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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2020

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____  to _____

 

Commission file number 000-19364

TIVITY HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

62-1117144

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

701 Cool Springs Boulevard, Franklin, TN  37067

(Address of principal executive offices) (Zip code)

 

(800) 869-5311

(Registrant's telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock - $.001 par value

 

TVTY

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes

No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Smaller reporting company

Non-accelerated filer

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

No

 

 

As of August 4, 2020, there were outstanding 48,560,369 shares of the registrant’s common stock, par value $.001 per share (“Common Stock”).

 

 

 

 


 

Tivity Health, Inc.

Form 10-Q

 

Table of Contents

 

 

 

 

Page

Part I

 

 

 

 

Item 1.

Financial Statements

3

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

Item 4.

Controls and Procedures

46

 

 

 

 

Part II

 

 

 

 

Item 1.

Legal Proceedings

47

 

Item 1A.

Risk Factors

47

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

Item 6.

Exhibits

63

 

2


 

PART I

 

Item 1. Financial Statements

 

TIVITY HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited) 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,274

 

 

$

2,486

 

Accounts receivable, net

 

 

36,339

 

 

 

97,596

 

Inventories

 

 

22,088

 

 

 

36,407

 

Prepaid expenses

 

 

15,058

 

 

 

18,255

 

Other current assets

 

 

8,110

 

 

 

6,993

 

Total current assets

 

 

141,869

 

 

 

161,737

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of

   $53,525 and $42,510 respectively

 

 

52,436

 

 

 

52,909

 

Right-of-use assets, operating leases

 

 

35,300

 

 

 

41,518

 

Right-of-use assets, finance leases

 

 

1,356

 

 

 

1,680

 

Intangible assets, net

 

 

593,520

 

 

 

689,686

 

Goodwill, net

 

 

535,135

 

 

 

654,635

 

Other assets

 

 

21,554

 

 

 

23,740

 

Total assets

 

$

1,381,170

 

 

$

1,625,905

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

35,492

 

 

$

46,480

 

Accrued salaries and benefits

 

 

10,539

 

 

 

13,071

 

Accrued liabilities

 

 

42,020

 

 

 

55,663

 

Deferred revenue

 

 

12,440

 

 

 

12,037

 

Income taxes payable

 

 

7,835

 

 

 

405

 

Current portion of operating lease liabilities

 

 

13,157

 

 

 

13,131

 

Current portion of finance lease liabilities

 

 

644

 

 

 

624

 

Current portion of long-term debt

 

 

9,775

 

 

 

 

Current portion of other long-term liabilities

 

 

15,664

 

 

 

4,947

 

Total current liabilities

 

 

147,566

 

 

 

146,358

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,002,547

 

 

 

1,048,127

 

Long-term operating lease liabilities

 

 

23,515

 

 

 

30,321

 

Long-term finance lease liabilities

 

 

753

 

 

 

1,080

 

Long-term deferred tax liability

 

 

137,205

 

 

 

160,846

 

Other long-term liabilities

 

 

31,863

 

 

 

12,263

 

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock $.001 par value, 5,000,000 shares authorized,

   none outstanding

 

 

 

 

 

 

Common Stock $.001 par value, 120,000,000 shares authorized,

   48,548,741 and 48,156,786 shares outstanding, respectively

 

 

48

 

 

 

48

 

Additional paid-in capital

 

 

505,760

 

 

 

504,419

 

Accumulated deficit

 

 

(406,840

)

 

 

(237,284

)

Treasury stock, at cost, 2,254,953 shares in treasury

 

 

(28,182

)

 

 

(28,182

)

Accumulated other comprehensive loss

 

 

(33,065

)

 

 

(12,091

)

Total stockholders' equity

 

 

37,721

 

 

 

226,910

 

Total liabilities and stockholders' equity

 

$

1,381,170

 

 

$

1,625,905

 

 

See accompanying notes to the consolidated financial statements.

3


 

TIVITY HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except earnings per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

$

79,856

 

 

$

157,481

 

 

$

239,548

 

 

$

314,008

 

Products

 

 

182,742

 

 

 

182,896

 

 

 

360,705

 

 

 

240,463

 

Total revenues

 

 

262,598

 

 

 

340,377

 

 

 

600,253

 

 

 

554,471

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services (exclusive of depreciation of

   $2,240, $1,503, $4,071, and $2,859,

   respectively, included below)

 

 

31,886

 

 

 

111,073

 

 

 

147,034

 

 

 

224,916

 

Products (exclusive of depreciation and

   amortization of $8,587, $5,861, $19,280,

   and $7,488, respectively, included below)

 

 

86,355

 

 

 

83,685

 

 

 

170,363

 

 

 

110,181

 

Total cost of revenue

 

 

118,241

 

 

 

194,758

 

 

 

317,397

 

 

 

335,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing expenses

 

 

51,105

 

 

 

54,603

 

 

 

138,177

 

 

 

78,751

 

Selling, general and administrative

   expenses

 

 

23,471

 

 

 

29,667

 

 

 

51,480

 

 

 

56,852

 

Depreciation and amortization

 

 

12,919

 

 

 

9,084

 

 

 

27,682

 

 

 

12,666

 

Impairment loss

 

 

 

 

 

 

 

 

199,500

 

 

 

 

Restructuring and related charges

 

 

1,009

 

 

 

2,352

 

 

 

1,752

 

 

 

3,943

 

Operating income (loss)

 

 

55,853

 

 

 

49,913

 

 

 

(135,735

)

 

 

67,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

21,235

 

 

 

23,661

 

 

 

42,898

 

 

 

31,328

 

Income (loss) before income taxes

 

 

34,618

 

 

 

26,252

 

 

 

(178,633

)

 

 

35,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

6,107

 

 

 

8,115

 

 

 

(9,038

)

 

 

13,483

 

Net income (loss)

 

 

28,511

 

 

 

18,137

 

 

 

(169,595

)

 

 

22,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.38

 

 

$

(3.49

)

 

$

0.49

 

Diluted (1)

 

$

0.58

 

 

$

0.37

 

 

$

(3.49

)

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

27,366

 

 

$

5,901

 

 

$

(190,569

)

 

$

10,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and

   equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,711

 

 

 

47,790

 

 

 

48,662

 

 

 

45,165

 

Diluted (1)

 

 

48,794

 

 

 

48,461

 

 

 

48,662

 

 

 

45,719

 

 

 

(1)

The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.

 

See accompanying notes to the consolidated financial statements.

 

4


 

TIVITY HEALTH, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

28,511

 

 

$

18,137

 

 

$

(169,595

)

 

$

22,351

 

Net change in fair value of interest rate swaps, net of

   income tax benefit of $393, $4,068, $7,195, and

   $4,068, respectively

 

 

(1,145

)

 

 

(12,236

)

 

 

(20,974

)

 

 

(12,236

)

Comprehensive income (loss)

 

$

27,366

 

 

$

5,901

 

 

$

(190,569

)

 

$

10,115

 

 

See accompanying notes to the consolidated financial statements.

 

5


 

TIVITY HEALTH, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three and Six Months Ended June 30, 2020 and 2019

(In thousands)

(Unaudited)

 

 

 

Preferred

Stock

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

(Accumulated

Deficit)

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance, March 31, 2019

 

$

 

 

$

47

 

 

$

491,548

 

 

$

53,751

 

 

$

(28,182

)

 

$

 

 

$

517,164

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

18,137

 

 

 

 

 

 

(12,236

)

 

 

5,901

 

Exercise of stock options

 

 

 

 

 

 

 

 

137

 

 

 

 

 

 

 

 

 

 

 

 

137

 

Tax withholding for share-based

   compensation

 

 

 

 

 

 

 

 

(794

)

 

 

 

 

 

 

 

 

 

 

 

(794

)

Share-based employee compensation

   expense

 

 

 

 

 

 

 

 

6,898

 

 

 

 

 

 

 

 

 

 

 

 

6,898

 

Balance, June 30, 2019

 

$

 

 

$

47

 

 

$

497,789

 

 

$

71,888

 

 

$

(28,182

)

 

$

(12,236

)

 

$

529,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

 

 

$

41

 

 

$

347,487

 

 

$

49,655

 

 

$

(28,182

)

 

$

 

 

$

369,001

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

22,351

 

 

 

 

 

 

(12,236

)

 

 

10,115

 

Issuance of Common Stock in connection

   with Merger

 

 

 

 

 

6

 

 

 

132,832

 

 

 

 

 

 

 

 

 

 

 

 

132,838

 

Share-based compensation replacement

   awards related to Merger and

   attributable to pre-

   combination services

 

 

 

 

 

 

 

 

9,107

 

 

 

 

 

 

 

 

 

 

 

 

9,107

 

Exercise of stock options

 

 

 

 

 

 

 

 

370

 

 

 

 

 

 

 

 

 

 

 

 

370

 

Tax withholding for share-based

   compensation

 

 

 

 

 

 

 

 

(1,135

)

 

 

 

 

 

 

 

 

 

 

 

(1,135

)

Share-based employee compensation

   expense

 

 

 

 

 

 

 

 

9,257

 

 

 

 

 

 

 

 

 

 

 

 

9,257

 

Other

 

 

 

 

 

 

 

 

(129

)

 

 

(118

)

 

 

 

 

 

 

 

 

(247

)

Balance, June 30, 2019

 

$

 

 

$

47

 

 

$

497,789

 

 

$

71,888

 

 

$

(28,182

)

 

$

(12,236

)

 

$

529,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2020

 

$

 

 

$

48

 

 

$

503,049

 

 

$

(435,371

)

 

$

(28,182

)

 

$

(31,920

)

 

$

7,624

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

28,511

 

 

 

 

 

 

(1,145

)

 

 

27,366

 

Tax withholding for share-based

   compensation

 

 

 

 

 

 

 

 

(154

)

 

 

 

 

 

 

 

 

 

 

 

(154

)

Share-based employee compensation

   expense

 

 

 

 

 

 

 

 

2,865

 

 

 

 

 

 

 

 

 

 

 

 

2,865

 

Other

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

Balance, June 30, 2020

 

$

 

 

$

48

 

 

$

505,760

 

 

$

(406,840

)

 

$

(28,182

)

 

$

(33,065

)

 

$

37,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

 

 

$

48

 

 

$

504,419

 

 

$

(237,284

)

 

$

(28,182

)

 

$

(12,091

)

 

$

226,910

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(169,595

)

 

 

 

 

 

(20,974

)

 

 

(190,569

)

Exercise of stock options

 

 

 

 

 

 

 

 

601

 

 

 

 

 

 

 

 

 

 

 

 

601

 

Tax withholding for share-based

   compensation

 

 

 

 

 

 

 

 

(2,949

)

 

 

 

 

 

 

 

 

 

 

 

(2,949

)

Share-based employee compensation

   expense

 

 

 

 

 

 

 

 

3,689

 

 

 

 

 

 

 

 

 

 

 

 

3,689

 

Other

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

 

 

 

39

 

Balance, June 30, 2020

 

$

 

 

$

48

 

 

$

505,760

 

 

$

(406,840

)

 

$

(28,182

)

 

$

(33,065

)

 

$

37,721

 

 

See accompanying notes to the consolidated financial statements.

6


 

TIVITY HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(169,595

)

 

$

22,351

 

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,682

 

 

 

12,666

 

Amortization and write-off of deferred loan costs

 

 

2,315

 

 

 

3,073

 

Amortization of debt discount

 

 

2,049

 

 

 

389

 

Share-based employee compensation expense

 

 

3,689

 

 

 

9,257

 

Impairment of goodwill and intangible assets

 

 

199,500

 

 

 

 

Deferred income taxes

 

 

(16,447

)

 

 

10,789

 

Decrease (increase) in accounts receivable, net

 

 

61,257

 

 

 

(3,754

)

Decrease in inventory

 

 

14,319

 

 

 

8,719

 

Decrease in other current assets

 

 

1,363

 

 

 

1,057

 

Increase (decrease) in accounts payable

 

 

9,411

 

 

 

(5,872

)

(Decrease) increase in accrued salaries and benefits

 

 

(2,532

)

 

 

570

 

Decrease in other current liabilities

 

 

(5,925

)

 

 

(8,266

)

Increase (decrease) in deferred revenue

 

 

403

 

 

 

(2,725

)

Other

 

 

3,454

 

 

 

1,345

 

Net cash flows provided by operating activities

 

$

130,943

 

 

$

49,599

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

$

(10,362

)

 

$

(8,918

)

Business acquisitions, net of cash acquired

 

 

 

 

 

(1,062,818

)

Net cash flows used in investing activities

 

$

(10,362

)

 

$

(1,071,736

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

$

196,525

 

 

$

1,399,945

 

Payments of long-term debt

 

 

(236,375

)

 

 

(347,879

)

Payments related to tax withholding for share-based compensation

 

 

(2,949

)

 

 

(1,135

)

Exercise of stock options

 

 

601

 

 

 

370

 

Deferred loan costs

 

 

 

 

 

(30,189

)

Principal payments related to financing leases

 

 

(306

)

 

 

(22

)

Change in cash overdraft and other

 

 

(20,289

)

 

 

3,530

 

Net cash flows (used in) provided by financing activities

 

$

(62,793

)

 

$

1,024,620

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

$

 

 

$

(12

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

57,788

 

 

$

2,471

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

2,486

 

 

$

1,933

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

60,274

 

 

$

4,404

 

 

See accompanying notes to the consolidated financial statements.

7


 

TIVITY HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Basis of Presentation and Recent Developments

 

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Tivity Health®, Inc. and its wholly-owned subsidiaries, including the results of Nutrisystem®, Inc. (“Nutrisystem”) acquired on March 8, 2019 (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.  In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Due to the significant uncertainty relating to the potential future impacts of the coronavirus pandemic on our business and the overall market, actual results could differ from those estimates, including, but not limited to, estimates of fair value of goodwill and indefinite-lived intangible assets, allowances for doubtful accounts, and valuation allowances on deferred tax assets.  Our consolidated statements of operations include results of Nutrisystem from March 8, 2019 forward.  We have reclassified certain items in prior periods to conform to current classifications.

 

Following the acquisition of Nutrisystem (the “Merger”), we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment is comprised of our legacy business and includes SilverSneakers® senior fitness, Prime® Fitness, WholeHealth Living® and Wisely WellTM.  The Nutrition segment is comprised of Nutrisystem’s legacy business and includes the Nutrisystem® and the South Beach Diet® programs.

