References throughout this document to the "Company" includeParty City Holdco Inc. and its subsidiaries. In this document the words "we," "our," "ours" and "us" refer only to the Company and its subsidiaries and not to any other person. Business Overview Our Company We are the leading party goods company by revenue inNorth America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons,Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As ofSeptember 30, 2020 , the Company's retail operations include 829 specialty retail party supply stores (including franchise stores) throughoutthe United States andMexico operating under the names Party City andHalloween City, and e-commerce websites, including through the domain name PartyCity.com and others. In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available in over 100 countries with theUnited Kingdom ("U.K."),Canada ,Germany ,Mexico andAustralia among the largest end markets for our products outside ofthe United States .
How We Assess the Performance of Our Company
In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted net income (loss), adjusted net income (loss) per common share - diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to "Financial Measures - Adjusted EBITDA," "Financial Measures - Adjusted Net Income (Loss)" and "Financial Measures - Adjusted Net Income (Loss) Per Common Share - Diluted" below.
Segments
We have two reporting segments: Retail and Wholesale.
Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and CostumesUSA brand names through Party City,Halloween City and PartyCity.com. For the nine months endedSeptember 30, 2020 , 81.4% of the product that was sold by our retail segment was supplied by our wholesale segment and 30.2% of the product that was sold by our retail segment was self-manufactured. Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores (including our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and e-commerce merchandisers. Intercompany sales between the Wholesale and the Retail segment are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.
Financial Measures
Revenues. Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retail e-commerce sales are recognized when the consumer receives the product as control transfers upon delivery. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail sales are reported net of taxes collected. 23 -------------------------------------------------------------------------------- Under the terms of our agreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchisees' sales. The Company records the royalty fees at the time that the franchisees' sales are recorded. For most of our wholesale sales, control transfers upon the shipment of the product as: 1) legal title transfers on such date and 2) we have a present right to payment at such time. Wholesale sales returns are not significant as we generally only accept the return of goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to our extensive history operating as a leading party goods wholesaler, we have sufficient history with which to estimate future sales returns and we use the expected value method to estimate such activity.
Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.
Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales include stores that were temporarily closed in 2020 due to COVID-19 but exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail e-commerce sales. Cost of Sales. Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs, including rent at distribution facilities, and outbound freight to get goods to our wholesale customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale segment. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail e-commerce business. Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an on-going basis in order to identify slow-moving goods.
Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.
Wholesale Selling Expenses. Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom expenses, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.
Retail Operating Expenses. Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net sales.
Franchise Expenses. Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.
General and Administrative Expenses. General and administrative expenses include all operating costs not included elsewhere in the statement of operations and comprehensive (loss) income. These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees, stock and equity-based compensation and data-processing costs. These expenses generally do not vary proportionally with net sales. 24 --------------------------------------------------------------------------------
Art and Development Costs. Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.
Development Stage Expenses. Development stage expenses represent start-up
activities related to
Adjusted EBITDA. We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants. Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance. Adjusted Net Income (Loss) Per Common Share - Diluted. Adjusted net income (loss) per common share - diluted represents adjusted net income (loss) divided by the Company's diluted weighted average common shares outstanding. We present the metric because we believe it assists investors in comparing our per share performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.
Results of Operations
Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as ofMarch 18, 2020 . During the temporary store closures, the Company offered curbside pickup and the Company's e-commerce site, www.partycity.com, remained fully operational. This led to a temporary furlough of approximately 90% of store employees and 70% of wholesale, manufacturing and corporate employees for whom the Company provides health benefits. In addition, there were non-payroll expense reductions including advertising and other store operating expenses, as well as professional and consulting fees, and cancellation of orders and negotiated receipt delays to manage inventory levels. The Company began reopening stores onMay 1, 2020 , in accordance with state and local health ordinances, and byJune 22, 2020 , all stores were re-opened. But our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. The disruption to the global economy and to our business, the sustained decline in market capitalization, and reduced fair value of certain intangibles and long-lived assets, resulted in the Company recognizing non-cash pre-tax impairment charges for the nine months endedSeptember 30, 2020 .
As described in Note 16 - Current and Long-Term Obligations of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q, the Company recognized a gain on debt refinancing transactions.
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Three Months Ended
The following table sets forth the Company's operating results and operating results as a percentage of total revenues for the three months endedSeptember 30, 2020 and 2019. Three Months Ended September 30, 2020 2019 (Dollars in thousands) Revenues: Net sales$ 532,053 99.7 %$ 538,345 99.7 % Royalties and franchise fees 1,722 0.3 1,886 0.3 Total revenues 533,775 100.0 540,231 100.0 Expenses: Cost of sales 355,923 66.7 373,413 69.1 Wholesale selling expenses 11,950 2.2 16,084 3.0 Retail operating expenses 97,100 18.2 111,595 20.7 Franchise expenses 2,795 0.5 3,274 0.6 General and administrative expenses 42,191 7.9 43,062 8.0 Art and development costs 4,257 0.8 5,927 1.1 Development stage expenses - 0.0 2,728 0.5 Store impairment and restructuring charges 1,926 0.4 2,574 0.5Goodwill , intangibles and long-lived assets impairment 44,732 8.4 259,100 48.0 Total expenses 560,874 105.1 817,757 151.4 (Loss) from operations (27,099 ) (5.1 ) (277,526 ) (51.4 ) Interest expense, net 13,422 2.5 29,424 5.4 Other (income) expense, net (2,873 ) (0.5 ) 2,047 0.4 (Gain) on debt refinancing (273,149 ) (51.2 ) - 0.0 Income (loss) before income taxes 235,501 44.1 (308,997 ) (57.2 ) Income tax (benefit) (4,164 ) (0.8 ) (27,252 ) (5.0 ) Net income (loss) 239,665 44.9 (281,745 ) (52.2 ) Less: Net (loss) attributable to noncontrolling interests (42 ) - (212 ) - Net income (loss) attributable to common shareholders of Party City Holdco Inc.$ 239,707 44.9 %$ (281,533 ) (52.1 ) % Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.-Basic$ 2.25 $ (3.02 ) Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.-Diluted$ 2.24 $ (3.02 ) Revenues Total revenues for the third quarter of 2020 were$533.8 million and were$6.4 million , or 1.2%, lower than the third quarter of 2019. The following table sets forth the Company's total revenues for the three months endedSeptember 30, 2020 and 2019. Three Months Ended September 30, 2020 2019 Dollars in Percentage of Dollars in Percentage of Thousands Total Revenues Thousands Total Revenues Net Sales: Wholesale$ 346,621 64.9 %$ 383,425 71.0 % Eliminations (179,049 ) (33.5 ) (214,547 ) (39.7 ) Net wholesale 167,572 31.4 168,878 31.3 Retail 364,481 68.3 369,467 68.4 Total net sales 532,053 99.7 538,345 99.7 Royalties and franchise fees 1,722 0.3 1,886 0.3 Total revenues$ 533,775 100.0 %$ 540,231 100.0 % 26
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Retail
Retail net sales during the third quarter of 2020 were$364.5 million and were$5.0 million , or 1.3%, lower than during the third quarter of 2019. Retail net sales at our North American Party City stores totaled$329.9 million and were$3.5 million , or 1.1% higher than in the third quarter of 2019. Growth in same-store sales for the Party City brand was partially offset by lower non-comp sales from the divestiture of 65 Canadian Party City stores inOctober 2019 and the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. In addition, store sales increased due to the acquisition of two franchise stores and the opening of two new stores during the twelve months endedSeptember 30, 2020 . Global retail e-commerce sales totaled$32.9 million during the third quarter of 2020 and were$4.6 million , or 12.2% lower than during the corresponding quarter of 2019. Sales at the temporaryHalloween City stores totaled$0.7 million and were$3.8 million lower than in the third quarter of 2019 due to opening 25Halloween City stores in 2020 compared to 256 stores in 2019. Sales at other store formats totaled$1.0 million during the third quarter of 2020.
Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 8.3% during the third quarter of 2020, principally due to growth in everyday sales particularly in the balloon, birthday, and entertaining categories.
Our North American retail e-commerce sales, which include our Amazon marketplace sales, decreased by 28.7% compared to the third quarter of 2019 and, when adjusting for the impact of our "buy online, pick-up in store" program which includes our curbside pickup and delivery (such sales are included in our store sales), increased by 36.0%.
Excluding the impact of e-commerce, same-store sales increased by 4.5%.
Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the third quarter of 2020 totaled$167.6 million and were$1.3 million , or 0.8%, lower than the third quarter of 2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled$57.9 million and were$8.0 million , or 12.1% lower than during 2019 principally due to lower demand from independent third party customers partially offset by growth in Party City franchise stores and mass channel business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled$21.5 million during the third quarter of 2020 and were$4.7 million , or 27.9%, higher than during the corresponding quarter of 2019 principally due to demand growth in domestic distributor and value channels. Our international sales (which includeU.S. export sales and excludeU.S. import sales from foreign subsidiaries) totaled$88.2 million and were$2.0 million , or 2.3%, higher than in 2019. Foreign currency translation positively impacted sales by approximately$1.5 million . Intercompany sales to our retail affiliates totaled$179.0 million during the third quarter of 2020 and were$35.5 million lower than during the corresponding quarter of 2019. Intercompany sales represented 51.7% of total wholesale sales during the third quarter of 2020 and were 16.5% lower than during the third quarter of 2019, principally due to a planned reduction in purchases as part of the initiative to reduce the overall product assortment as well as the impact of fewer Party City Corporate stores due to the sale of 65 Canadian Party City stores inOctober 2019 and the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the third quarter of 2020 totaled$1.7 million and were$0.2 million lower than during the third quarter of 2019 primarily due to the acquisition of 2 franchise stores and closure of 6 franchise stores during the twelve months endedSeptember 30, 2020 . 27 --------------------------------------------------------------------------------
Gross Profit
The following table sets forth the Company's gross profit for the three months
ended
Three Months Ended September 30, 2020 2019 Dollars in Percentage Dollars in
Percentage
Thousands of Net Sales Thousands of Net Sales Retail$ 133,817 36.7 %$ 128,692 34.8 % Wholesale 42,313 25.3 36,240 21.5 Total Gross Profit$ 176,130 33.1 %$ 164,932 30.6 % The gross profit margin on net sales at retail during the third quarter of 2020 was 36.7% or 190 basis points higher than during the corresponding quarter of 2019. The increase was primarily due to lower sales promotions, favorable share of shelf gains, and lower year over year markdowns in conjunction with the Company's "store optimization program" (see "operating expenses" below for further discussion) partially offset by increased costs of freight and helium. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 29.6% during the third quarter of 2020 was 4.2% higher as compared to the third quarter of 2019. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 81.1% during the quarter or 2.8% higher than during the third quarter of 2019. The gross profit margin on net sales at wholesale during the third quarters of 2020 and 2019 was 25.3% and 21.5%, respectively. The increase was principally due to favorable product mix including increased sale of metallic balloons and favorable customer mix. Operating expenses Wholesale selling expenses were$12.0 million during the third quarter of 2020 and were$4.1 million lower than during the corresponding quarter of 2019, largely due to lower payroll costs as well as lower travel, marketing, merchant and commission expenses. Wholesale selling expenses were 7.1% and 9.5% of net wholesale sales during the third quarters of 2020 and 2019, respectively. Retail operating expenses during the third quarter of 2020 were$97.1 million and were$14.5 million lower than the corresponding quarter of 2019. The decrease was primarily due to the divestiture of 65 Canada Retail stores inOctober 2019 , lower advertising spend, and lower payroll and occupancy costs due to the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. These lower expenses were partially offset by higher costs associated with the acquisition of Livario and Webdots in November of 2019. Retail operating expenses were 26.6% and 30.2% of retail sales during the third quarters of 2020 and 2019, respectively.
Franchise expenses during the third quarter of 2020 and 2019 were
General and administrative expenses during the third quarters of 2020 totaled$42.2 million and were$0.9 million , or 2.0%, lower than in the third quarter of 2019 principally due to lower travel expenses, employee payroll costs, and stock compensation (see Note 10 - Capital Stock, of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q), partially offset by higher bad debt, depreciation, and insurance expenses. General and administrative expenses as a percentage of total revenues were 7.9% and 8.0% during the third quarters of 2020 and 2019, respectively.
Art and development costs were
Development stage expenses represent third quarter 2019 costs related to Kazzam which are zero in the third quarter of 2020 due to the acquisition of Ampology's interest inKazzam, LLC in an equity transaction in March of 2020. See Note 19 -Kazzam, LLC in Item 1 for further discussion. 28 -------------------------------------------------------------------------------- During the three months endedMarch 31, 2020 , the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations ("store optimization program") and, after careful consideration and evaluation of the store locations, the Company made the decision in the first quarter of 2020 to accelerate the optimization of its store portfolio with the closure of approximately 21 stores in the third quarter of 2020. Closed stores were primarily located in close proximity to other Party City stores. An additional$3.1 million expense was recorded for the stores during the three months endedSeptember 30, 2020 . These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, for the three months endedMarch 31, 2020 the Company estimated lease impairment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19.
Interest expense, net
Interest expense, net, totaled$13.4 million during the third quarter of 2020, compared to$29.4 million during the third quarter of 2019. The decrease in interest principally reflects forgiveness of interest as part of the debt refinancing in the third quarter of 2020. Refer to Note 16 - Current and Long-Term Obligations of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q for further discussion.
