Stalking Horse Agreement) in a principal amount equal to $210.0 million, subject to adjustment as provided therein, (b) the payment of an amount in cash equal to $550.0 million, subject to adjustment as provided therein, (c) the issuance of up to $10.0 million in convertible junior notes to the Debtors’ unsecured creditors, subject to the satisfaction of certain conditions and (d) the assumption of the Assumed Liabilities (together, the “Purchase Price”). In addition, under the Stalking Horse Agreement, Harbin Buyer is obligated to make a $57.0 million good faith deposit (the “Deposit”) to be held in a segregated escrow account, with the Deposit being released to the Company upon the earlier to occur of (i) the Closing, in which case the amount of the Deposit will be credited against the cash portion of the Purchase Price and (ii) a Buyer Default Termination (as defined in the Stalking Horse Agreement). If the Stalking Horse Agreement is terminated other than due to a Buyer Default Termination, the Deposit will be returned to Harbin Buyer.
The Stalking Horse Agreement, which is subject to Court approval, is intended to constitute a “stalking horse bid” for the Assets in accordance with the Debtors’ motion to modify the bidding procedures order (the “Bidding Procedures Order”), which was approved by a final order of the Court on Court on July 22, 2020, to extend the deadline by which the Debtors are authorized to enter into a Stalking Horse Agreement to August 7, 2020 (the “Stalking Horse Extension Motion”). The Stalking Horse Agreement includes certain bid protections for Harbin Buyer payable in accordance with the terms thereof, including a break-up fee equal to $22.8 million and an expense reimbursement of up to $3.0 million of reasonable and documented out of pocket fees (the “Bid Protections”). A hearing to consider the Stalking Horse Extension Motion, and the entry of a final order approving the modified Bidding Procedures Order, is scheduled to be held before the Bankruptcy Court on August 19, 2020 at 1.00 p.m. ET.
The Bidding Procedures Order established certain bidding procedures for an auction that allows other qualified bidders to submit higher or otherwise better offers to purchase all or substantially all of the Assets (any such offer, a “Competing Transaction”). The Bid Protections are payable upon certain termination events set forth in
the Stalking Horse Agreement, including the consummation of a Competing Transaction (subject to certain exceptions).
The Bidding Procedures Order set the deadline (the “Bid Deadline”) to submit bids for the Debtors’ assets as September 11, 2020. Upon the receipt of at least one qualified offer from other bidders proposing a Competing Transaction by the Bid Deadline, the Debtors will hold an auction with respect to the Assets on or about September 15, 2020.