 

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes.  You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Developments

 

In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus, which causes the disease known as “COVID-19”.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and COVID-19 continues to spread throughout the United States and other countries.  Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. Such measures have resulted in significantly reduced demand for many businesses that have continued in operation.  

 

By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location. A substantial number of our fitness partner locations remained closed through April, with some locations reopening in May and additional locations reopening in June.  For the month of June 2020, approximately 66% of our fitness partner locations reported at least one visit from our SilverSneakers program.  For the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.   

 

We do not believe that COVID-19-related developments had a material impact on the results of operations or cash flows of our Nutrition segment for the first or second quarters of 2020.  While overall we did not experience any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we experienced delays in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19.  As a result, we incurred incremental expense of $1.3 million in the second quarter related to increased labor rates and

8


 

overtime for employees of our fulfillment provider as well as additional shipping and related charges as we transferred the fulfillment of certain orders to other warehouses that were farther from the customer’s delivery destination.

 

We have taken a number of actions in response to the pandemic, including the following:

 

 

Given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our Revolving Credit Facility as a precautionary measure to increase our cash position and maintain financial flexibility. We repaid such $75 million in full in June 2020.  As of June 30, 2020, outstanding debt under our credit agreement was $1,012.3 million, and we had $60.3 million of cash and cash equivalents.  In July 2020, we repaid $24.8 million of principal on the term loans under our credit agreement, resulting in our next required quarterly installment being due in December 2021. As of June 30, 2020, we had a working capital deficit of $5.7 million.  While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement (as defined below) will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

 

 

We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include implementing remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements.

 

 

We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other COVID-19-related legislation, curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  

 

 

o

In April 2020, we furloughed 13% of our approximately 1,000 employees. In June 2020, some of these furloughed employees’ positions were eliminated (in addition to other position eliminations, resulting in approximately 8% of our employees being terminated), and we extended the furlough for substantially all of the remaining furloughed employees through the end of 2020. Also in June 2020, we placed an additional 2% of our total employees on furlough through the end of 2020.  

 

 

o

Also in April 2020, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  In June 2020, the Compensation Committee determined to extend such reductions in base salary through December 31, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who stood for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  In June 2020, the Board determined to extend such reduction in cash compensation to the Board through December 31, 2020.

 

 

o

Effective at the end of July 2020, the Compensation Committee suspended the Company matching contribution to the Company’s 401(k) plan.

 

As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).  Through this evaluation, management concluded that the fair value of goodwill allocated to the

9


 

Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment. There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

     

2.

Recent Relevant Accounting Standards

 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”.  ASC 848 contains temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, such as a transition away from the use of LIBOR.  ASC 848 was effective for the Company as of January 1, 2020.  The provisions of ASC 848 are available through December 31, 2022, at which time the reference rate replacement activity is expected to have been completed.  The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level.  The accounting relief provided by ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. Modifications that are unrelated to reference rate reform will scope out a given contract.  ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable.  For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis.  In March 2020, we elected the expedient that allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform.  In addition, we have the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848.  In June 2020, we elected to (i) continue the method of assessing effectiveness as documented in the original hedge documentation and (ii) apply the expedient wherein the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument.  We will also apply the aforementioned elections to any future designated cash flow hedging relationship.

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" (“ASU 2018-16”), which adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. As of March 31, 2020, the benchmark interest rate in our existing interest rate swap agreements is LIBOR. The adoption of this standard did not have an impact on our financial position, results of operations, or cash flows. 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.  ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted ASU 2017-04 on October 1, 2019.  As further discussed in Note 12, we recorded impairment losses related to goodwill during the fourth quarter of 2019 and the first quarter of 2020.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820.  ASU 2018-13 is effective for fiscal years beginning on or after December 15, 2019, including interim periods therein, and is generally required to be applied retrospectively, except for certain components that are to be applied prospectively.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement. This standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal

10


 

years. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires companies to measure credit losses for financial assets held at the reporting date utilizing a methodology that reflects current expected credit losses over the lifetime of such assets.  ASU 2016-13 was effective for the Company on January 1, 2020 and is generally required to be applied using the modified retrospective approach, with limited exceptions for specific instruments.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

3.

Revenue Recognition

 

We account for revenue from contracts with customers in accordance with Accounting Standards Codification (“ASC”) Topic 606.  The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.

 

Healthcare Segment

 

Our Healthcare segment earns revenue from three programs, SilverSneakers senior fitness, Prime Fitness and WholeHealth Living.  We provide the SilverSneakers senior fitness program to members of Medicare Advantage and Medicare Supplement plans through our contracts with such plans.  We offer Prime Fitness, a fitness facility access program, through contracts with commercial health plans, employers, and other sponsoring organizations that allow their members to individually purchase the program.  We sell our WholeHealth Living program primarily to health plans.

 

Except for Prime Fitness, our Healthcare segment’s customer contracts generally have initial terms of approximately three years.  Some contracts allow the customer to terminate early and/or determine on an annual basis to which of their members they will offer our programs.  For Prime Fitness, our contracts with commercial health plans, employers, and other sponsoring organizations generally have initial terms of approximately three years, while individuals who purchase the Prime Fitness program through these organizations may cancel at any time (on a monthly basis) after an initial period of one to three months.  The significant majority of our Healthcare segment’s customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term.  There are generally no performance obligations that are unsatisfied at the end of a particular month.  There was no material revenue recognized during the three and six months ended June 30, 2020 from performance obligations satisfied in a prior period.

 

Our fees within the Healthcare segment are variable month to month and are generally billed per member per month (“PMPM”) or billed based on a combination of PMPM and member visits to a network location.  We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month.  We bill for member visits approximately one month in arrears once actual member visits are known.  Payments from customers are typically due within 30 days of invoice date.  When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period. At June 30, 2020 and December 31, 2019, $0.7 million and $0.5 million, respectively, of such costs were capitalized. During the three and six months ended June 30, 2020 and 2019, the amortization of such capitalized costs was immaterial.

 

Our Healthcare segment’s customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month.  The allocated consideration corresponds directly with the value to our customers of our services completed for the month.  Under the majority of our Healthcare segment’s contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. ASC 606-10-50-14(b) provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.

 

11


 

Although we evaluate our financial performance and make resource allocation decisions based upon the results of our two reportable segments, we believe the following information depicts how our Healthcare segment revenues and cash flows are affected by economic factors.  

 

The following table sets forth Healthcare revenue disaggregated by program.  Revenue from our SilverSneakers program is predominantly contracted with Medicare Advantage and Medicare Supplement plans.

 

(In thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

SilverSneakers

 

$

49,157

 

 

$

122,899

 

 

$

170,764

 

 

$

245,922

 

Prime Fitness

 

 

19,047

 

 

 

29,751

 

 

 

51,858

 

 

 

58,494

 

WholeHealth Living

 

 

4,747

 

 

 

4,467

 

 

 

9,796

 

 

 

9,041

 

Other (1)

 

 

8,972

 

 

 

364

 

 

 

9,197

 

 

 

551

 

 

 

$

81,923

 

 

$

157,481

 

 

$

241,615

 

 

$

314,008

 

 

 

(1)

For the three and six months ended June 30, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer as well as $2.1 million of Wisely Well revenue.

 

Sales and usage-based taxes are excluded from revenues.

 

Nutrition Segment

 

Our Nutrition segment earns revenue from four sources: direct to consumer, retail, QVC and other.  Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties.  As explained in more detail below, revenue is recognized upon satisfaction of the performance obligation by transferring control over a product to a Nutrition segment customer.  Direct-mail advertising costs are expensed as incurred.  We recognize an asset for the carrying amount of product to be returned and for costs to obtain a contract if the amortization is more than one year in duration.  We expense costs to obtain a contract as incurred if the amortization period is less than one year.

 

We sell pre-packaged foods directly to weight loss program participants primarily through the Internet and telephone (referred to as the direct to consumer channel), through QVC (a television shopping network), and select retailers. Pre-packaged foods include both frozen and non-frozen (ready-to-go), shelf-stable products.

 

Products sold through the direct to consumer channel, both frozen and non-frozen, may be sold separately (a la carte) or as part of a packaged monthly meal plan for which Nutrition segment customers pay at the point of sale. Products sold through QVC are payable by QVC upon our shipment of the product to the end consumer. For both the direct to consumer channel and QVC, we recognize revenue at a point in time, i.e., at the shipping point.  Direct to consumer customers may return unopened ready-to-go Nutrisystem products within 30 days after purchase in order to receive a refund or credit. Frozen Nutrisystem products are refundable only if the order is canceled within 14 days after delivery.  South Beach Diet products are not refundable.   

 

Products sold to retailers include both frozen and non-frozen products and are payable by the retailer upon receipt. We recognize revenue at a point in time, i.e., when the retailers take possession of the product. Certain retailers have the right to return unsold products.

 

We account for the shipment of frozen and non-frozen, ready-to-go products as separate performance obligations. The consideration, including variable consideration for product returns, is allocated between frozen and non-frozen products based on their standalone selling prices. The amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data.

 

In addition to our pre-packaged foods, we sell prepaid gift cards through a wholesaler that are redeemable through the Internet or telephone. Prepaid gift cards represent grants of rights to goods to be provided in the future to gift card buyers. The wholesaler has the right to return all unsold prepaid gift cards. The wholesaler’s retail selling price of the gift cards is deferred in the balance sheet and recognized as revenue when we have satisfied our performance obligation, i.e., when a gift card holder redeems the gift card with us. We recognize breakage amounts (the estimated amount of unused gift cards) as revenue, in proportion to the actual gift card redemptions exercised by gift card holders in relation to the total expected redemptions of gift cards. We utilize historical experience in estimating the total expected breakage and period over which the gift cards will be redeemed.

12


 

 

Sales and other taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a Nutrition segment customer are excluded from revenue and presented on a net basis.  After control over a product has transferred to a Nutrition segment customer, shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in revenue and cost of revenue in the accompanying consolidated statements of operations. Revenue from shipping and handling charges was $6.5 million and $13.0 million for the three and six months ended June 30, 2020, respectively, and $6.3 million and $8.1 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively.

 

The following table sets forth Nutrition segment revenue, from March 8, 2019 forward, disaggregated by the source of revenue:

 

(In thousands)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Nutrisystem direct to consumer

 

$

165,118

 

 

$

155,976

 

 

$

320,509

 

 

$

203,977

 

South Beach Diet direct to consumer

 

 

8,650

 

 

 

14,464

 

 

$

21,414

 

 

 

19,118

 

Retail

 

 

3,902

 

 

 

8,728

 

 

 

9,350

 

 

 

13,032

 

QVC

 

 

2,901

 

 

 

3,522

 

 

 

7,088

 

 

 

4,044

 

Other

 

 

104

 

 

 

206

 

 

 

277

 

 

 

292

 

 

 

$

180,675

 

 

$

182,896

 

 

$

358,638

 

 

$

240,463

 

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Contract assets

 

$

243

 

 

$

95

 

Contract liabilities

 

$

10,937

 

 

$

10,911

 

 

The contract assets primarily relate to unbilled accounts receivable and are included as other current assets in the accompanying consolidated balance sheet. The contract liabilities (deferred revenue) primarily relate to sale of prepaid gift cards and unshipped foods, which are deferred until such time as the Company has satisfied its performance obligations.

 

Significant changes in the contract liabilities (deferred revenue) balance during the period are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2020

 

Revenue recognized that was included in the contract liability (deferred revenue) balance on January 1, 2020

 

$

(2,395

)

 

$

(8,112

)

Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue, and (decreases) due to returns

 

$

(71

)

 

$

8,138

 

 

13


 

The following table includes estimated revenue from the prepaid gift cards expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period:

 

(In thousands)

 

 

 

 

Remaining 2020

 

$

1,789

 

2021

 

 

1,901

 

2022

 

 

1,192

 

2023

 

 

468

 

2024

 

 

297

 

2025

 

 

220

 

 

 

$

5,867

 

 

We apply the practical expedient in subtopic ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

We review the reserves for our Nutrition segment customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment. The provision for estimated returns for the three and six months ended June 30, 2020 was $4.1 million and $9.3 million, respectively, and $5.6 million and $7.0 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively. At June 30, 2020 and December 31, 2019, the reserve for estimated returns incurred but not received and processed was $1.4 million and $0.8 million, respectively, and has been included in accrued liabilities in the accompanying consolidated balance sheet.

 

4.

Inventories

 

Inventories consist principally of packaged food held in external fulfillment locations. We value inventories at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. We continually assess quantities of inventory on hand to identify excess or obsolete inventory and record a provision for any estimated loss. We estimate the reserve for excess and obsolete inventory primarily on forecasted demand and/or our ability to sell the products, our ability to introduce new products, future production requirements, and changes in consumer behavior. The reserve for excess and obsolete inventory was $2.0 million and $1.8 million at June 30, 2020 and December 31, 2019, respectively.

 

5.

Intangible Assets and Goodwill

 

The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company.  In March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets.  Through this evaluation, management concluded that the fair value of goodwill allocated to the Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and in the first quarter of 2020, we recorded impairment losses of $80.0 million and $119.5 million related to the Nutrisystem tradename and goodwill, respectively (see Note 12).  A reconciliation of our goodwill balance is as follows:

 

(In thousands)

 

Healthcare

 

 

Nutrition

 

 

Consolidated

 

Balance, January 1, 2020

 

$

334,680

 

 

$

319,955

 

 

$

654,635

 

Impairment loss

 

 

 

 

 

(119,500

)

 

$

(119,500

)

Balance, June 30, 2020

 

$

334,680

 

 

$

200,455

 

 

$

535,135

 

 

14


 

At June 30, 2020 and December 31, 2019, intangible assets not subject to amortization consist of tradenames of $509.0 million and $589.0 million, respectively.

 

6.

Marketing Expenses

 

Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $45.1 million and $122.4 million for the three and six months ended June 30, 2020, respectively, and $47.3 million and $67.5 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on the cost per customer acquired, depending upon the terms.  All other advertising costs are charged to expense as incurred or the first time the advertising takes place. At June 30, 2020 and December 31, 2019, $0.3 million and $5.0 million, respectively, of costs have been prepaid for future advertisements and promotions.