Other (income) expense, net
For the third quarters of 2020 and 2019, other (income) expense, net, totaled
(Gain) on debt refinancing
As described in Note 16 - Current and Long-Term Obligations of Item 1,
"Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly
Report on Form 10-Q, the Company recognized a gain of
Income tax benefit
The effective income tax rate for the three months endedSeptember 30, 2020 , (1.8)% is different from the statutory rate primarily due the excludable portion of the cancellation of debt income, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%. 29
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Nine Months Ended
The following table sets forth the Company's operating results and operating results as a percentage of total revenues for the nine months endedSeptember 30, 2020 and 2019. Nine Months Ended September 30, 2020 2019 (Dollars in thousands) Revenues: Net sales$ 1,198,160 99.6 %$ 1,611,149 99.6 % Royalties and franchise fees 4,349 0.4 6,089 0.4 Total revenues 1,202,509 100.0 1,617,238 100.0 Expenses: Cost of sales 890,587 74.1 1,065,511 65.9 Wholesale selling expenses 37,115 3.1 50,929 3.1 Retail operating expenses 250,502 20.8 302,756 18.7 Franchise expenses 9,225 0.8 9,813 0.6
General and administrative expenses 162,118 13.5
126,497 7.8 Art and development costs 13,095 1.1 17,568 1.1 Development stage expenses 2,932 0.2 7,966 0.5 Gain on sale/leaseback transaction - 0.0 (58,381 ) (3.6 ) Store impairment and restructuring charges 20,818 1.7 25,817 1.6
259,100 16 Total expenses 1,967,772 163.6 1,807,576 111.8 (Loss) from operations (765,263 ) (63.6 ) (190,338 ) (11.8 ) Interest expense, net 63,954 5.3 88,857 5.5 Other expense, net 4,287 0.4 6,643 0.4 (Gain) on debt refinancing (273,149 ) (22.7 ) - 0.0 (Loss) before income taxes (560,355 ) (46.6 ) (285,838 ) (17.7 ) Income tax (benefit) (128,293 ) (10.7 ) (21,809 ) (1.3 ) Net (loss) (432,062 ) (35.9 ) (264,029 ) (16.3 ) Less: Net (loss) attributable to noncontrolling interests (241 ) - (352 ) - Net (loss) attributable to common shareholders of Party City Holdco Inc.$ (431,821 ) (35.9 ) %$ (263,677 ) (16.3 ) % Net (loss) per share attributable to common shareholders ofParty City Holdco Inc. -Basic$ (4.41 ) $ (2.83 ) Net (loss) per share attributable to common shareholders ofParty City Holdco Inc. -Diluted$ (4.41 ) $ (2.83 ) 30
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Revenues
Total revenues for the first nine months of 2020 were
Nine Months Ended September 30, 2020 2019 Percentage Dollars in Percentage of Dollars in of Total Thousands Total Revenues Thousands RevenuesNet Sales : Wholesale$ 692,715 57.6 %$ 962,793 59.5 % Eliminations (345,167 ) (28.7 ) (522,421 ) (32.3 ) Net wholesale 347,548 28.9 440,372 27.2 Retail 850,612 70.7 1,170,777 72.4 Total net sales 1,198,160 99.6 1,611,149 99.6 Royalties and franchise fees 4,349 0.4 6,089 0.4 Total revenues$ 1,202,509 100.0 %$ 1,617,238 100.0 % Retail Retail net sales during the first nine months of 2020 were$850.6 million and were$320.2 million , or 27.3%, lower than during the first nine months of 2019. Retail net sales at our North American Party City stores totaled$737.5 million and were$323.0 million , or 30.5% lower than in the first nine months of 2019 principally due to the temporary closure of all Party City stores in response to the COVID-19 pandemic starting onMarch 18, 2020 with all stores reopened byJune 22, 2020 . Additional factors impacting the sales decline included the divestiture of 65 Canadian Party City stores inOctober 2019 , and the closure of 55 and 21 Party City stores in conjunction with the 2019 and 2020 store optimization programs, respectively. These negative factors affecting sales were partially offset by the acquisition of two franchise stores and the opening of two new stores during the twelve months endedSeptember 30, 2020 . Global retail e-commerce sales totaled$110.5 million during the first nine months of 2020 and were$6.5 million , or 6.3% higher than the first nine months of 2019. Sales at the temporaryHalloween City stores totaled$0.7 million and were$3.8 million lower than in the first nine months of 2019 due to opening 25Halloween City stores in 2020 compared to 256 stores in 2019. Sales at other store formats totaled$1.9 million during the first nine months of 2020.
Same-store sales for the Party City brand (including North American retail e-commerce sales) decreased by 21.8% during the first nine months of 2020, principally due to the impact of the temporary closure of all Party City stores in response to the COVID-19 pandemic.
Our North American retail e-commerce sales, which include our Amazon marketplace sales, decreased by 13.9% compared to the first nine months of 2019 and, when adjusting for the impact of our "buy online, pick-up in store" program which includes our curbside pickup and delivery launched onMarch 25, 2020 (such sales are included in our store sales), increased by 40.1%.
Excluding the impact of e-commerce, same-store sales decreased by 29.3%.
Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.
Wholesale
Wholesale net sales during the first nine months of 2020 totaled$347.5 million and were$92.9 million , or 21.1%, lower than the first nine months of 2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled$126.2 million and were$50.3 million , or 28.5%, lower than during 2019 principally due to lower distributor demand and closed franchise and independent party goods stores as a result of the COVID-19 pandemic. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled$51.1 million during the first nine months of 2020 and were$3.7 million , or 6.7%, lower than during the corresponding period of 2019 principally due to the negative impact of the COVID-19 pandemic earlier in the year partially offset by demand recovery in the domestic distributer and value channels later in the year. Our international sales (which includeU.S. export sales and excludeU.S. import sales from foreign subsidiaries) totaled$170.3 million and were$38.8 million , or 18.6%, lower than in 2019. Foreign currency translation negatively impacted sales by approximately$0.7 million . 31
-------------------------------------------------------------------------------- Intercompany sales to our retail affiliates totaled$345.2 million during the first nine months of 2020 and were$177.2 million lower than during the first nine months of 2019. Intercompany sales represented 49.8% of total wholesale sales during the first nine months of 2020 and were 33.9% lower than during the first nine months of 2019, principally reflecting the impact of the Party City store closures related to the COVID-19 pandemic. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.
Royalties and franchise fees
Royalties and franchise fees for the first nine months of 2020 totaled$4.3 million and were$1.8 million lower than during the first nine months of 2019 primarily due to lower sales as a result of store closures resulting from the COVID-19 pandemic. Gross Profit
The following table sets forth the Company's gross profit for the nine months
ended
Nine Months Ended September 30, 2020 2019 Dollars in Percentage Dollars in
Percentage
Thousands of Net Sales Thousands of Net Sales Retail$ 257,035 30.2 %$ 436,761 37.3 % Wholesale 50,538 14.5 108,877 24.7 Total Gross Profit$ 307,573 25.7 %$ 545,638 33.9 % The gross profit margin on net sales at retail during the first nine months of 2020 was 30.2% or 710 basis points lower than during the corresponding nine months of 2019. The decrease was mainly due to sales deleverage from the temporary closure of all the Company's retail stores in response to the COVID-19 pandemic starting onMarch 18, 2020 with all stores reopened byJune 22, 2020 . In addition, the increased costs of freight and helium contributed to the margin decline. The declines in margin were partially offset by margin increases due to favorable share of shelf gains and lower year over year markdowns in conjunction with the Company's "store optimization program" (see "operating expenses" below for further discussion). Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 30.2% during the first nine months of 2020 was 350 bps higher as compared to the first nine months of 2019. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 81.4% during the first nine months of 2020 or 340 bps higher than during the first nine months of 2019. The gross profit margin on net sales at wholesale during the first nine months of 2020 and 2019 was 14.5% and 24.7%, respectively. The decrease was principally due to the deleveraging of distribution and manufacturing costs from lower sales to closed franchise and independent party stores due to the COVID-19 pandemic as well as increased rent associated with the sale leaseback transaction.