 

7.

Share-Based Compensation

 

We currently have five types of share-based awards outstanding to our employees and directors: stock options, restricted stock awards, restricted stock units, performance-based stock units, and market stock units.  We believe that our share-based awards align the interests of our employees and directors with those of our stockholders. Vesting terms for each of these award types generally range from one to four years.

 

We recognize share-based compensation expense for the market stock units if the requisite service period is rendered, even if the market condition is never satisfied. For the three and six months ended June 30, 2020, we recognized total share-based compensation costs of $2.9 million and $3.7 million, respectively.  For the three and six months ended June 30, 2019, we recognized total share-based compensation costs of $6.9 million and $9.3 million, respectively, including $0.5 million and $0.6 million, respectively, recorded to restructuring and related charges.  We account for forfeitures as they occur.  

 

8.

Income Taxes

 

For the three months ended June 30, 2020 and 2019, we had an effective income tax rate of 17.6% and 30.9%, respectively. During the second quarter of 2020, our effective income tax rate was lower than our statutory rate, primarily due to a change in the estimated annual effective income tax rate.  During the second quarter of 2019, we had nondeductible expenses related to the acquisition of Nutrisystem that caused an increase in our effective income tax rate.

For the six months ended June 30, 2020 and 2019, we had an effective tax benefit rate of 5.1% and an effective income tax rate of 37.6%, respectively. For the six months ended June 30, 2020, our effective tax benefit rate was lower than our statutory benefit rate primarily due to the nondeductible goodwill impairment loss of $119.5 million recorded during the first quarter.  For the six months ended June 30, 2019, our effective income tax rate increased due to nondeductible expenses related to the acquisition of Nutrisystem as well as two adjustments related to the acquisition that collectively increased our income tax expense for such period by approximately $2.7 million: (i) we evaluated the realizability of beginning-of-the-year deferred tax assets and increased the valuation allowance on deferred tax assets related to state net operating loss carryforwards by $1.8 million, and (ii) we recorded a $0.9 million reduction in deferred tax assets related to state income tax credits.

We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions.  Tax years remaining subject to examination in the U.S. Federal jurisdiction include 2016 to present.

15


 

9.

Leases

We maintain lease agreements principally for our office spaces and certain equipment. In addition, certain of our contracts, such as those with our fulfillment vendor related to our warehouse space or contracts with certain equipment vendors, contain embedded leases.  We maintain three sublease agreements with respect to two of our office locations, each of which continues through the initial term of our master lease agreement.  Such sublease income and payments, while they reduce our rent expense, are not considered in the value of the right-of-use asset or lease liability. With the exception of two finance leases related to a network server and office equipment, all of our leases are classified as operating leases.  In the aggregate, our leases generally have remaining lease terms of one to five years, some of which include options to extend the lease for additional periods.  

The following table shows the components of lease expense for the three and six months ended June 30, 2020 and 2019:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased

   assets

 

$

162

 

 

$

12

 

 

$

324

 

 

$

24

 

Interest of lease liabilities

 

 

22

 

 

 

2

 

 

 

47

 

 

 

4

 

Operating lease cost

 

 

3,675

 

 

 

3,804

 

 

 

7,350

 

 

 

6,520

 

Short-term lease cost

 

 

137

 

 

 

116

 

 

 

266

 

 

 

149

 

Total lease cost before subleases

 

$

3,996

 

 

$

3,934

 

 

$

7,987

 

 

$

6,697

 

Sublease income

 

 

(1,363

)

 

 

(1,356

)

 

 

(2,764

)

 

 

(2,700

)

Total lease cost, net

 

$

2,633

 

 

$

2,578

 

 

$

5,223

 

 

$

3,997

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash paid for amounts included in the

   measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow attributable to operating leases

 

$

(2,545

)

 

$

(3,561

)

 

$

(5,611

)

 

$

(5,108

)

Operating cash flow attributable to

   finance leases

 

 

(22

)

 

 

(2

)

 

 

(47

)

 

 

(4

)

Financing cash flow attributable to

   finance leases

 

 

(155

)

 

 

(11

)

 

 

(306

)

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental noncash information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for

   operating lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

48,972

 

Right-of-use assets obtained in exchange for

   finance lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

181

 

 

 

(1)

No new leases were entered into during the six months ended June 30, 2019.  Amounts shown are due to the adoption of ASC 842 and reflect balances as of January 1, 2019 for the Healthcare segment and as of March 8, 2019 for the Nutrition segment (i.e., the date of our acquisition of Nutrisystem).

 

16


 

10.

Debt

The Company's debt, net of unamortized deferred loan costs and original issue discount, consisted of the following at June 30, 2020 and December 31, 2019:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Term Loan A

 

$

280,000

 

 

$

288,750

 

Term Loan B

 

 

775,000

 

 

 

786,250

 

Revolving Credit Facility

 

 

 

 

 

19,850

 

 

 

 

1,055,000

 

 

 

1,094,850

 

Less: deferred loan costs and original issue discount

 

 

(42,678

)

 

 

(46,723

)

     Total debt

 

 

1,012,322

 

 

 

1,048,127

 

Less: current portion

 

 

(9,775

)

 

 

 

     Total non-current portion of debt

 

$

1,002,547

 

 

$

1,048,127

 

  

Credit Facility

In connection with the consummation of the Merger, on March 8, 2019, we entered into a new Credit and Guaranty Agreement (the “Credit Agreement”) with a group of lenders, Credit Suisse AG, Cayman Islands Branch, as general administrative agent, term facility agent and collateral agent, and SunTrust Bank, as revolving facility agent and swingline lender.  The Credit Agreement provides us with (i) a $350.0 million term loan A facility (“Term Loan A”), (ii) an $830.0 million term loan B facility (“Term Loan B” and, together with Term Loan A, the “Term Loans”), (iii) a $125.0 million revolving credit facility that includes a $35.0 million sublimit for swingline loans and a $50.0 million sublimit for letters of credit (the “Revolving Credit Facility”; Term Loan A, Term Loan B and the Revolving Credit Facility are sometimes herein referred to collectively as the “Credit Facilities”), and (iv) uncommitted incremental accordion facilities in an aggregate amount at any date equal to the greater of $125.0 million or 50% of our consolidated EBITDA for the then-preceding four fiscal quarters, plus additional amounts based on, among other things, satisfaction of certain financial ratio requirements.  As of June 30, 2020, outstanding debt under the Credit Agreement was $1,012 million, and availability under the Revolving Credit Facility totaled $124.5 million as calculated under the most restrictive covenant.

We are required to repay Term Loan A loans in consecutive quarterly installments, each in the amount of 2.50% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2024, at which time the entire outstanding principal balance of such loans is due and payable in full. We are required to repay Term Loan B loans in consecutive quarterly installments, each in the amount of 0.75% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2026, at which time the entire outstanding principal balance of such loans is due and payable in full. We are permitted to make voluntary prepayments of borrowings under the Term Loans at any time without penalty.  From March 8, 2019 through June 30, 2020, we made payments of $125.0 million on the Term Loans, which included prepayments of all amounts due through March 31, 2021, excluding any Excess Cash Flow Payments that may be required, as described below.  We are required to repay in full any outstanding swingline loans and revolving loans under the Revolving Credit Facility on March 8, 2024.  In addition, the Credit Agreement contains provisions that, beginning with fiscal 2019, may require annual excess cash flow (as defined in the Credit Agreement and generally designed to equal cash generated by our business in excess of cash used in the business) to be applied towards the Term Loans. We are required to make prepayments on the Term Loans equal to our excess cash flow for a given fiscal year multiplied by the following excess cash flow percentages (such resulting payment an “Excess Cash Flow Payment”) based on our Net Leverage Ratio (as defined below) on the last day of such fiscal year: (a) 75% if the Net Leverage Ratio is greater than 3.75:1, (b) 50% if the Net Leverage Ratio is equal to or less than 3.75:1 but greater than 3.25:1 (c) 25% if the Net Leverage Ratio is equal to or less than 3.25:1 but greater than 2.75:1, and (d) 0% if the Net Leverage Ratio is equal to or less than 2.75:1. Any such potential mandatory prepayments are reduced by voluntary prepayments.  We were not required to make an Excess Cash Flow Payment for fiscal 2019.

17


 

The Credit Agreement contains a financial covenant that requires us to maintain maximum ratios or levels of consolidated total net debt to consolidated adjusted EBITDA, calculated as provided in the Credit Agreement (the “Net Leverage Ratio”), of 5.75:1.00 for all test dates occurring on or after December 31, 2019 but prior to December 31, 2020, 5.25:1.00 for all test dates occurring on or after December 31, 2020 but prior to December 31, 2021, and 4.75:1.00 for all test dates occurring on or after December 31, 2021.  As of June 30, 2020, we were in compliance with all of the covenant requirements of the Credit Agreement, and our Net Leverage Ratio was equal to 4.08.

Based on our current assumptions with respect to the COVID-19 pandemic, including, among other things, the duration of the temporary closures of our fitness partner locations and the average monthly total participation levels of our members after such locations reopen, we currently believe we will be in compliance with the Net Leverage Ratio covenant over the next 12 months; however, given the significant uncertainty relating to the potential impacts of the COVID-19 pandemic on our business going forward, there are potential scenarios under which we could fail to comply with the Net Leverage Ratio covenant.  Our failure to comply with the Net Leverage Ratio covenant would result in an event of default that, if not waived, could have a material adverse effect on our financial condition, results of operations or debt service capability. We will continue to monitor our projected ability to comply with all covenants under the Credit Agreement, including the Net Leverage Ratio, which could include seeking an amendment to or waiver of the Net Leverage Ratio covenant if necessary.

Borrowings under the Credit Agreement bear interest at variable rates based on a margin or spread in excess of either (1) one-month, two-month, three-month or six-month LIBOR (or, with the approval of all lenders holding the particular class of loans, 12-month LIBOR), which may not be less than zero, or (2) the greatest of (a) the prime lending rate of the agent bank for the particular facility, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the “Base Rate”), as selected by the Company. The LIBOR margin for Term Loan A loans is 4.25%, the LIBOR margin for Term Loan B loans is 5.25% and the LIBOR margin for revolving loans varies between 3.75% and 4.25%, depending on our total Net Leverage Ratio. The Base Rate margin for Term Loan A loans is 3.25%, the Base Rate margin for Term Loan B loans is 4.25% and the Base Rate margin for revolving loans varies between 2.75% and 3.25%, depending on our total Net Leverage Ratio.  In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2% plus a spread, as described in the preceding sentences.  As of June 30, 2020, these interest rate swap agreements had current notional amounts totaling $800.0 million.

The Credit Agreement also provides for annual commitment fees ranging between 0.250% and 0.500% of the unused commitments under the Revolving Credit Facility, depending on our total Net Leverage Ratio, and annual letter of credit fees on the daily outstanding availability under outstanding letters of credit at the applicable LIBOR margin for the Revolving Credit Facility, depending on our total Net Leverage Ratio.

Extensions of credit under the Credit Agreement are secured by guarantees from substantially all of the Company’s active material domestic subsidiaries and by security interests in substantially all of Company’s and such subsidiaries’ assets.

The Credit Agreement contains a financial covenant that requires us to maintain specified maximum ratios or levels of consolidated total net debt to EBITDA, calculated as provided in the Credit Agreement. The Credit Agreement also contains various other affirmative and negative covenants customary for financings of this type that, subject to certain exceptions, impose restrictions and limitations on the Company and certain of the Company’s subsidiaries with respect to, among other things, indebtedness; liens; negative pledges; restricted payments (including dividends, distributions, buybacks, redemptions, repurchases with respect to equity interests, and payments, redemptions, retirements, purchases, acquisitions, defeasance, exchange, conversion, cancellation or termination with respect to junior lien, subordinated or unsecured debt); restrictions on subsidiary distributions; loans, advances, guarantees, acquisitions and other investments; mergers and other fundamental changes; sales and other dispositions of assets (including equity interests in subsidiaries); sale/leaseback transactions; transactions with affiliates; conduct of business; amendments and waivers of organizational documents and material junior debt agreements; and changes to fiscal year.

 

11.

Commitments and Contingencies

 

Shareholder Lawsuits: Weiner Lawsuit, Consolidated Derivative Lawsuit, and Witmer Lawsuit

 

On November 6, 2017, United Healthcare issued a press release announcing expansion of its fitness benefits (“United Press Release”), and the market price of the Company's shares of common stock, par value $.001 per

18


 

share (“Common Stock”) dropped on that same day. In connection with the United Press Release, four lawsuits were filed against the Company. As further described below, three of the four lawsuits have been dismissed.  We are currently not able to predict the probable outcome of the remaining matter or to reasonably estimate a range of potential loss, if any.  We intend to vigorously defend ourselves against the remaining complaint.

 

On November 20, 2017, Eric Weiner, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased Common Stock between February 24, 2017 and November 3, 2017 (“Weiner Lawsuit”).  The Weiner Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming as defendants the Company, the Company's chief executive officer, chief financial officer and a former executive who served as both chief accounting officer and interim chief financial officer.  The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the United Press Release.  The complaint seeks monetary damages on behalf of the purported class.  On April 3, 2018, the Court entered an order appointing the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, designated counsel for the lead plaintiff, and established certain deadlines for the case.  On June 4, 2018, plaintiff filed a first amended complaint.   The Court denied the Company’s Motion to Dismiss on March 18, 2019 and the Company’s Motion to Reconsider on May 22, 2019. On January 29, 2020, the Court granted lead plaintiff’s motion to certify the class. On July 23, 2020, the United States Court of Appeals for the Sixth Circuit denied the Company’s application for permission to appeal the class certification ruling.  The case is currently set for trial on May 18, 2021.

 

On January 26, 2018 and August 24, 2018, individuals claiming to be stockholders of the Company filed shareholder derivative actions, on behalf of the Company, in the U.S. District Court for the Middle District of Tennessee, naming the Company as a nominal defendant and certain current and former executives and directors as defendants.  On October 15, 2018, the two complaints were consolidated (the “Consolidated Derivative Lawsuit”).  On May 15, 2019, a consolidated amended complaint was filed. The consolidated amended complaint asserts claims for violation of Section 10(b), 14(a), and 29(b) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Plaintiffs seek to recover damages on behalf of the Company, certain corporate governance and internal procedural reforms, and other equitable relief. On June 14, 2019, the defendants filed a Motion to Dismiss all claims and the plaintiffs filed their opposition to the Motion to Dismiss on July 17, 2019. On October 22, 2019, the Consolidated Derivative Lawsuit was dismissed with prejudice. On November 20, 2019, plaintiffs filed a notice of appeal with the United States Circuit Court for the Sixth Circuit.  The parties have entered into a Memorandum of Understanding (“MOU”) to resolve the Consolidated Derivative Lawsuit, and on May 19, 2020, the case was remanded to the District Court to review for approval a forthcoming stipulation of settlement based on the terms set forth in the MOU.

 

Shareholder Lawsuits: Strougo, Cobb, and Delaware Lawsuits

 

On February 25, 2020, Robert Strougo, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased Common Stock between March 8, 2019 and February 19, 2020 (the "Strougo Lawsuit").  The Strougo Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming the Company, the Company's chief financial officer and former chief executive officer as defendants.  The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the performance of the Nutrisystem business that the Company acquired on March 8, 2019.  The complaint seeks monetary damages on behalf of the purported class.  Three parties have filed a motion seeking to be appointed lead plaintiff and counsel, but the Court has not ruled on those motions.  Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.

 

19


 

On April 9, 2020, John Cobb, claiming to be a stockholder of the Company, filed a derivative complaint in the United States District Court for the Middle District of Tennessee naming the Company as a nominal defendant and certain directors and the Company’s former chief executive officer and current chief financial officer as defendants (the “Cobb Lawsuit”). The complaint asserted claims for breach of Section 14(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, failure of internal controls, and unjust enrichment, largely tracking the factual allegations in the Strougo Lawsuit. The plaintiff seeks monetary damages on behalf of the Company, restitution, and certain corporate governance and internal procedural reforms. On June 9, 2020, the United States Magistrate Judge approved the parties’ stipulation to a stay the case pending the resolution of defendants’ anticipated motion to dismiss in the Strougo case.  Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.  

 

In July 2020, three putative derivative complaints were filed in the United States District Court for the District of Delaware by the following individuals claiming to be stockholders of the Company: Patrick Yerby, Thomas R. Conte, Melvyn Klein, and Mark Ridendour (the “Delaware Derivative Lawsuits”).  The complaints largely track the allegations, named defendants, asserted claims, and requested relief of the Cobb Lawsuit.  Once the Delaware Derivative Lawsuits are consolidated by the District Court, the Company intends to seek a stay similar to that entered in the Cobb Lawsuit.

 

Given the uncertainty of litigation and the preliminary stage of the case, we are not currently able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.  We intend to vigorously defend ourselves against the Strougo Lawsuit, Cobb Lawsuit, and Delaware Derivative Lawsuit.

 

Trademark Lawsuit: Pacific Packaging Lawsuit

 

On May 31, 2019, Pacific Packaging Concepts, Inc. (“Pacific Packaging”) filed a complaint in the U.S. District Court for the Central District of California, Western Division, naming as defendants two subsidiaries of the Company; Nutrisystem, Inc. and Nutri/System IPHC, Inc. In its complaint, Pacific Packaging alleged that the defendants’ use of Pacific Packaging’s federally registered trademark, Fresh Start, in advertisements for its weight management program and shakes constitutes federal trademark infringement, counterfeit trademark infringement, false designation of origin, federal trademark dilution, unfair competition, false advertising, common law unfair competition, and common law trademark infringement. The complaint seeks injunctive relief and monetary damages in an unspecified amount.  On August 29, 2019, the defendants filed their Answer to Complaint. Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any. We intend to vigorously defend ourselves against this complaint.

 

Other

 

Additionally, from time to time, we are subject to contractual disputes, claims and legal proceedings that arise in the ordinary course of our business.  Some of the legal proceedings pending against us as of the date of this report are expected to be covered by insurance policies.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future.  We expense legal costs as incurred. 

12.

Fair Value Measurements

We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1: 

Quoted prices in active markets for identical assets or liabilities;

20


 

 

Level 2: 

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3: 

Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019.  

 

 

 

Level 2

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

44,407

 

 

$

16,238

 

The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using internal models and third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We measure certain assets at fair value on a nonrecurring basis in the fourth quarter of each year, including the following:

 

reporting units measured at fair value as part of a goodwill impairment test; and

 

indefinite-lived intangible assets measured at fair value for impairment assessment.

Each of these assets above is classified as Level 3 within the fair value hierarchy.  The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company. In March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).

We estimated the fair value of each reporting unit using a combination of a discounted cash flow model and a market-based approach, and we reconciled the aggregate fair value of our reporting units to our consolidated market capitalization.  Estimating fair value requires significant judgments, including management’s estimate of future cash flows of each reporting unit (which is dependent on internal forecasts of projected income), estimation of the long-term growth rates of future revenues for our reporting units, the terminal growth rate of revenue, the tax rate, and determination of the weighted average cost of capital, as well as relevant comparable company revenue and earnings multiples and market participant acquisition premium for the market-based approaches. Changes in these estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each reporting unit.  There is significant uncertainty relating to the potential future impacts of the COVID-19 pandemic on our business and the overall market.

Certain significant inputs used in the estimation of fair value were adversely impacted by the changing market and economic conditions discussed above, most notably the weighted average cost of capital, resulting in a lower estimated fair value for each of our reporting units.  Before we performed the impairment analysis during the first quarter, the estimated fair value of the Nutrition reporting unit was equal to its carrying value due to an impairment loss we recorded in the fourth quarter of 2019.  Because there was no excess of estimated fair value over carrying value (“headroom”) for the Nutrition reporting unit at the beginning of 2020, the decrease in the estimated fair value of the Nutrition reporting unit during the first quarter of 2020 resulted in an impairment of the carrying value of

21


 

goodwill for the Nutrition reporting unit, and we recorded a $119.5 million goodwill impairment loss.  None of the impaired goodwill is deductible for tax purposes, and there is no cash tax benefit related to the impairment.  For the Healthcare reporting unit, the fair value of the reporting unit exceeded its carrying amount, and we determined that the carrying value of goodwill was not impaired.

Also during the first quarter of 2020, we estimated the fair value of indefinite-lived intangible assets, which consisted of two tradenames (the Nutrisystem tradename and the SilverSneakers tradename), using the relief-from-royalty method, which required significant assumptions such as the long-term growth rate of future revenues, the royalty rate for such revenue, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradenames. Similar to the goodwill impairment analysis described above, the discount rate used in the estimation of fair value of the tradenames was adversely impacted by the changing market and economic conditions discussed above, resulting in a lower estimated fair value for each tradename.    

Due to an impairment loss recorded in the fourth quarter of 2019 related to the Nutrisystem tradename and goodwill, the estimated fair value of the Nutrisystem tradename was equal to its carrying value at the beginning of 2020.  The decrease in the estimated fair value of the Nutrisystem tradename during the first quarter of 2020 resulted in an impairment of tradename, and we recorded an $80.0 million impairment loss related to the Nutrisystem tradename. None of this impairment loss is deductible for tax purposes, and there is no cash tax benefit related to the impairment.  Based on our impairment assessment of the SilverSneakers tradename, we determined that the carrying value of the tradename was not impaired as of the measurement date.

There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

Fair Value of Other Financial Instruments

The estimated fair value of each class of financial instruments at June 30, 2020 was as follows:

Cash and cash equivalents The carrying amount of $60.3 million approximates fair value due to the short maturity of those instruments (less than three months).

Debt The estimated fair value of outstanding borrowings under the Credit Agreement, which includes term loan facilities and a revolving credit facility (see Note 10), is determined based on the fair value hierarchy as discussed above.

The Term Loans are actively traded and therefore are classified as Level 1 valuations. The estimated fair value is based on quotes as of June 30, 2020 from dealers who stand ready and willing to transact at those prices. The Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for similar instruments.  The estimated fair value and carrying amount of outstanding borrowings under the Term Loans at June 30, 2020 were $921.2 million and $1,012.3 million, respectively.  There were no outstanding borrowings under the Revolving Credit Facility at June 30, 2020.  

13.

Derivative Instruments and Hedging Activities

We use derivative instruments to manage differences in the amount, timing, and duration of our known or expected cash payments related to our outstanding debt (i.e., interest rate risk).  These derivatives are designated and qualify as a hedge of the exposure to variability in expected future cash flows and are therefore considered cash flow hedges.  We account for derivatives in accordance with FASB ASC Topic 815, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet at fair value as either an asset or liability.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We classify cash flows from settlement of our cash flow hedges in the same category as the cash flows from the related hedged items, generally within the operating activities in the consolidated statements of cash flows.  We do not use derivatives for trading or speculative purposes and currently do not have any derivatives that are not designated as hedges.

22


 

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.  The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance by such counterparties. However, at June 30, 2020, we do not anticipate nonperformance by these counterparties. Our interest rate swap agreements with each of the counterparties contain a provision whereby if we either default or are capable of being declared in default on any of our indebtedness, whether or not such default results in repayment of the indebtedness being accelerated by the lender, then we could also be declared in default on our derivative obligations.

Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2% plus a spread (see Note 10).  As of June 30, 2020, these interest rate swap agreements had current notional amounts totaling $800.0 million.  

We record derivatives that are designated and qualify as cash flow hedges at estimated fair value in the consolidated balance sheet, with the related gains and losses recorded in accumulated other comprehensive income or loss ("accumulated OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earningsAmounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as we make interest payments on our variable-rate debt.  As of June 30, 2020, we expect to reclassify $15.8 million from accumulated OCI as an increase to interest expense within the next 12 months due to the scheduled payment of interest associated with our debt.

The estimated gross fair values of derivative instruments and their classification on the consolidated balance sheet at June 30, 2020 and December 31, 2019 were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

Current portion of long-term liabilities

 

$

15,664

 

 

$

4,947

 

Other long-term liabilities

 

 

28,743

 

 

 

11,291

 

 

 

$

44,407

 

 

$

16,238

 

 

The following table presents the effect of cash flow hedge accounting on accumulated OCI as of June 30, 2020 and 2019:

 

(In thousands)

 

For the Three Months

Ended

 

 

For the Six Months

Ended

 

Derivatives in Cash Flow Hedging Relationships

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Loss related to effective portion of derivatives

   recognized in accumulated OCI, gross of

   tax effect

 

$

5,020

 

 

$

16,144

 

 

$

32,772

 

 

$

16,144

 

Gain (loss) related to effective portion of

   derivatives reclassified from accumulated

   OCI to interest expense, gross of tax effect

 

$

(3,482

)

 

$

160

 

 

$

(4,603

)

 

$

160

 

 

 

23


 

14.  Earnings (Loss) Per Share

We use the two-class method to calculate earnings per share as the unvested restricted stock awards outstanding under our equity incentive plan are participating shares with nonforfeitable rights to dividends. Under the two-class method, we compute earnings per share of Common Stock by dividing the sum of distributed earnings to common stockholders (currently not applicable as we do not pay dividends) and undistributed earnings allocated to common stockholders by the weighted average number of outstanding shares of Common Stock for the period.  In applying the two-class method, we allocate undistributed earnings to both shares of Common Stock and participating securities based on the number of weighted average shares outstanding during the period. Any undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses.  Following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019:

 

(In thousands except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

28,511

 

 

$

18,137

 

 

$

(169,595

)

 

$

22,351

 

Net income allocated to unvested restricted stock

 

 

(20

)

 

 

(93

)

 

 

 

 

 

(77

)

Net income (loss) allocated to shares of Common Stock

 

$

28,491

 

 

$

18,044

 

 

$

(169,595

)

 

$

22,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for basic income (loss) per share

 

 

48,711

 

 

 

47,790

 

 

 

48,662

 

 

 

45,165

 

Effect of dilutive stock options and

   restricted stock units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

8

 

 

 

93

 

 

 

 

 

 

110

 

Restricted stock units

 

 

75

 

 

 

578

 

 

 

 

 

 

444

 

Shares used for diluted income (loss) per share (1)

 

 

48,794

 

 

 

48,461

 

 

 

48,662

 

 

 

45,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.38

 

 

$

(3.49

)

 

$

0.49

 

Diluted (1)

 

$

0.58

 

 

$

0.37

 

 

$

(3.49

)

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities outstanding not included in the

   computation of earnings per share

   because their effect is anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

235

 

 

 

71

 

 

 

202

 

 

 

76

 

Restricted stock units

 

 

750

 

 

 

288

 

 

 

544

 

 

 

172

 

Restricted stock awards

 

 

32

 

 

 

128

 

 

 

35

 

 

 

64

 

Performance-based stock units

 

 

95

 

 

 

 

 

 

64

 

 

 

 

Market-based stock units

 

 

49

 

 

 

 

 

 

25

 

 

 

 

 

 

(1)

The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.

 

Market stock units and performance stock units outstanding are considered contingently issuable shares, and certain of these stock units were excluded from the calculations of diluted earnings per share for all periods presented as the performance criteria had not been met as of the end of the reporting periods.

 

 

24


 

15. Accumulated OCI

 

The following tables summarize the changes in accumulated OCI, net of tax, for the six months ended June 30, 2020:

 

(In thousands)

 

Net Change in Fair Value of Interest Rate Swaps

 

Accumulated OCI, net of tax, as of January 1, 2020

 

$

(12,091

)

Other comprehensive income (loss) before reclassifications, net of tax of $8,370

 

 

(24,402

)

Amounts reclassified from accumulated OCI, net of tax of $1,175

 

 

3,428

 

Accumulated OCI, net of tax, as of June 30, 2020

 

$

(33,065

)

 

The following table presents details about reclassifications out of accumulated OCI for the six months ended June 30, 2020:

 

(In thousands)

 

Six Months Ended June, 2020

 

 

Statement of Operations Classification

Interest rate swaps

 

$

4,603

 

 

Interest expense

 

 

 

(1,175

)

 

Income tax expense

 

 

$

3,428

 

 

Net of tax

 

See Note 13 for a further discussion of our interest rate swaps.