Operating expenses
Wholesale selling expenses were$37.1 million during the first nine months of 2020 and were$13.8 million lower than during the corresponding nine months of 2019 principally due to lower payroll costs as well as lower travel, marketing, merchant and commission expenses. Wholesale selling expenses were 10.7% and 11.6% of net wholesale sales during the first nine months of 2020 and 2019, respectively. Retail operating expenses during the first nine months of 2020 were$250.5 million and were$52.3 million lower than the corresponding nine months of 2019. The decrease was mainly due to the COVID-19 pandemic impact on costs including employee payroll from furloughs and lower advertising and credit card fees. In addition, retail operating expenses were lower due to the sale of the 65 Canada Retail stores, and the closing of 55 US stores in conjunction with the store optimization program partially offset by higher costs associated with the acquisition of Livario and Webdots in November of 2019. Retail operating expenses were 29.4% and 25.9% of retail sales during the first nine months of 2020 and 2019, respectively.
Franchise expenses during the first nine months of 2020 and 2019 were
32 -------------------------------------------------------------------------------- General and administrative expenses during the first nine months of 2020 totaled$162.1 million and were$35.6 million , or 28.2%, higher than in the first nine months of 2019 mainly due to higher professional fees, increased depreciation, stock compensation (see Note 10 - Capital Stock, of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q), higher bad debt expense, and new executive leadership compensation partially offset by lower employee payroll from furloughs associated with the COVID-19 pandemic and less travel. General and administrative expenses as a percentage of total revenues were 13.5% and 7.8% during the first nine months of 2020 and 2019, respectively.
Art and development costs were
Development stage expenses represent costs related to Kazzam.
DuringJune 2019 , the Company reported a$58.4 million gain from the sale and leaseback of its main distribution center inChester, New York and its metallic balloons manufacturing facility inEden Prairie, Minnesota . The aggregate sale price for the three properties was$128.0 million . Simultaneous with the sale, the Company entered into twenty-year leases for each of the facilities. During the first nine months of 2020 and 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations ("store optimization program") and, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 21 and 55 stores in the first nine months of 2020 and 2019, respectively. Closed stores were primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company estimated lease impairment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19.Goodwill , intangibles and long-lived assets impairment charges for the nine months endedSeptember 30, 2020 were$581.4 million . The non-cash pre-tax impairment charges were the result of a sustained decline in the Company's market capitalization, significantly reduced customer demand for its products due to COVID-19 and reduced fair value of certain intangibles and long-lived assets. See Note 4 -Goodwill , Intangibles and Long-Lived Assets Impairment, of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q for further discussion.
Interest expense, net
Interest expense, net, totaled$64.0 million during the first nine months of 2020, compared to$88.9 million during the first nine months of 2019. The decrease in interest principally reflects lower debt following a debt refinancing in the third quarter of 2020. Refer to Note 16 - Current and Long-Term Obligations of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q for further discussion.
Other expense, net
For the first nine months of 2020 and 2019, other expense, net, totaled
(Gain) on debt refinancing
As described in Note 16 - Current and Long-Term Obligations of Item 1,
"Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly
Report on Form 10-Q, the Company recognized a gain of
Income tax benefit
The effective income tax rate for the nine months endedSeptember 30, 2020 , 22.9%, is different from the statutory rate primarily due the non-deductible portions of the goodwill impairment charges noted above, the excludable portion of the cancellation of debt income, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%. 33
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Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share - Diluted
The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company's net income (loss) adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation, and impairment charges. Adjusted net income per common share - diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company's presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company's future results will be unaffected by unusual or non-recurring items. The Company presents the measures because the Company believes they assist investors in comparing the Company's performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share - diluted are helpful benchmarks to evaluate its operating performance.
Adjusted EBITDA, adjusted net income, and adjusted net income per common share - diluted have limitations as analytical tools. Some of these limitations are:
• they do not reflect the Company's cash expenditures or future requirements
for capital expenditures or contractual commitments;
• they do not reflect changes in, or cash requirements for, the Company's
working capital needs;
• adjusted EBITDA does not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal payments, on
the Company's indebtedness;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and adjusted EBITDA does not reflect any cash requirements for such
replacements;
• non-cash compensation is and will remain a key element of the Company's
overall long-term incentive compensation package, although the Company
excludes it as an expense when evaluating its core operating performance
for a particular period;
• they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and
• other companies in the Company's industry may calculate adjusted EBITDA,
adjusted net income and adjusted net income per common share differently
than the Company does, limiting its usefulness as a comparative measure.
34 -------------------------------------------------------------------------------- Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted only on a supplemental basis. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) Net (loss) income$ 239,665 $
(281,745 )