 

16. Segment Disclosures and Concentrations of Risk  

 

Background and Basis of Organization

 

Following the acquisition of Nutrisystem in March 2019, we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment derives its revenues from SilverSneakers senior fitness, Prime Fitness and WholeHealth Living.  The Nutrition segment provides weight management products and services and derives its revenues from Nutrisystem and South Beach Diet products. Prior to the acquisition of Nutrisystem, we had one reportable segment.   

 

25


 

Segment Revenues, Profit or Loss, and Assets

 

Our chief operating decision maker evaluates performance and allocates resources based on each segment’s EBITDA excluding acquisition and integration costs, impairment loss, restructuring and related charges, CEO transition costs, and direct, incremental costs related to COVID-19.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between the segments primarily consist of payments made by one segment on behalf of the other segment, which are recorded as current assets and eliminated in consolidation. Intersegment revenues and costs related to Wisely Well totaled $1.9 million for the three and six months ended June 30, 2020. The following tables present information about reported segment revenues and profit or loss, net of intersegment eliminations, as well as reconciliations of each such amount to consolidated totals:

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

81,923

 

 

$

180,675

 

 

$

262,598

 

 

$

157,481

 

 

$

182,896

 

 

$

340,377

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

 

 

$

34,618

 

 

 

 

 

 

 

 

 

 

$

26,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

2,049

 

 

 

 

 

 

 

 

 

 

 

8,999

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

1,745

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,009

 

 

 

 

 

 

 

 

 

 

 

2,352

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

21,235

 

 

 

 

 

 

 

 

 

 

 

23,661

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

12,919

 

 

 

 

 

 

 

 

 

 

 

9,084

 

 

Adjusted EBITDA

 

$

41,472

 

 

$

33,363

 

 

$

74,835

 

 

$

35,681

 

 

$

34,667

 

 

$

70,348

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

241,615

 

 

$

358,638

 

 

$

600,253

 

 

$

314,008

 

 

$

240,463

 

 

$

554,471

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income (loss) before income taxes

 

 

 

 

 

 

 

 

 

$

(178,633

)

 

 

 

 

 

 

 

 

 

$

35,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

4,844

 

 

 

 

 

 

 

 

 

 

 

26,049

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

199,500

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

4,332

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,752

 

 

 

 

 

 

 

 

 

 

 

3,943

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

42,898

 

 

 

 

 

 

 

 

 

 

 

31,328

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

27,682

 

 

 

 

 

 

 

 

 

 

 

12,666

 

 

Adjusted EBITDA

 

$

71,719

 

 

$

31,916

 

 

$

103,635

 

 

$

61,810

 

 

$

48,010

 

 

$

109,820

 

 

 

 

(1)

The figure for total segments equals the consolidated figure for such item.

 

Our total assets by segment were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Healthcare

 

$

527,353

 

 

$

526,013

 

Nutrition

 

 

853,817

 

 

 

1,099,892

 

Total assets

 

$

1,381,170

 

 

$

1,625,905

 

 

26


 

Concentrations of Risk

As of June 30, 2020, we were subject to concentration of revenue risk related to the services that we provide.  For the three and six months ended June 30, 2020, a significant portion (19% and 28%, respectively) of our consolidated revenues was derived from our SilverSneakers senior fitness offering, in which a meaningful amount of our fees is earned based on member visits to fitness partner locations.  Due to widespread closures of our partner locations beginning in March 2020 related to the COVID-19 pandemic, there was a significant decrease in member participation and the related revenues during March 2020, with visits decreasing sharply by the end of March. A substantial number of our fitness partner locations remained closed for at least a portion of the second quarter.  During the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.  These adverse impacts to revenue were somewhat mitigated by a reduction in cost of services as our visit costs decreased in a corresponding manner.

27


 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

As used throughout this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the terms “we,” “us,” “our,” “Tivity Health,” or the “Company” refer collectively to Tivity Health, Inc. and its wholly-owned subsidiaries.  Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Item 1. “Financial Statements” of this report.

 

Recent Developments

 

In January 2020, the Secretary of HHS declared a national public health emergency due to a novel strain of coronavirus, which causes the disease known as “COVID-19”.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and COVID-19 continues to spread throughout the United States and other countries.  Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. Such measures have resulted in significantly reduced demand for many businesses that have continued in operation.  

 

By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location. A substantial number of our fitness partner locations remained closed through April, with some locations reopening in May and additional locations reopening in June.  For the month of June 2020, approximately 66% of our fitness partner locations reported at least one visit from our SilverSneakers program.  For the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.  We are unable to predict with certainty how many of our fitness partner locations will be open in the future and for what duration, or the level of member participation at our fitness partner locations.  

 

We do not believe that COVID-19-related developments had a material impact on the results of operations or cash flows of our Nutrition segment for the first or second quarters of 2020.  While overall we did not experience any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we experienced delays in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19.  As a result, we incurred incremental expense of $1.3 million in the second quarter related to increased labor rates and overtime for employees of our fulfillment provider as well as additional shipping and related charges as we transferred the fulfillment of certain orders to other warehouses that were farther from the customer’s delivery destination.

 

We have taken a number of actions in response to the pandemic, including the following:

 

 

Given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our Revolving Credit Facility as a precautionary measure to increase our cash position and maintain financial flexibility.  We repaid such $75 million in full in June 2020.  As of June 30, 2020, outstanding debt under our Credit Agreement was $1,012.3 million, and we had $60.3 million of cash and cash equivalents.  In July 2020, we repaid $24.8 million of principal on the term loans under our Credit Agreement, resulting in our next required quarterly installment being due in December 2021. While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

 

 

We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include implementing remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the

28


 

 

transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements, and all of these policies and initiatives could impact our operations.

 

 

We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the CARES Act, curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  

 

 

o

In April 2020, we furloughed 13% of our approximately 1,000 employees.  In June 2020, some of these furloughed employees’ positions were eliminated (in addition to other position eliminations, resulting in approximately 8% of our employees being terminated), and we extended the furlough for substantially all of the remaining furloughed employees through the end of 2020. Also in June 2020, we placed an additional 2% of our total employees on furlough through the end of 2020.

 

 

o

Also in April 2020, the Compensation Committee of the Company’s Board approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  In June 2020, the Compensation Committee determined to extend such reductions in base salary through December 31, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who stood for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  In June 2020, the Board determined to extend such reduction in cash compensation to the Board through December 31, 2020.  

 

 

o

Effective at the end of July 2020, the Compensation Committee suspended the Company matching contribution to the Company’s 401(k) plan.

 

 

o

The CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) of the Internal Revenue Code increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification significantly increases the Company’s allowable interest expense deduction and results in significantly less taxable income for the years ended 2019 and 2020, resulting in less cash taxes owed for these years.  In addition, the CARES Act allows net operating losses (“NOLs”) incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.  In July 2020, we filed a refund claim of $8.2 million under such NOL carryback provision.

 

As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets.  Through this evaluation, management concluded that the fair value of goodwill allocated to the Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment. There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

 

Overview

 

Tivity Health, Inc., founded and incorporated in Delaware in 1981, is a leading provider of healthy life-changing solutions, including SilverSneakers, Nutrisystem, Prime Fitness, Wisely Well, South Beach Diet, and WholeHealth Living.  On March 8, 2019, we completed our acquisition of Nutrisystem, Inc. (“Nutrisystem”), a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily through the Internet and telephone and multi-day kits and single items (a la carte) available at select retail locations.  

 

29


 

Following the acquisition of Nutrisystem, we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment is comprised of our legacy business and includes SilverSneakers, Prime Fitness, WholeHealth Living, and Wisely Well.  The Nutrition segment is comprised of Nutrisystem’s legacy business and includes Nutrisystem and the South Beach Diet.  

 

On May 6, 2020, we announced that the Board has decided to explore strategic alternatives with respect to our Nutrition business unit, including a possible transaction.  We can give no assurance as to whether we will be able to identify any strategic alternatives that are likely to increase value to our stockholders.  

 

As part of our Healthcare segment, SilverSneakers is offered to members of Medicare Advantage and Medicare Supplement plans.  We also offer Prime Fitness, a fitness facility access program, through commercial health plans, employers, and other sponsoring organizations.  Our national network of fitness centers delivers both SilverSneakers and Prime Fitness.  Our fitness networks encompass more than 16,000 partner locations and approximately 1,000 alternative virtual and physical locations that provide classes outside of traditional fitness centers. Through our WholeHealth Living program, which we sell primarily to health plans, we offer a continuum of services related to complementary, alternative, and physical medicine.  Our WholeHealth Living network includes relationships with approximately 24,000 complementary, alternative, and physical medicine practitioners to serve individuals through health plans and employers who seek health services such as chiropractic care, acupuncture, physical therapy, occupational therapy, massage therapy, and more.

 

Our Nutrition segment includes Nutrisystem and the South Beach Diet. Typically, our Nutrition segment customers purchase monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on the program they are following, with items such as fresh fruits, fresh vegetables, lean protein and dairy. Most Nutrition segment customers order on auto-delivery, which means we send a four-week meal plan on an ongoing basis until notified of a customer’s cancellation. Auto-delivery customers are offered savings off of our regular one-time rate with each order. Monthly notifications are also sent to remind customers to update order preferences. We offer pre-selected favorites or customers may personalize their meal plan by selecting their entire menu or by customizing plans to their specific tastes or dietary preference. In total, our plans feature approximately 250 food options including frozen and unfrozen ready-to-go entrees, snacks, and shakes, at different price points. Additionally, we offer unlimited counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. Counselors are available as needed, seven days a week throughout an extended day, with further support provided through our digital tools.  The Nutrition segment also offers its products through select retailers and QVC, a television shopping network.

Forward-Looking Statements

This report contains forward-looking statements, which are based upon current expectations, involve a number of risks and uncertainties, and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical statements of fact and those regarding the intent, belief, or expectations of the Company, including, without limitation, all statements regarding the Company's future earnings, revenues, and results of operations.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary from those in the forward-looking statements as a result of various factors, including, but not limited to:

 

 

impacts from the COVID-19 pandemic (including the response of governmental authorities to combat and contain the pandemic, the closure of fitness centers in our national network (or operational restrictions imposed on such fitness centers), and potential reclosures as a result of recent surges in positive COVID-19 cases) on our business, operations or liquidity;

 

 

the risk that the significant indebtedness incurred in connection with the acquisition of Nutrisystem may limit our ability to adapt to changes in the economy or market conditions, expose us to interest rate risk for the variable rate indebtedness and require a substantial portion of cash flows from operations to be dedicated to the payment of indebtedness;

 

 

our ability to service our debt, make principal and interest payments as those payments become due, and remain in compliance with our debt covenants;

30


 

 

 

the risks associated with changes in macroeconomic conditions (including the impacts of any recession or changes in consumer spending resulting from the COVID-19 pandemic), widespread epidemics, pandemics (such as the current COVID-19 pandemic) or other outbreaks of disease, geopolitical turmoil, and the continuing threat of domestic or international terrorism;

 

 

our ability to collect accounts receivable from our customers and amounts due under our sublease agreements;

 

 

the market’s acceptance of our new products and services;

 

 

our ability to develop and implement effective strategies and to anticipate and respond to strategic changes, opportunities, and emerging trends in our industry and/or business, as well as to accurately forecast the related impact on our revenues and earnings;

 

 

the risk that our exploration of strategic alternatives for our Nutrition business unit will be unsuccessful in identifying or consummating any strategic alternative that yields additional value for our stockholders, or that such exploration adversely affects the Nutrition business unit or the Company as a whole;

 

 

the risk that we are unable to achieve the strategic benefits, synergies and growth opportunities that were anticipated in connection with the acquisition of Nutrisystem, either in a timely manner or at all;

 

 

counterparty risk associated with our interest rate swap agreements;

 

 

our ability to obtain adequate financing to provide the capital that may be necessary to support our current or future operations;

 

 

the impact of any additional impairment of our goodwill, intangible assets, or other long-term assets;

 

 

the risks associated with potential failures of our information systems;

 

 

the risks associated with data privacy or security breaches, computer hacking, network penetration and other illegal intrusions of our information systems or those of third-party vendors or other service providers, which may result in unauthorized access by third parties, loss, misappropriation, disclosure or corruption of customer, employee or our information, or other data subject to privacy laws and may lead to a disruption in our business, costs to modify, enhance, or remediate our cybersecurity measures, enforcement actions, fines or litigation against us, or damage to our business reputation;

 

 

the impact of any new or proposed legislation, regulations and interpretations relating to Medicare, Medicare Advantage, Medicare Supplement, e-commerce, advertising, and privacy and security laws;

 

 

our ability to attract, hire, or retain key personnel or other qualified employees and to control labor costs;

 

 

the risks associated with changes to traditional office-centered business processes and/or conducting operations out of the office in a work-from-home or remote model during adverse situations (e.g., during a crisis, disaster, or pandemic), which may result in additional costs and/or may negatively impact productivity and cause other disruptions to our business;

 

 

the effectiveness of the reorganization of our business (including the 2020 COVID Restructuring Plan) and our ability to realize the anticipated benefits;

 

 

our ability to effectively compete against other entities, whose financial, research, staff, and marketing resources may exceed our resources;

 

 

the impact of legal proceedings involving us and/or our subsidiaries, products, or services, including any claims related to intellectual property rights;

 

 

our ability to enforce our intellectual property rights;

31


 

 

 

the risks associated with deriving a significant concentration of our revenues from a limited number of our Healthcare segment customers, many of whom are health plans;

 

 

our ability and/or the ability of our Healthcare segment customers to enroll participants and to accurately forecast their level of enrollment and participation in our programs in a manner and within the timeframe we anticipate;

 

 

our ability to sign, renew and/or maintain contracts with our Healthcare segment customers and/or our fitness partner locations under existing terms or to restructure these contracts on terms that would not have a material negative impact on our results of operations;

 

 

the impact of a reduction in Medicare Advantage health plan reimbursement rates or changes in plan design;

 

 

the ability of our Healthcare segment health plan customers to maintain the number of covered lives enrolled in those health plans during the terms of our agreements;

 

 

our ability to add and/or retain paid subscribers in our Prime Fitness program;

 

 

the impact of severe or adverse weather conditions, the current COVID-19 pandemic, and the potential emergence of additional health pandemics or infectious disease outbreaks on member participation in our Healthcare segment programs;

 

 

the impact of healthcare reform on our business;

 

 

the effectiveness of our marketing and advertising programs;

 

 

loss of, or disruption in the business of, any of our food suppliers or our fulfillment provider, or disruptions in the shipping of our food products for our Nutrition segment (including as a result of the COVID-19 pandemic);

 

 

the impact of claims that our Nutrition segment personnel are unqualified to provide proper weight loss advice;

 

 

the impact of health- or advertising-related claims by our Nutrition segment customers or competitors;

 

 

competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods;

 

 

loss of any of our Nutrition segment third-party retailer agreements and any obligations associated with such loss;

 

 

our ability to continue to develop innovative weight loss programs and enhance our existing programs, or the failure of our programs to continue to appeal to the market;

 

 

the impact of claims from our Nutrition segment competitors regarding advertising or other marketing practices;

 

 

our ability to develop and commercially introduce new products and services;

 

 

our ability to receive referrals for sales of our programs in the Nutrition segment from existing Nutrition segment customers, a decline in which could adversely impact our customer acquisition costs;

 

 

failure to attract spokespersons or negative publicity with respect to any of our spokespersons;

 

32


 

 

our ability to anticipate change and respond to emerging trends for customer preferences and the impact of the same on demand for our services and products;

 

 

the seasonality of the business of our Nutrition segment, particularly with respect to diet season;

 

 

negative publicity with respect to the weight loss industry;

 

 

the impact of increased governmental regulation on our Nutrition segment;

 

 

a significant portion of our Nutrition segment revenue depends on our ability to sustain subscriptions of our Nutrition segment’s programs, and cancellations could impact our future operating results;

 

 

claims arising from the sale of ingested products; and

 

other risks detailed in this report and our other filings with the Securities and Exchange Commission.

We undertake no obligation to update or revise any such forward-looking statements.

 

Business Strategy

 

Tivity Health’s integrated portfolio of healthy life-changing solutions supports overall health and wellness programs, which we believe are critical to our health plan and employer-based customers.  On May 6, 2020, we announced that the Board has decided to explore strategic alternatives with regard to our Nutrition business unit, including a possible transaction. We can give no assurance as to whether we will be able to identify any strategic alternatives that are likely to increase value to our stockholders.  In the event that we determine to pursue a sale of the Nutrition business unit, we may be unable to secure a buyer or, if we do so, such sale transaction may not be at a price that is favorable to us. Speculation regarding any developments related to the review of strategic alternatives for our Nutrition business unit and perceived uncertainties related to the future of the Company could cause our stock price to fluctuate significantly.  We have not set a specific timetable for the conclusion of this process.  Notwithstanding the exploration of strategic alternatives, our near-term strategy for the Nutrition business unit is to maximize opportunities to better serve our customers and grow our business as well as prepare for a successful 2021 diet season.  For the Healthcare business unit, we will continue to focus on adding new members, building engagement and participation among current eligible members (including expansion and enhancement of our digital offerings and virtual exercise classes during and beyond the duration of the COVID-19 pandemic), and collaborating with health plans and other partners to introduce new products and services.  In addition, we expect that the Healthcare business unit will continue to use the Wisely Well brand and to support our health plan partners with nutrition offerings such as home meal delivery to seniors or members recently discharged from the hospital as well as nutritional support for members with chronic conditions.  

 

Critical Accounting Policies

 

We describe our significant accounting policies in Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”).  We prepare the consolidated financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

We believe the following accounting policies are the most critical in understanding the estimates and judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.  

33


 

Excess and Obsolete Inventory

We continually assess the quantities of inventory on hand to identify excess or obsolete inventory and record a provision for any estimated loss. We estimate the reserve for excess and obsolete inventory based primarily on our forecasted demand and/or our ability to sell the products, introduction of new products, future production requirements and changes in our customers’ behavior. The reserve for excess and obsolete inventory was $2.0 million and $1.8 million at June 30, 2020 and December 31, 2019, respectively.

 

Acquisition Accounting

 

In connection with any acquisitions, we allocate the purchase price to the assets and liabilities we acquire, such as net tangible assets, deferred revenue, identifiable intangible assets such as trade names, customer lists, and customer relationships, and goodwill.  We apply significant judgments and estimates in determining the fair market value of the assets acquired and their useful lives.  For example, we estimated the fair value of existing definite-lived customer lists based on the multi-period excess earnings method under the income approach, which involved applying an attrition rate to the estimated net future cash flows from the customers that existed as of the acquisition date. We estimated the fair values of the tradenames using the relief-from-royalty method, which required significant assumptions such as the long-term growth rates of future revenues, the royalty rate for such revenue, the terminal growth rate of revenue, the tax rate, and a discount rate.  Different estimates and assumptions in valuing acquired assets could yield materially different results.

Impairment of Intangible Assets and Goodwill

 

We review goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.  Following the acquisition of Nutrisystem in March 2019, we have two reporting units: Healthcare and Nutrition. Prior to such acquisition, we had one reporting unit.  As further described below under “Impairment Loss,” in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets.  Through this evaluation, management concluded that the fair value of goodwill allocated to the Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and during the first quarter of 2020, we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment.  See Note 12 of the notes to consolidated financial statements included in this report.  

 

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

 

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

 

Except for two tradenames that have an indefinite life and are not subject to amortization, we amortize identifiable intangible assets over their estimated useful lives on a straight-line or accelerated basis based on the period for which the economic benefits of the asset are expected to be realized. We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that

34


 

the carrying values may not be recoverable. If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset's fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.  

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

Revenue Recognition

 

We account for revenue from contracts with customers in accordance with Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers” (“ASC Topic 606”).  The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract’s transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.

 

Healthcare Segment

 

Our Healthcare segment earns revenue from our three programs, SilverSneakers senior fitness, Prime Fitness and WholeHealth Living.  We provide the SilverSneakers senior fitness program to members of Medicare Advantage and Medicare Supplement plans through our contracts with those plans.  We offer Prime Fitness, a fitness facility access program, through contracts with commercial health plans, employers, and other sponsoring organizations that allow their members to individually purchase the program.  We sell our WholeHealth Living program primarily to health plans.

 

The significant majority of our Healthcare segment’s customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term.  There are generally no performance obligations that are unsatisfied at the end of a particular month.  There was no material revenue recognized during the three and six months ended June 30, 2020 from performance obligations satisfied in a prior period.  

 

Our fees within our Healthcare segment are variable month to month and are generally billed per member per month (“PMPM”) or billed based on a combination of PMPM and member visits to a network location.  We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month.  We bill for member visits approximately one month in arrears once actual member visits are known.  Payments from customers are typically due within 30 days of invoice date.  When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period.

 

Our Healthcare segment’s customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month.  The allocated consideration corresponds directly with the value to our customers of our services completed for the month.  Under the majority of our Healthcare segment’s contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice.  

 

Although we evaluate our financial performance and make resource allocation decisions based upon the results of our two reportable segments, we believe the following information depicts how our Healthcare segment revenues and cash flows are affected by economic factors.  For the three and six months ended June 30, 2020, revenue from our SilverSneakers program, which is predominantly contracted with Medicare Advantage and Medicare

35


 

Supplement plans, comprised approximately 60% and 71%, respectively, of revenues in the Healthcare segment, while revenue from our Prime Fitness program comprised approximately 23% and 21%, respectively of revenues in the Healthcare segment, and our WholeHealth Living program comprised approximately 6% and 4%, respectively, of revenues in the Healthcare segment.  Other revenues, which were earned from health plans and a large employer, comprised 11% and 4% of our revenues for the three and six months ended June 30, 2020, respectively.

 

Sales and usage-based taxes are excluded from revenues.

 

Nutrition Segment

 

Our Nutrition segment earns revenue from four sources: direct to consumer, retail, QVC and other.  Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties.  As explained in more detail below, revenue is recognized upon satisfaction of the performance obligation by transferring control over a product to a Nutrition segment customer.  The estimated breakage of gift cards (estimated amount of unused gift cards) is recognized over the pattern of redemption of the gift cards, and direct-mail advertising costs are expensed as incurred.  We recognize an asset for the carrying amount of product to be returned and for costs to obtain a contract if the amortization is more than one year in duration.  We expense costs to obtain a contract as incurred if the amortization period is less than one year.

 

We sell pre-packaged foods directly to weight loss program participants primarily through the Internet and telephone (referred to as the direct to consumer channel), through QVC (a television shopping network), and select retailers. Pre-packaged foods are comprised of both frozen and non-frozen (ready-to-go), shelf-stable products.

 

Products sold through the direct to consumer channel, both frozen and non-frozen, may be sold separately (a la carte) or as part of a packaged monthly meal plan for which Nutrition segment customers pay at the point of sale. Products sold through QVC are payable by QVC upon our shipment of the product to the end consumer. For both the direct to consumer channel and QVC, we recognize revenue at a point in time, i.e., at the shipping point.  Direct to consumer customers may return unopened ready-to-go Nutrisystem products within 30 days after purchase in order to receive a refund or credit. Frozen Nutrisystem products are non-returnable and non-refundable unless the order is canceled within 14 days after delivery.  South Beach Diet products are not refundable. 

 

Products sold to retailers include both frozen and non-frozen products and are payable by the retailer upon receipt.  We recognize revenue at a point in time, i.e., when the retailers take possession of the product. Certain retailers have the right to return unsold products.

 

We account for the shipment of frozen and non-frozen, ready-to-go products as separate performance obligations. The consideration, including variable consideration for product returns, is allocated between frozen and non-frozen products based on their standalone selling prices. The amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data.

 

In addition to our pre-packaged foods, we sell prepaid gift cards through a wholesaler that are redeemable through the Internet or telephone. Prepaid gift cards represent grants of rights to goods to be provided in the future to gift card buyers. The wholesaler has the right to return all unsold prepaid gift cards. The wholesaler’s retail selling price of the gift cards is deferred in the balance sheet and recognized as revenue when we have satisfied our performance obligation, i.e., when a gift card holder redeems the gift card with us. We recognize breakage amounts (the estimated amount of unused gift cards) as revenue, in proportion to the actual gift card redemptions exercised by gift card holders in relation to the total expected redemptions of gift cards. We utilize historical experience in estimating the total expected breakage and period over which the gift cards will be redeemed.

 

Sales and other taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a Nutrition segment customer are excluded from revenue and presented on a net basis.  After control over a product has transferred to a Nutrition segment customer, shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in revenue and cost of revenue in the accompanying consolidated statements of operations.

 

36


 

We review the reserves for our Nutrition segment customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment.  The provision for estimated returns for the three and six months ended June 30, 2020 was $4.1 million and $9.3 million, respectively. The provision for estimated returns for the three and six months ended June 30, 2019 was $5.6 million and $7.0 million, respectively.  The reserve for estimated returns incurred but not received and processed was $1.4 million and $0.8 million at June 30, 2020 and December 31, 2019, respectively, and has been included in accrued liabilities in the accompanying consolidated balance sheet.

 

Key Performance Indicators

 

In managing our business, we regularly review and analyze a number of key performance indicators (“KPIs”), including revenues by segment, adjusted EBITDA by segment (both in dollars and as a percentage of revenues), and free cash flow.  Free cash flow is not calculated in accordance with U.S. GAAP (“non-GAAP”).  These KPIs help us monitor our performance, identify trends affecting our business, determine the allocation of resources, and assess the quality and potential variability of our cash flows and earnings.  We believe they are useful to investors in evaluating and understanding our business.

  

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In $000s)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Healthcare segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

81,923

 

 

$

157,481

 

 

$

241,615

 

 

$

314,008

 

Adjusted EBITDA

 

 

41,472

 

 

 

35,681

 

 

 

71,719

 

 

 

61,810

 

Adjusted EBITDA as a percentage of

   revenues

 

 

50.6

%

 

 

22.7

%

 

 

29.7

%

 

 

19.7

%

Nutrition segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

180,675

 

 

$

182,896

 

 

$

358,638

 

 

$

240,463

 

Adjusted EBITDA

 

 

33,363

 

 

 

34,667

 

 

 

31,916

 

 

 

48,010

 

Adjusted EBITDA as a percentage of

   revenues

 

 

18.5

%

 

 

19.0

%

 

 

8.9

%

 

 

20.0

%

 

 

Revenues – we review year-over-year changes in revenue by segment as a key measure of our success in growing our business.  In addition to measuring revenue by segment, we also measure and report revenue by program type or source of revenue, as detailed in Note 3 of the notes to the consolidated financial statements included in this report, i.e., SilverSneakers, Prime Fitness, WholeHealth Living, Other, Nutrisystem direct to consumer, South Beach Diet direct to consumer, retail, and QVC.  Evaluating revenue by program type or source helps us identify and address changes in product mix, broad market factors that may affect our revenues, and opportunities for future growth.

  

 

Adjusted EBITDA is defined as described in Note 16, “Segment Disclosures and Concentrations of Risk”, of the notes to the consolidated financial statements included in this report.  We believe adjusted EBITDA provides investors a helpful measure for comparing our operating performance with our historical operating results as well as the performance of other companies that may have different financing and capital structures or tax rates. We believe it is a useful indicator of the operational strength and performance of our business without regard to items such as amortization of intangible assets, which can vary substantially from company to company depending upon the nature and extent of acquisitions.  Adjusted EBITDA is not considered a non-GAAP measure in the context of ASC 280, “Segment Reporting”, which requires disclosure of the metrics that the chief operating decision maker uses to evaluate performance and allocate resources.  Because adjusted EBITDA may be defined differently by other companies in our industry, the financial measure presented herein may not be comparable to similarly titled measures of other companies.

 

37


 

 

Free cash flow is a non-GAAP measure and is defined by the Company as net cash flows provided by operating activities less acquisition of property and equipment.  We believe free cash flow is useful to management and investors to measure (i) our performance, (ii) the strength of the Company and its ability to generate cash, and (iii) the amount of cash that is available to repay debt or make other investments.  A reconciliation of free cash flow to cash flows from operating activities (the most comparable U.S. GAAP measure) is set forth below.