13,422 29,424 63,954 88,857 Income tax (benefit) (4,164 ) (27,252 ) (128,293 ) (21,809 ) Depreciation and amortization 17,278 19,155 57,796 62,380 EBITDA 266,201 (260,418 ) (438,605 ) (134,601 ) Non-cash purchase accounting adjustments - - - 2,757 Store impairment and restructuring charges (a) 6,763 8,694 36,285 54,960 Other restructuring, retention and severance (b) 2,957 (73 ) 11,701 5,248Goodwill , intangibles and long-lived assets impairment (c) 44,732 259,100 581,380 259,100 Deferred rent (d) 254 446 (2,618 ) (1,042 ) Closed store expense (e) 1,247 2,326 2,882 3,424 Foreign currency losses/(gains), net (3,312 ) 646 955 486 Stock option expense - time - based (f) 111 409 671 1,150 Stock option expense - performance - based (n) - - 7,847 - Restricted stock unit and restricted cash awards expense - performance-based 510 - 510 - Non-employee equity-based compensation (g) - 128 1,033 386 Undistributed income (loss) in equity method investments (59 ) 7 356 (195 ) Corporate development expenses (h) 581 4,588 6,193 11,782 Restricted stock units - time-based (i) 429 610 1,568 1,543 Restricted stock unit expense - performance-based (m) - 560 - 1,036 Non-recurring legal settlements/costs 661 194 7,170 1,795 (Gain) on debt refinancing (p) (273,149 ) - (273,149 ) - Gain on sale/leaseback transaction (o) - - - (58,381 ) COVID - 19 (l) 679 - 71,059 - Other 546 (75 ) 3,034 217 Adjusted EBITDA $ 49,151 $ 17,142 $ 18,272$ 149,665 35
-------------------------------------------------------------------------------- Three Months Ended September 30, 2020 EBITDA Adjustments Stock Option Goodwill, Expense/Non- intangibles Employee Equity September and Store Compensation/ 30, 2020 long-lived impairment Restricted OtherSeptember 30 , GAAP assets and Corporate stock units - restructuring, Closed Foreign 2020 Basis (as impairment restructuring Gain on debt development
time-based Deferred retention and store COVID- currency
Non-GAAP reported) (c) charges (a) refinancing (p) expenses (h) Legal (f)(g)(i)(n) Rent (d) severance (b) expense (e) 19 (l) losses Other basis Revenues: Net sales$ 532,053 $ 532,053 Royalties and franchise fees 1,722 1,722 Total revenues 533,775 533,775 Cost of sales 355,923 (4,837 ) (80 ) (1,266 ) (469 ) 349,271 Wholesale selling expenses 11,950 11,950 Retail operating expenses 97,100 (224 ) (1,225 ) (1,745 ) 93,906 Franchise expenses 2,795 2,795 General and administrative expenses 42,191 (370 ) (661 ) (1,050 ) 50 (2,957 ) (22 ) 2,332 39,513 Art and development costs 4,257 4,257 Store impairment and restructuring charges 1,926 (1,926 ) -Goodwill , intangibles and long-lived assets impairment 44,732 (44,732 ) - Total expenses 560,874 (44,732 ) (6,763 ) - (370 ) (661 ) (1,050 ) (254 ) (2,957 ) (1,247 ) (679 ) - (469 ) 501,692 (Loss) from operations (27,099 ) 32,083 Interest expense, net 13,422 13,422 Other (income) expense, net (2,873 ) (211 ) 3,312 (18 ) 210 (Gain) on debt refinancing (273,149 ) 273,149 - Income (loss) before income taxes 235,501 18,451 Interest expense, net 13,422 13,422 Depreciation and amortization 17,278 17,278 EBITDA 266,201 49,151 Adjustments to EBITDA (217,050 ) (44,732 )
(6,763 ) 273,149 (581 ) (661 ) (1,050 ) (254 ) (2,957 ) (1,247 ) (679 ) 3,312 (487 ) - Adjusted EBITDA$ 49,151 $ (44,732 ) $ (6,763 ) $ 273,149 $ (581 )$ (661 ) $ (1,050 )$ (254 ) $ (2,957 ) $ (1,247 ) $ (679 ) $ 3,312 $ (487 ) $ 49,151 35
-------------------------------------------------------------------------------- Three Months Ended September 30, 2019 EBITDA Adjustments Stock Option Expense/Non- Employee Equity September Store Compensation/ 30, 2019Goodwill , impairment Gain on Restricted OtherSeptember 30 , GAAP intangibles and and sale/leaseback Corporate stock units - restructuring, Closed Foreign 2019 Basis (as long-lived assets restructuring transaction development time-based Deferred retention and store currency Non-GAAP reported) impairment (c) charges (a) (o) expenses (h) Legal (f)(g)(i)(m) Rent (d) severance (b) expense (e) gains Other basis Revenues: Net sales$ 538,345 $ 538,345 Royalties and franchise fees 1,886 1,886 Total revenues 540,231 540,231 Cost of sales 373,413 (6,120 ) (656 ) 366,637 Wholesale selling expenses 16,084 16,084 Retail operating expenses 111,595 (2,240 ) 109,355 Franchise expenses 3,274 3,274 General and administrative expenses 43,062 (194 ) (1,707 ) 210 73 (86 ) 41,358 Art and development costs 5,927 5,927 Development stage expenses 2,728 (2,728 ) - Store impairment and restructuring charges 2,574 (2,574 ) -Goodwill , intangibles and long-lived assets impairment 259,100 (259,100 ) - Total expenses 817,757 (259,100 ) (8,694 ) - (2,728 ) (194 ) (1,707 ) (446 ) 73 (2,326 )
- - 542,635 Income from operations (277,526 ) (2,404 ) Interest expense, net 29,424 29,424 Other expense, net 2,047 (1,860 ) (646 ) 68 (391 ) Income before income taxes (308,997 ) (31,437 ) Interest expense, net 29,424 29,424 Depreciation and amortization 19,155 19,155 EBITDA (260,418 ) 17,142 Adjustments to EBITDA 277,560 (259,100 ) (8,694 ) - (4,588 ) (194 ) (1,707 ) (446 ) 73 (2,326 ) (646 ) 68 - Adjusted EBITDA$ 17,142 $ (259,100 )$ (8,694 ) $ -$ (4,588 ) $ (194 ) $ (1,707 )$ (446 ) $ 73$ (2,326 ) $ (646 ) $ 68 $ 17,142 36
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Nine Months Ended September 30, 2020 EBITDA Adjustments Stock Option Expense/Non- September Store Employee Equity 30, 2020Goodwill , impairment Compensation/ OtherSeptember 30 , GAAP intangibles and and Corporate Restricted restructuring, Closed Foreign 2020 Basis (as long-lived assets restructuring Gain on debt development stock units Deferred retention and store COVID- currency Non-GAAP reported) impairment (c) charges (a) refinancing (p) expenses (h) Legal (f)(g)(i)(n) Rent (d) severance (b) expense (e) 19 (l) losses Other basis Revenues: Net sales$ 1,198,160 $ 1,198,160 Royalties and franchise fees 4,349 4,349 Total revenues 1,202,509 1,202,509 Cost of sales 890,587 (15,467 ) (214 ) (4,437 ) (42,446 ) (898 ) 827,125 Wholesale selling expenses 37,115 (1,840 ) (623 ) 34,652 Retail operating expenses 250,502 2,685 (2,733 ) (16,312 ) 234,142 Franchise expenses 9,225 (672 ) 8,553 General and administrative expenses 162,118 (570 ) (7,170 ) (10,596 ) 147 (7,264 ) (149 ) (11,006 ) 125,510 Art and development costs 13,095 13,095 Development stage expenses 2,932 (2,932 ) - (Gain) on sale/leaseback transaction - - Store impairment and restructuring charges 20,818 (20,818 ) -Goodwill , intangibles and long-lived assets impairment 581,380 (581,380 ) - Total expense 1,967,772 (581,380 ) (36,285 ) - (5,342 ) (7,170 ) (10,596 ) 2,618 (11,701 ) (2,882 ) (71,059 ) - (898 ) 1,243,077
(Loss) from operations (765,263 ) (40,568 ) Interest expense, net 63,954 63,954 Other expense, net 4,287 (851 ) (1,033 ) (955 ) (2,492 ) (1,044 ) (Gain) on debt refinancing (273,149 ) 273,149 - (Loss) before income taxes (560,355 ) (103,478 ) Interest expense, net 63,954 63,954 Depreciation and amortization 57,796 57,796 EBITDA (438,605 ) 18,272 Adjustments to EBITDA 456,877 (581,380 ) (36,285 ) 273,149 (6,193 ) (7,170 ) (11,629 ) 2,618 (11,701 ) (2,882 ) (71,059 ) (955 ) (3,390 ) - Adjusted EBITDA$ 18,272 $ (581,380 ) $
(36,285 )
37
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Nine Months Ended