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

Net cash flows provided by operating activities

 

$

130,943

 

 

$

49,599

 

Acquisition of property and equipment

 

 

(10,362

)

 

 

(8,918

)

Free cash flow

 

$

120,581

 

 

$

40,681

 

 

Outlook

 

Although there is significant uncertainty relating to the potential impacts of the COVID-19 pandemic on our business going forward, including the duration of the outbreak, the timing and duration of our fitness partner locations being open, the impact on member participation in our SilverSneakers programs, and the ultimate medium- and long-term impact of the pandemic on the global economy, we expect our results of operations for the short term to be adversely impacted by COVID-19, primarily in our Healthcare segment, when compared to the same periods in the prior year and to our expectations at the beginning of 2020.  For the Nutrition segment, we expect revenues for the third quarter of 2020 to decrease compared to the second quarter of 2020 due to normal seasonality in this business.

 

Executive Overview of Results

 

The key financial results for the three and six months ended June 30, 2020 are:

 

 

Revenueof $262.6 million for the three months ended June 30, 2020, including $81.9 million from the Healthcare segment and $180.7 million from the Nutrition segment, compared to revenueof $340.4 million for the three months ended June 30, 2019, including $157.5 million from the Healthcare segment and $182.9 million from the Nutrition segment.  

 

 

Revenueof $600.3 million for the six months ended June 30, 2020, including $241.6 million from the Healthcare segment and $358.6 million from the Nutrition segment, compared to revenueof $554.5 million for the six months ended June 30, 2019, including $314.0 million from the Healthcare segment and $240.5 million from the Nutrition segment.

 

 

Pre-tax income of $34.6 million for the three months ended June 30, 2020 compared to $26.3 million for the three months ended June 30, 2019.  Pre-tax income for the three months ended June 30, 2020 includes:

 

o

$51.1 million of marketing expenses, including $50.3 million attributable to the Nutrition segment, compared to $54.6 million for the same period in 2019, which included $50.6 million attributable to the Nutrition segment;

 

o

$21.2 million of interest expense compared to $23.7 million for the same period in 2019;

 

o

$7.1 million of amortization expense compared to $4.4 million for the same period in 2019;

 

o

$2.0 million of transition, acquisition, and integration costs compared to $9.0 million for the same period in 2019;

 

o

$1.7 million of CEO transition costs compared to $0 for the same period in 2019;

 

o

$1.3 million of COVID-19 costs compared to $0 for the same period in 2019; and

 

o

$1.0 million of restructuring and related charges compared to $2.4 million for the same period in 2019.

38


 

 

Pre-tax loss of ($178.6) million for the six months ended June 30, 2020 compared to pre-tax income of $35.8 million for the six months ended June 30, 2019.  Pre-tax loss for the six months ended June 30, 2020 includes:

 

o

$199.5 million of impairment loss, all of which was attributable to the Nutrition segment, compared to $0 for the same period in 2019;

 

o

$138.2 million of marketing expenses, including $130.1 million attributable to the Nutrition segment, compared to $78.8 million for the same period in 2019, which included $65.5 million attributable to the Nutrition segment;

 

o

$42.9 million of interest expense compared to $31.3 million for the same period in 2019;

 

o

$16.2 million of amortization expense compared to $5.8 million for the same period in 2019;

 

o

$4.8 million of transition, acquisition, and integration costs compared to $26.0 million for the same period in 2019;

 

o

$4.3 million of CEO transition costs compared to $0 for the same period in 2019;

 

o

$1.8 million of restructuring and related charges compared to $3.9 million for the same period in 2019; and

 

o

$1.3 million of COVID-19 costs compared to $0 for the same period in 2019.

 

Results of Operations

 

The following table sets forth the components of the consolidated statements of operations for the three and six months ended June 30, 2020 and 2019 expressed as a percentage of revenues from continuing operations.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue (exclusive of depreciation and

   amortization included below)

 

 

45.0

%

 

 

57.2

%

 

 

52.9

%

 

 

60.4

%

Marketing expenses

 

 

19.5

%

 

 

16.0

%

 

 

23.0

%

 

 

14.2

%

Selling, general and administrative expenses

 

 

8.9

%

 

 

8.7

%

 

 

8.6

%

 

 

10.3

%

Depreciation and amortization

 

 

4.9

%

 

 

2.7

%

 

 

4.6

%

 

 

2.3

%

Impairment loss

 

 

 

 

 

 

 

 

33.2

%

 

 

 

Restructuring and related charges

 

 

0.4

%

 

 

0.7

%

 

 

0.3

%

 

 

0.7

%

Operating income (loss) (1)

 

 

21.3

%

 

 

14.7

%

 

 

(22.6

)%

 

 

12.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8.1

%

 

 

7.0

%

 

 

7.1

%

 

 

5.7

%

Income (loss) before income taxes (1)

 

 

13.2

%

 

 

7.7

%

 

 

(29.8

)%

 

 

6.5

%

Income tax expense

 

 

2.3

%

 

 

2.4

%

 

 

(1.5

)%

 

 

2.4

%

Net income (loss) (1)

 

 

10.9

%

 

 

5.3

%

 

 

(28.3

)%

 

 

4.0

%

 

 

(1)

Figures may not add due to rounding.

 

39


 

Revenues

 

Revenues were $262.6 million for the second quarter of 2020 compared to $340.4 million for the second quarter of 2019, including the following revenues by segment:  

 

 

Healthcare segment revenues were $81.9 million for the second quarter of 2020 compared to $157.5 million for the second quarter of 2019, a decrease of $75.6 million, primarily as a result of a net decrease in SilverSneakers revenue of $73.7 million driven by a decrease in revenue-generating visits for the second quarter of 2020 due to the COVID-19 pandemic, which resulted in the closure of substantially all of our fitness partner locations beginning in March 2020. While some of these locations reopened in May and additional locations reopened in June of 2020, the average monthly total participation levels of our members after such locations reopened were significantly lower than in the second quarter of 2019.  As a result, revenues from PMPM fees represented 88% of SilverSneakers revenue for the second quarter of 2020, compared to 33% for the second quarter of 2019.  In addition, revenue from Prime Fitness decreased by $10.7 million due to a decrease in paid subscribers for the second quarter of 2020 compared to the second quarter of 2019.  These decreases were partially offset by an increase of $6.8 million during the second quarter of 2020 from a program with a large employer seeking to improve its employees’ well-being during the COVID-19 pandemic. We do not expect revenue from this program to recur at this level in future quarters.

 

 

Nutrition segment revenues were $180.7 million for the second quarter of 2020 compared to $182.9 million for the second quarter of 2019, a decrease of $2.2 million, primarily due to decreases in revenue from South Beach Diet and retail of $5.8 million and $4.8 million, respectively, mostly offset by an increase in Nutrisystem direct to consumer revenue of $9.1 million, primarily driven by higher revenue from new customers in their initial diet cycle ($11.5 million), partially offset by lower revenue from reactivation of former customers ($2.4 million).

 

Revenues were $600.3 million for the six months ended June 30, 2020 compared to $554.5 million for the six months ended June 30, 2019, including the following revenues by segment:

 

 

Healthcare segment revenues were $241.6 million for the six months ended June 30, 2020 compared to $314.0 million for the six months ended June 30, 2019, a decrease of $72.4 million, primarily as a result of a net decrease in SilverSneakers revenue of $75.2 million driven by a decrease in revenue-generating visits in 2020 due to the COVID-19 pandemic, which resulted in the closure of substantially all of our fitness partner locations beginning in March 2020. While some of these locations reopened in May and additional locations reopened in June of 2020, the average participation level of our members after such locations reopened was significantly lower than in the comparable period in 2019.  As a result, revenues from PMPM fees represented 51% of SilverSneakers revenue for the six months ended June 30, 2020, compared to 33% for the same period in 2019.  In addition, revenue from Prime Fitness decreased by $6.6 million due to a decrease in paid subscribers for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. These decreases were partially offset by an increase of $6.8 million during the second quarter of 2020 from a program with a large employer seeking to improve its employees’ well-being during the COVID-19 pandemic. We do not expect revenue from this program to recur at this level in future quarters.

 

 

Nutrition segment revenues were $358.6 million for the six months ended June 30, 2020 compared to $240.5 million for the second quarter of 2019, primarily due to the acquisition of Nutrisystem on March 8, 2019.  

 

40


 

Cost of Revenue

 

Cost of revenue (excluding depreciation and amortization) (“Cost of Revenue”) was $118.2 million, or 45.0% of revenues, for the second quarter of 2020 compared to $194.8 million, or 57.2% of revenues, for the second quarter of 2019, including the following Cost of Revenue by segment:  

 

 

For the Healthcare segment, Cost of Revenue was $33.8 million, or 41.3% of revenues, for the second quarter of 2020 compared to $111.1 million, or 70.5% of revenues, for the second quarter of 2019, primarily due to a higher mix of revenues from PMPM fees in the second quarter of 2020, as noted above, coupled with a decrease in visit costs due to the temporary closure of fitness partner locations and a decline in average monthly total participation levels (compared to the same period in 2019) after such locations reopened.  

 

 

For the Nutrition segment, Cost of Revenue was $84.4 million, or 46.7% of revenues, for the second quarter of 2020 compared to $83.7 million, or 45.8% of revenues, for the second quarter of 2019, primarily due to (i) incremental expense due to the COVID-19 pandemic as discussed under “Recent Developments” and (ii) increased food costs and changes in program mix to more premium products. These increases were partially offset by a decrease in acquisition and integration costs.

 

Cost of Revenue was $317.4 million, or 52.9% of revenues, for the six months ended June 30, 2020 compared to $335.1 million, or 60.4% of revenues, for the six months ended June 30, 2019, including the following Cost of Revenue by segment:  

 

 

For the Healthcare segment, Cost of Revenue was $149.0 million, or 61.6% of revenues, for the six months ended June 30, 2020 compared to $224.9 million, or 71.6% of revenues, for the six months ended June 30, 2019, primarily due to a higher mix of revenues from PMPM fees in 2020, as noted above, coupled with a decrease in visit costs due to the temporary closure of fitness partner locations and a decline in average monthly total participation levels (compared to the same period in 2019) after such locations reopened.  

 

 

For the Nutrition segment, Cost of Revenue was $168.4 million, or 47.0% of revenues, for the six months ended June 30, 2020 compared to $110.2 million, or 45.8% of revenues, for the six months ended June 30, 2019, primarily due to (i) incremental expense due to the COVID-19 pandemic as discussed under “Recent Developments”, (ii) increased food costs and changes in program mix to more premium products, and (iii) promotional activity. These increases were partially offset by a decrease in acquisition and integration costs.

 

Marketing Expenses

 

Marketing expenses were $51.1 million, or 19.4% of revenues, for the second quarter of 2020 compared to $54.6 million, or 16.0% of revenues, for the second quarter of 2019, including the following marketing expenses by segment:

 

 

For the Healthcare segment, marketing expenses were $0.8 million, or 0.9% of revenues, for the second quarter of 2020 compared to $4.0 million, or 2.5% of revenues, for the second quarter of 2019, primarily due to decreased spending in the second quarter of 2020 on SilverSneakers advertising and media campaigns compared to the second quarter of 2019.  

 

 

For the Nutrition segment, marketing expenses as a percentage of revenues did not change materially from the second quarter of 2019 ($50.6 million, or 27.7% of revenues) to the second quarter of 2020 ($50.3 million, or 27.9% of revenues).

 

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Marketing expenses were $138.2 million, or 23.0% of revenues, for the six months ended June 30, 2020 compared to $78.8 million, or 14.2% of revenues, for the six months ended June 30, 2019, including the following marketing expenses by segment:

 

 

For the Healthcare segment, marketing expenses were $8.1 million, or 3.3% of revenues, for the six months ended June 30, 2020 compared to $13.2 million, or 4.2% of revenues, for the six months ended June 30, 2019, primarily due to decreased spending during the six months ended June 30, 2020 on SilverSneakers advertising and media campaigns compared to the six months ended June 30, 2019.  

 

 

For the Nutrition segment, marketing expenses were $130.1 million, or 36.3% of revenues, for the six months ended June 30, 2020 compared to $65.5 million, or 27.2% of revenues, for the six months ended June 30, 2019, primarily due to a disproportionate amount of annual marketing expenses being incurred in January and February of each year (the beginning of diet season), and in 2019, these expenses were incurred prior to our acquisition of Nutrisystem on March 8, 2019.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses were $23.5 million, or 8.9% of revenues, for the second quarter of 2020 compared to $29.7 million, or 8.7% of revenues, for the second quarter of 2019, including the following SG&A expenses by segment:

 

 

For the Healthcare segment, SG&A expenses were $8.9 million, or 10.9% of revenues, for the second quarter of 2020 compared to $11.1 million, or 7.1% of revenues, for the second quarter of 2019, primarily due to (i) the fixed nature of certain costs that cannot be reduced proportionately with reductions in revenue and (ii) CEO transition-related expenses associated with the termination of our former CEO in February 2020 and the hiring of a new CEO in June 2020.  These increases were partially offset by a decrease in transition, acquisition, and integration costs from $3.5 million for the second quarter of 2019 to $1.0 million for the second quarter of 2020.

 

 

For the Nutrition segment, SG&A expenses were $14.6 million, or 8.1% of revenues, for the second quarter of 2020 compared to $18.6 million, or 10.1% of revenues, for the second quarter of 2019, primarily due to a decrease in transition, acquisition, and integration expenses from $3.4 million for the second quarter of 2019 to $0.5 million for the second quarter of 2020.

 

SG&A expenses were $51.5 million, or 8.6% of revenues, for the six months ended June 30, 2020 compared to $56.9 million, or 10.3% of revenues, for the six months ended June 30, 2019, including the following SG&A expenses by segment:

 

 

For the Healthcare segment, SG&A expenses were $21.0 million, or 8.7% of revenues, for the six months ended June 30, 2020 compared to $33.8 million, or 10.8% of revenues, for the six months ended June 30, 2019, primarily due to a decrease in transition, acquisition, and integration costs from $18.8 million for the six months ended June 30, 2019 to $2.6 million for the six months ended June 30, 2020.  This decrease was partially offset by (i) CEO transition-related expenses associated with the termination of our former CEO in February 2020 and the hiring of a new CEO in June 2020 and (ii) the fixed nature of certain costs that cannot be reduced proportionately with reductions in revenue.

 

 

For the Nutrition segment, SG&A expenses were $30.5 million, or 8.5% of revenues, for the six months ended June 30, 2020 compared to $23.1 million, or 9.6% of revenues, for the six months ended June 30, 2019, primarily due to a decrease in transition, acquisition, and integration expenses from $4.3 million for the six months ended June 30, 2019 to $0.7 million for the six months ended June 30, 2020.    