Stock Option Expense/Non- September Store Employee Equity 30, 2019Goodwill , impairment Gain on Compensation/ Other Non-CashSeptember 30 , GAAP intangibles and and sale/leaseback Corporate Restricted restructuring, Closed Purchase Foreign 2019 Basis (as long-lived assets restructuring transaction development stock units Deferred retention and store Accounting currency Non-GAAP reported) impairment (c) charges (a) (o) expenses (h) Legal (f)(g)(i)(m) Rent (d) severance (b) expense (e) Adjustments gains Other basis Revenues: Net sales$ 1,611,149 $ 1,611,149 Royalties and franchise fees 6,089 6,089 Total revenues 1,617,238 1,617,238 Cost of sales 1,065,511 (29,143 ) 831 1,037,199 Wholesale selling expenses 50,929 50,929 Retail operating expenses 302,756 (31 ) (3,111 ) 299,614 Franchise expenses 9,813 9,813 General and administrative expenses 126,497 (1,795 ) (4,115 ) 211 (5,217 ) (313 ) 115,268 Art and development costs 17,568 17,568 Development stage expenses 7,966 (7,965 ) 1 Gain on sale/leaseback transaction (58,381 ) 58,381 - Store impairment and restructuring charges 25,817 (25,817 ) -Goodwill , intangibles and long-lived assets impairment 259,100 (259,100 ) - Total expenses 1,807,576 (259,100 ) (54,960 ) 58,381 (7,965 ) (1,795 ) (4,115 ) 1,042 (5,248 ) (3,424 ) - - - 1,530,392 Income from operations (190,338 ) 86,846 Interest expense, net 88,857 88,857 Other expense, net 6,643 (3,817 ) (2,757 ) (486 ) (22 ) (439 )
(Loss) before income taxes (285,838 ) (1,572 ) Interest expense, net 88,857 88,857 Depreciation and amortization 62,380 62,380 EBITDA (134,601 ) 149,665 Adjustments to EBITDA 284,266 (259,100 ) (54,960 ) 58,381 (11,782 ) (1,795 ) (4,115 ) 1,042 (5,248 ) (3,424 ) (2,757 ) (486 ) (22 ) - Adjusted EBITDA$ 149,665 $ (259,100 )$ (54,960 ) $ 58,381$ (11,782 ) $ (1,795 ) $ (4,115 )$ 1,042 $ (5,248 ) $ (3,424 ) $ (2,757 ) $ (486 ) $ (22 ) $ 149,665 38
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Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands, except per share amounts) Income (loss) before income taxes $ 235,501$ (308,997 ) $ (560,355 ) $ (285,838 ) Intangible asset amortization 2,899 3,553 8,444 10,528 Non-cash purchase accounting adjustments - 424 - 4,200 Amortization of deferred financing costs and original issuance discounts (j) 875 1,222 3,276 3,511 Store impairment and restructuring charges (a) 1,321 8,694 29,475 54,960 Other restructuring charges (b) 2,622 (263 ) 10,139 2,822Goodwill , intangibles and long-lived assets impairment (c) 44,732 259,100 581,380 259,100 Non-employee equity-based compensation (g) - 128 1,033 386 Refinancing charges (j) - - - 36 Non-recurring legal settlements/costs 605 - 7,026 - Stock option expense - time - based (f) 110 409 671 1,150 Stock option expense - performance - based (n) - - 7,847 - Gain on sale/leaseback transaction (o) - - - (58,381 ) (Gain) on debt refinancing (p) (273,149 ) - (273,149 ) - Restricted stock unit expense - performance-based (m) - 560 - 1,036 COVID - 19 (l) 733 - 71,113 - Adjusted income (loss) before income taxes 16,249 (35,170 ) (113,100 ) (6,490 ) Adjusted income tax (benefit) expense (k) 5,234 (9,459 ) (36,416 ) (2,117 ) Adjusted net (loss) income $ 11,015 $
(25,711 )
$ 0.10$ (0.28 ) $ (0.78 )$ (0.05 ) Weighted-average number of common shares-diluted 106,875,631 93,346,448 97,872,174 93,271,392
(a) During the three and nine months ended
initiated a store optimization program under which it identified 55 stores
for closure, out of which 35 stores were closed in 2019 and 20 stores were
closed in
first quarter of 2020 were closed in the third quarter. In conjunction with
the program, during the nine months ended
recorded the following charges: inventory reserves:
asset impairment:
stores that were closed in earlier in 2020 due to COVID-19), plant and
equipment impairment:
stores:
Company recorded the following charges related to the store optimization
program: inventory reserves:
costs relates to closing stores:
Store Impairment and Restructuring Charges in Item 1 for further discussion.
Additionally, during the process of liquidating the inventory in such stores,
the Company lost margin of
(b) Amounts expensed during the first nine months of 2020 principally relate to
severance due to organizational changes. Amounts expensed during 2019
principally relate to executive severance and the write-off of inventory for
a section of the Company's Party City stores that were restructured.
(c) As a result of a sustained decline in market capitalization and reduced fair
value of certain intangibles and long-lived assets, the Company recognized
non-cash pre-tax goodwill and intangibles impairment charges for the nine
months ended
(d) The "deferred rent" adjustment reflects the difference between accounting for
rent and landlord incentives in accordance with GAAP and the Company's actual
cash outlay for such items. During the first quarter of 2019, the Company
adopted ASC 842. Under the standard, the difference between accounting for
rent and landlord incentives in accordance with GAAP and the Company's actual
cash outlay for such items is now incorporated in the Company's operating
lease asset.
(e) Charges incurred related to closing and relocating stores in the ordinary
course of business.
(f) Represents non-cash charges related to stock options - time-based and
performance-based.
(g) The acquisition of Ampology's interest in
transaction. See Note 19 -
(h) Primarily represents costs for Kazzam (see Note 19 -
for further discussion) and third-party costs related to acquisitions
(principally legal and diligence expenses).
(i) Non-cash charges for restricted stock units that vest based on service
conditions. 39
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(j) During
conjunction with the amendment, the Company wrote-off capitalized deferred
financing costs, original issue discounts and call premiums. The amounts are
included in "Amortization of deferred financing costs and original issuance
discounts" in the adjusted net income table above.
(k) Represents income tax expense/benefit after excluding the specific tax
impacts for each of the pre-tax adjustments. The tax impacts for each of the
adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.
(l) Represents COVID-19 expenses for employees on temporary furlough for whom the
Company provides health benefits; non-payroll expenses including advertising,
occupancy and other store expenses.
(m) Non-cash charges for restricted stock units that vest based on performance
conditions.
(n) Represents non-cash charges related to stock options that vest based on
performance conditions. For the three and nine months ended
2020, this includes a one-time compensation expense of
from THL not achieving specified investment returns. See Note 10, Capital
Stock of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in
this Quarterly Report on Form 10-Q.
(o) During
leaseback of its main distribution center in
metallic balloons manufacturing facility in
aggregate sale price for the three properties was
the sale, the Company entered into twenty-year leases for each of the
facilities.
(p) As described in Note 16 - Current and Long-Term Obligations of Item 1,
"Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly
Report on Form 10-Q, the Company recognized a gain of
refinancing transactions.
Liquidity
We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs. Per Note 16, Current and Long-Term Obligations of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q, as ofSeptember 30, 2020 , the Company's indebtedness principally consisted of: (i) a senior secured term loan facility ("Term Loan Credit Agreement"), (ii) 6.125% Senior Notes (the "2023 Notes"), (iii) 6.625% Senior Notes, (iv) First Lien Party City Notes (as defined below), (v) First Lien Anagram Notes (as defined below), and (vi) Second Lien Anagram Notes (as defined below). Additionally, the Company had an asset-based revolving credit facility ("ABL Facility") that it draws down on as necessary. Prior toApril 2019 , the Company had a$540,000 asset-based revolving credit facility (with a seasonal increase to$640,000 during a certain period of each calendar year) (the "ABL Facility"), which matures duringAugust 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company's other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed$50,000 . DuringApril 2019 , the Company amended the ABL Facility. Such amendment removed the seasonal component and made the ABL Facility a$640,000 facility with no seasonal modification component. In connection with the refinancing transactions as follows, PCHI (1) reduced the ABL revolving commitments and prepaid the outstanding ABL revolving loans, in each case, in an aggregate principal amount equal to$44,000 in accordance with the ABL Facility credit agreement, and (2) designatedAnagram Holdings and each of its subsidiaries as an unrestricted subsidiary under the ABL Facility and the Term Loan Credit Agreement. In the first nine months of 2020 the Company drew down$269.8 million under the ABL Facility. AtSeptember 30, 2020 ,$100.1 million was invested inUS Treasury funds with maturities of less than three months. The Company had approximately$ 178.5 million of availability under the ABL Facility as ofSeptember 30, 2020 . OnJuly 30, 2020 (the "Settlement Date"), the Company and certain of its direct or indirect subsidiaries, including PCHI,Anagram Holdings, LLC , aDelaware limited liability company and wholly owned direct subsidiary of PCHI ("Anagram Holdings "), andAnagram International, Inc. , aMinnesota corporation and wholly owned direct subsidiary ofAnagram Holdings , completed certain refinancing transactions, including, among other things: (i) the exchange of$327,076 of 6.125% Senior Notes due 2023 (the "2023 Notes") and$392,746 of 6.625% Senior Notes due 2026 (the "2026 Notes" and, together with the 2023 Notes, the "Existing Notes") issued by PCHI, in each case tendered in the Company's offers to exchange pursuant to the terms described in a confidential offering memorandum, for (A)$156,669 of Senior Secured First Lien Floating Rate Notes due 2025 (the "First Lien Party City Notes") issued by PCHI; (B)$84,687 of 10.00% PIK/Cash Senior Secured Second Lien Notes due 2026 (the "Second Lien Anagram Notes") issued byAnagram Holdings andAnagram International (together, the "Anagram Issuers"); and (C) 15,942,551 shares of the Company's common stock,$0.01 par value per share (the "Common Stock"); (ii) the issuance of$110,000 in the aggregate of 15.00% PIK/Cash Senior Secured First Lien Notes due 2025 (the "First Lien Anagram Notes") by the Anagram Issuers and an additional$5,000 of First Lien Party City Notes in connection with a rights offering and a private placement, as applicable; and (iii) the solicitations of certain consents with respect to the indentures governing Existing Notes. 40 -------------------------------------------------------------------------------- The First Lien Party City Notes were issued pursuant to an indenture, dated as of the Settlement Date, among PCHI, as issuer, certain guarantors party thereto (the "Party City Guarantors") andAnkura Trust Company, LLC ("Ankura"), as trustee and collateral trustee. The First Lien Party City Notes were issued in an aggregate amount of$161,669 and will mature onJuly 15, 2025 . Interest on the First Lien Party City Notes accrues from the Settlement Date at a floating rate equal to the 6-month London Inter-Bank Offered Rate plus 500 basis points (with a floor of 75 basis points) per annum, payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, commencingJanuary 15, 2021 . The First Lien Party City Notes are senior secured obligations of PCHI and the Party City Guarantors. The First Lien Party City Notes are pari passu in right of payment with all of PCHI' other senior indebtedness, including the existing senior secured term loan facility and the ABL Facility, and are structurally subordinated to the First Lien Anagram Notes and the Second Lien Anagram Notes, to the extent of the value of the Anagram Collateral (as defined below). The First Lien Party City Notes are secured by a first priority lien on collateral that includes liens on substantially all assets (other than certain accounts, inventory, deposit accounts, securities accounts, related assets and general intangibles) of the Party City Guarantors, in each case subject to certain exceptions and permitted liens. The First Lien Anagram Notes were issued pursuant to an indenture, dated as of the Settlement Date, amongAnagram Holdings , as issuer,Anagram International , as co-issuer, certain guarantors party thereto (the "Anagram Guarantors") andAnkura , as trustee and collateral trustee. The First Lien Anagram Notes were issued in an aggregate amount of$110,000 and will mature onAugust 15, 2025 . Interest on the First Lien Anagram Notes accrues from the Settlement Date at (i) a rate of 10.00% per annum, payable in cash; and (ii) a rate of 5.00% per annum payable by increasing the principal amount of the outstanding First Lien Anagram Notes or issuing additional First Lien Anagram Notes, as the case may be, in each case payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencingFebruary 15, 2021 . The First Lien Anagram Notes are senior secured obligations of the Anagram Issuers and are pari passu in right of payment with all of the Anagram Issuers' other senior indebtedness. The First Lien Anagram Notes are secured by a first priority lien on collateral that consists of substantially all assets and properties of the Anagram Issuers and the Anagram Guarantors, subject to certain exceptions and permitted liens (the "Anagram Collateral"). Such security interests are senior in priority to the security interests in such assets that secure the Second Lien Anagram Notes. The Second Lien Anagram Notes were issued pursuant to an indenture, dated as of the Settlement Date, amongAnagram Holdings , as issuer,Anagram International , as co-issuer, the Anagram Guarantors andAnkura , as trustee and collateral trustee. The Second Lien Anagram Notes were issued in an aggregate amount of$84,687 and will mature onAugust 15, 2026 . Interest on the Second Lien Anagram Notes accrues from the Settlement Date at (i) a rate of 5.00% per annum, payable, at the Anagram Issuers' option, entirely in cash or entirely by increasing the principal amount of the outstanding Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes, as the case may be; and (ii) a rate of 5.00% per annum payable by increasing the principal amount of the outstanding Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes, as the case may be, in each case payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencingFebruary 15, 2021 ; provided, however, that onAugust 15, 2025 , interest will be required to be paid by increasing the principal amount of the Second Lien Anagram Notes or issuing the principal amount of the Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes. OnFebruary 15, 2026 , the Anagram Issuers will prepay in cash a portion of the Second Lien Anagram Notes then outstanding in an amount necessary such that the Second Lien Anagram Notes are not treated as "applicable high yield discount obligations" within the meaning of Section 163(i) of the Internal Revenue Code of 1986, as amended. The Second Lien Anagram Notes are senior secured obligations of the Anagram Issuers and are pari passu in right of payment with all of the Anagram Issuers' other senior indebtedness. The Second Lien Anagram Notes are secured by a second priority lien on the Anagram Collateral. Such security interests are junior to the security interests in such assets that secure the First Lien Anagram Notes. The Company evaluated the refinancing transaction in accordance with ASC 470-60 Troubled Debt Restructuring. The exchange of the 2023 Notes and 2026 Notes for the First Lien Party City Notes, Second Lien Anagram Notes, and shares of Common Stock, as well as the purchase by the participants in the exchange of First Lien Anagram Notes represents a troubled debt restructuring ("TDR"). As the future undiscounted cash flows of the restructured debt were less than the net carrying value of the Existing Notes (including accrued interest and unamortized discount) adjusted for Common Stock issued to the participants in the exchange and such participants' purchase of the First Lien Anagram Notes, the Company recognized a gain of$273,149 which reflects$18,902 of third-party fees incurred and,$27,007 of Common Stock issued in the exchange. The Company received$39,544 of cash from the participants in the exchange related to$44,500 of principal amount of First Lien Anagram Notes with an undiscounted value of$82,160 . Interest expense is not currently recognized for this portion of the restructured debt. Another portion of the restructured debt related to one holder of Existing Notes not result in gain recognition as the undiscounted cash flows of the restructured debt was higher than the carrying value of the existing debt. The carrying amount of this portion of the restructured debt is$32,328 and the interest expense will be recognized prospectively at a 3.5% effective interest rate. Amounts attributed to purchasers of the First Lien Anagram Noteswho were not participants in the exchange (principal balance of$50,500 ) are recognized at consideration received less allocated transaction costs (netting to$45,678 ) and the effective interest method will be used to recognize interest expense prospectively. 41
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Cash Flow
Net cash used in operating activities totaled$56.8 million and$182.3 million during the nine months endedSeptember 30, 2020 and 2019, respectively. The variance principally reflects decrease in accounts receivable due to decreased sales as well as reduced payments from lower inventory levels partially offset by increase in prepaid expenses and other current assets. Changes in operating assets and liabilities during the first nine months of 2020 resulted in cash provided of$16.2 million and during the first nine months of 2019 resulted in the cash used of$159.1 million . Net cash used in investing activities totaled$32.4 million during the nine months endedSeptember 30, 2020 , as compared to$58.6 million provided by investing activities during the nine months endedSeptember 30, 2019 . Capital expenditures during the nine months endedSeptember 30, 2020 and 2019 were$32.1 million and$45.8 million , respectively. Retail capital expenditures totaled$17.7 million during 2020. Wholesale capital expenditures during 2020 totaled$14.4 million . Net cash provided by financing activities was$227.4 million during the nine months endedSeptember 30, 2020 and$97.8 million during the nine months endedSeptember 30, 2019 . The variance was principally due to a$100.5 million of proceeds from the debt refinancing. For more information refer to Note 16, Current and Long-Term Obligations of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q, as ofSeptember 30, 2020 .
As of
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein. We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.
Long-Lived and Intangible Assets (including
We review the recoverability of our long-lived assets, including finite-lived intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets/asset groups, other than goodwill, based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If an impairment indicator exists, we compare the undiscounted future cash flows of the asset/asset group to the carrying value of the asset/asset group. If the sum of the undiscounted future cash flows is less than the carrying value of the asset/asset group, we would calculate discounted future cash flows based on market participant assumptions. If the sum of discounted cash flows is less than the carrying value of the asset/asset group, we would recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). When fair values are not readily available, we estimate fair values using discounted expected future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates. In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis generally on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.Goodwill and other intangibles that have indefinite lives are reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. For purposes of testing for impairment, reporting units are determined by identifying individual operating segments within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test. 42 -------------------------------------------------------------------------------- If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates. During the first and thirds quarter of 2020, the Company identified impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units. As a result, the Company recorded a$581.4 million goodwill, intangibles and long-lived assets impairment charge. See Note 4 -Goodwill , Intangibles and Long-Lived Assets Impairment, of Item 1, "Condensed Consolidated Financial Statements (Unaudited)" in this Quarterly Report on Form 10-Q for further discussion. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record additional impairment charges for the goodwill of such reporting units.
Contractual Obligations
Other than as described above under "Liquidity", there were no material changes
to our future minimum contractual obligations as of
Off Balance Sheet Arrangements
We had no off-balance sheet arrangements during the three months ended
Seasonality
Wholesale Operations
Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due toHalloween , the inventory balances of our wholesale operations are slightly higher during the second and third quarters. Additionally,Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the quarter. Retail Operations Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to ourHalloween sales in October and, to a lesser extent, year-end holiday sales. 43 --------------------------------------------------------------------------------
Cautionary Note Regarding Forward-Looking Statements
From time to time, including in this filing and, in particular, the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," we make "forward-looking statements" within the meaning of federal and state securities laws. Disclosures that use words such as the company "believes," "anticipates," "expects," "estimates," "intends," "will," "may" or "plans" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled "Risk Factors" included in our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 and in the "Risk Factors" section of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:
• potential risks and uncertainties relating to the ultimate geographic
spread of COVID-19; • economic slowdown affecting consumer spending and general economic conditions, including as a result of the COVID-19 pandemic; • the severity of the COVID-19 pandemic; • the duration of the COVID-19 pandemic;
• actions that may be taken by governmental authorities to contain the
COVID-19 pandemic or to treat its impact;
• the potential negative impacts of COVID-19 on the global economy and
foreign sourcing;
• the impacts of COVID-19 on the Company's financial condition and business
operation; • our ability to compete effectively in a competitive industry; • fluctuations in commodity prices; • helium shortages;
• our ability to appropriately respond to changing merchandise trends and
consumer preferences; • successful implementation of our business strategy; • decreases in ourHalloween sales; • unexpected or unfavorable consumer responses to our promotional or merchandising programs;
• failure to comply with existing or future laws relating to our marketing
programs, e-commerce initiatives and the use of consumer information;
• disruption to the transportation system or increases in transportation costs;
• product recalls or product liability; • economic slowdown affecting consumer spending and general economic conditions;
• loss or actions of third-party vendors and loss of the right to use
licensed material; • disruptions at our manufacturing facilities;
• failure by suppliers or third-party manufacturers to follow acceptable
labor practices or to comply with other applicable laws and guidelines;
• changes in regulations or enforcement, or our failure to comply with
existing or future regulations; • our international operations subjecting us to additional risks; 44
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• potential litigation and claims;
• risks related to international trade disputes and the
trade policy; • lack of available additional capital; • our inability to retain or hire key personnel; • risks associated with leasing substantial amounts of space;
• risks arising from the results of the public referendum held in United
Kingdom and its membership in the
• failure of existing franchisees to conduct their business in accordance
with agreed upon standards;
• adequacy of our information systems, order fulfillment and distribution
facilities;
• our ability to adequately maintain the security of our electronic and other
confidential information; • our inability to successfully identify and integrate acquisitions; • adequacy of our intellectual property rights;
• potential negative effect of certain aspects of recent
tax reform; • risks related to our substantial indebtedness; • risks associated with interest rate changes;
• straining of resources and ability to attract and retain qualified board
members due to maintaining and improving our financial controls; • decline of our common stock market price due to the large number of outstanding shares of our common stock eligible for sale; and
• the other factors set forth under "Risk Factors" in our Annual Report on
Form 10-K, filed with the
section of this Quarterly Report on Form 10-Q.
Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to conform these statements to actual results or to changes in our expectations.
You should read this filing with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
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