 

Impairment Loss

 

During the first quarter of 2020, we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment.  These impairment losses were primarily attributable to rapidly changing market and economic conditions resulting from the COVID-19 pandemic. See Note 12 of the notes to consolidated financial statements included in this report.

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Restructuring and Related Charges

 

2019 Restructuring Plan

 

During the first quarter of 2019, we began a reorganization primarily related to integrating the Healthcare and Nutrition segments and streamlining our corporate and operations support ("2019 Restructuring Plan").  The 2019 Restructuring Plan concluded during the first quarter of 2020.  For the three and six months ended June 30, 2019, we incurred restructuring charges of $2.4 million and $3.9 million, respectively, related to the 2019 Restructuring Plan, of which $0.8 million and $1.8 million, respectively, related to the Healthcare segment and $1.6 million and $2.1 million, respectively, related to the Nutrition segment.  For the six months ended June 30, 2020, we incurred restructuring charges of $0.7 million related to the 2019 Restructuring Plan, of which $0.5 million related to the Healthcare segment and $0.2 million related to the Nutrition segment.  To date, we have incurred restructuring charges of $7.8 million related to the 2019 Restructuring Plan, of which $2.4 million related to the Healthcare segment and $5.4 million related to the Nutrition segment.  These expenses consist entirely of severance and other employee-related costs.  The 2019 Restructuring Plan is expected to result in total annualized savings in 2020 of approximately $19.5 million, with $6.7 million relating to the Healthcare segment and $12.8 million relating to the Nutrition segment.

 

2020 COVID Restructuring Plan

 

During the second quarter of 2020, we began a reorganization plan primarily related to eliminating certain compensation costs in response to the COVID-19 pandemic in order to preserve our liquidity and manage our cash flows (“2020 COVID Restructuring Plan”).  To date, and for the three and six months ended June 30, 2020, we incurred restructuring charges of $1.0 million related to the 2020 COVID Restructuring Plan, of which $0.8 million related to the Healthcare segment and $0.2 million related to the Nutrition segment.  These expenses consist entirely of severance and other employee-related costs.  The 2020 COVID Restructuring Plan is expected to result in total annualized savings at target performance of approximately $7.5 million, with $6.0 million relating to the Healthcare segment and $1.5 million relating to the Nutrition segment.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $3.8 million for the second quarter of 2020 compared to the second quarter of 2019, primarily due to increased amortization expense on intangible assets in the Nutrition segment due to an adjustment to the customer list intangible asset to finalize the preliminary purchase price allocation during the fourth quarter of 2019 based on information obtained regarding facts and circumstances that existed as of the acquisition date.    

 

Depreciation and amortization expense increased by $15.0 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to the acquisition of Nutrisystem on March 8, 2019, which resulted in additional depreciation and amortization expense in 2020 attributable to the acquisition of Nutrisystem’s property and equipment as well as intangible assets recorded in connection with the acquisition.  

 

Interest Expense

 

Interest expense decreased by $2.4 million for the second quarter of 2020 compared to the second quarter of 2019, primarily due to a lower level of outstanding borrowings in 2020 under the Credit Agreement (as defined below).

 

Interest expense increased by $11.6 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to our entering into a new Credit and Guaranty Agreement (the “Credit Agreement”) with a group of lenders, Credit Suisse AG, Cayman Islands Branch, as general administrative agent, term facility agent and collateral agent, and SunTrust Bank, as revolving facility agent and swingline lender, on March 8, 2019, including term loans with an initial borrowing of $1,180 million, in connection with the acquisition of Nutrisystem.    

 

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Income Tax Expense

 

See Note 8 of the notes to consolidated financial statements in this report for a discussion of income tax expense.

 

Liquidity and Capital Resources

 

Overview

 

As of June 30, 2020, outstanding debt under the Credit Agreement was $1.0 billion, and we had $60.3 million of cash and cash equivalents.

 

As of June 30, 2020, we had a working capital deficit of $5.7 million. While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement will be sufficient to fund our operations, principal and interest payments, and capital expenditures (which we currently plan to curtail for the remainder of 2020) for the next 12 months.  We cannot assure you that we will be able to secure additional financing if needed and, if such funds are available, whether the terms or conditions will be favorable to us.  With the uncertainty surrounding COVID-19, our ability to engage in financing transactions may be constrained by (i) volatile or tight economic, capital, credit and/or financial market conditions, (ii) moderated investor and/or lender interest or capacity, (iii) restrictions under our Credit Agreement, and/or (iv) our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.  As of June 30, 2020, availability under the Revolving Credit Facility totaled $124.5 million as calculated under the most restrictive covenant.  

 

Credit Facility

In connection with the consummation of the acquisition of Nutrisystem, on March 8, 2019, we entered into the Credit Agreement.  The Credit Agreement provides us with (i) a $350.0 million Term Loan A, (ii) an $830.0 million Term Loan B, (iii) a $125.0 million revolving credit facility that includes a $35.0 million sublimit for swingline loans and a $50.0 million sublimit for letters of credit, and (iv) uncommitted incremental accordion facilities in an aggregate amount at any date equal to the greater of $125.0 million or 50% of our consolidated EBITDA for the then-preceding four fiscal quarters, plus additional amounts based on, among other things, satisfaction of certain financial ratio requirements.  

We are required to repay Term Loan A loans in consecutive quarterly installments, each in the amount of 2.50% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2024, at which time the entire outstanding principal balance of such loans is due and payable in full. We are required to repay Term Loan B loans in consecutive quarterly installments, each in the amount of 0.75% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2026, at which time the entire outstanding principal balance of such loans is due and payable in full. We are permitted to make voluntary prepayments of borrowings under the Term Loans at any time without penalty.  From March 8, 2019 through June 30, 2020, we made payments of $125.0 million on the Term Loans, which included prepayments of all amounts due through March 31, 2021, excluding any Excess Cash Flow Payments that may be required, as described below.  We are required to repay in full any outstanding swingline loans and revolving loans under the Revolving Credit Facility on March 8, 2024.  In addition, the Credit Agreement contains provisions that, beginning with fiscal 2019, may require annual excess cash flow (as defined in the Credit Agreement and generally designed to equal cash generated by our business in excess of cash used in the business) to be applied towards the Term Loans.  We are required to make prepayments on the Term Loans equal to our excess cash flow for a given fiscal year multiplied by the following excess cash flow percentages (such resulting payment an “Excess Cash Flow Payment”) based on our Net Leverage Ratio (as defined in the Credit Agreement) on the last day of such fiscal year: (a) 75% if the Net Leverage Ratio is greater than 3.75:1, (b) 50% if the Net Leverage Ratio is equal to or less than 3.75:1 but greater than 3.25:1 (c) 25% if the Net Leverage Ratio is equal to or less than 3.25:1 but greater than 2.75:1, and (d) 0% if the Net Leverage Ratio is equal to or less than 2.75:1.  Any such potential mandatory prepayments are reduced by voluntary prepayments.  We were not required to make an Excess Cash Flow Payment for fiscal 2019.

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The Credit Agreement contains a financial covenant that requires us to maintain maximum ratios or levels of consolidated total net debt to consolidated adjusted EBITDA, calculated as provided in the Credit Agreement (the “Net Leverage Ratio”), of 5.75:1.00 for all test dates occurring on or after December 31, 2019 but prior to December 31, 2020, 5.25:1.00 for all test dates occurring on or after December 31, 2020 but prior to December 31, 2021, and 4.75:1.00 for all test dates occurring on or after December 31, 2021. As of June 30, 2020, we were in compliance with all of the covenant requirements of the Credit Agreement, and our Net Leverage Ratio was equal to 4.08.

 

In July 2020, we repaid $24.8 million of principal on the term loans under our credit agreement, resulting in our next required quarterly installment being due in December 2021.  Based on our current assumptions with respect to the COVID-19 pandemic, including, among other things, our fitness partner locations reopening and/or remaining open and the average monthly total participation levels of our members at such locations, we currently believe we will be in compliance with the Net Leverage Ratio covenant over the next 12 months; however, given the significant uncertainty relating to the potential impacts of the COVID-19 pandemic on our business going forward, there are potential scenarios under which we could fail to comply with the Net Leverage Ratio covenant.  Our failure to comply with the Net Leverage Ratio covenant would result in an event of default that, if not waived, could have a material adverse effect on our financial condition, results of operations or debt service capability. We will continue to monitor our projected ability to comply with all covenants under the Credit Agreement, including the Net Leverage Ratio, which could include seeking an amendment to or waiver of the Net Leverage Ratio covenant if necessary

 

Cash Flows Provided by Operating Activities

 

Operating activities during the six months ended June 30, 2020 provided cash of $130.9 million compared to $49.6 million during the six months ended June 30, 2019. The increase in operating cash flow is primarily due to (i) increased collections on accounts receivable, (ii) decreased payments related to acquisition and integration costs, and (iii) decreased payments related to visit costs.  These changes were partially offset by higher interest payments related to borrowings under the Credit Agreement.

 

Cash Flows Used in Investing Activities

 

Investing activities during the six months ended June 30, 2020 used $10.4 million in cash, compared to $1,072 million during the six months ended June 30, 2019.  This change is primarily due to the acquisition of Nutrisystem in March 2019.

 

Cash Flows Provided by (Used In) Financing Activities

 

Financing activities during the six months ended June 30, 2020 used $62.8 million in cash, compared to cash provided of $1,025 million during the six months ended June 30, 2019.  This decrease is primarily due to a higher amount of net borrowings under the Credit Agreement in 2019 (compared to net payments under the Credit Agreement in 2020) and the payment of deferred loan costs in 2019, each related to the acquisition of Nutrisystem in March 2019.

 

Recent Relevant Accounting Standards

 

See Note 2 of the notes to consolidated financial statements included in this report for discussion of recent relevant accounting standards.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to market risk related to interest rate changes, primarily as a result of the Credit Agreement.  Borrowings under the Credit Agreement bear interest at variable rates based on a margin or spread in excess of either (1) one-month, two-month, three-month or six-month LIBOR (or, with the approval of all lenders holding the particular class of loans, 12-month LIBOR), which may not be less than zero, or (2) the greatest of (a) the prime lending rate of the agent bank for the particular facility, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (“Base Rate”), as selected by the Company. The LIBOR margin for Term Loan A loans is 4.25%, the LIBOR margin for Term Loan B loans is 5.25%, and the LIBOR margin for revolving loans varies between 3.75% and 4.25%, depending on our total Net Leverage Ratio. The Base Rate margin for Term Loan A loans is 3.25%, the Base Rate margin for Term Loan B loans is 4.25%, and the Base Rate margin for revolving

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loans varies between 2.75% and 3.25%, depending on our total Net Leverage Ratio.  Effective May 31, 2019, we maintain amortizing interest rate swap agreements with current notional amounts totaling $800.0 million, through which we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2% plus a spread.  

 

We estimate that a one-point interest rate change in our floating rate debt would have resulted in a change in interest expense of approximately $1.6 million for the six months ended June 30, 2020.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company's principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2020.  Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective as of June 30, 2020.  They are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company's internal controls over financial reporting during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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Part II Other Information

See Note 11 of the notes to consolidated financial statements included in this report for discussion of recent legal proceedings.

Item 1A. Risk Factors

Part I, Item 1A. “Risk Factors” in the 2019 Form 10-K, as amended and restated in its entirety in Part II, Item 1A. “Risk Factors” in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, is amended and restated in its entirety as follows:

 

In the execution of our business strategy, our operations and financial condition are subject to certain risks.  A summary of certain material risks is provided below, and you should take such risks into account in evaluating any investment decision involving the Company. This section does not describe all risks applicable to us and is intended only as a summary of certain material factors that could impact our operations in the industry in which we operate. Other sections of this report contain additional information concerning these and other risks.

 

Risks Relating to Our Business Generally

 

The COVID-19 pandemic has had, and is expected to continue to have, a material adverse effect on our business and results of operations.

 

In late 2019, COVID-19 was reported to have surfaced in Wuhan, China and has spread to other countries, including the United States. In January 2020, the Secretary of HHS declared a national public health emergency due to COVID-19, and in March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic. Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. As a result, by March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed.  A substantial number of our fitness partner locations remained closed through April 2020.  Although some locations reopened in May 2020 and additional locations reopened in June 2020, the average monthly total participation levels of our members after such locations reopened were significantly below historical levels, thus adversely impacting revenues in our Healthcare segment during the second quarter of 2020.  We may face reclosures and/or long-term closures and other operational restrictions with respect to some or all of our Healthcare segment’s fitness partner locations for prolonged periods of time due to, among other factors, evolving governmental restrictions including public health directives, quarantine policies, or social distancing measures.  Additionally, even if fitness partner locations are open, members may avoid public gathering places because of a perceived risk of infection or risk to health, which could reduce overall demand and adversely impact their use of our services.  Because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location, this decrease in member participation has affected and could further adversely affect our business and results of operations.

 

Consumer spending generally may also be negatively impacted by adverse general macroeconomic conditions and reduced consumer confidence, including the impacts of any recession resulting from the COVID-19 pandemic. This may further negatively impact the number of paid subscribers in our Prime Fitness program.  In addition, it may negatively impact sales in our Nutrition segment and may cause our Nutrition segment’s direct to consumer and retail customers to purchase fewer products from us. Any significant reduction in consumer spending caused by COVID-19 and decreased consumer confidence and spending following the pandemic would likely result in a loss of sales and profits in our Nutrition segment and other material adverse effects.

 

The COVID-19 pandemic also has the potential to significantly impact our Nutrition segment’s supply chain, food manufacturers, distribution centers, or logistics and other service providers.  We have experienced delays and some additional costs in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19 and could experience similar events or delays at our other warehouses.  Additionally, our service providers and their operations may be disrupted, temporarily closed or experience worker shortages, which could result in additional disruptions or delays in shipments of our Nutrition segment’s products.

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As a result of the COVID-19 pandemic, including related governmental guidance or requirements, we have implemented a work-from-home policy for our employees, which may negatively impact productivity and cause other disruptions to our business.  We closed our corporate offices and/or call centers in Franklin, Tennessee, Fort Washington, Pennsylvania and Chandler, Arizona from mid-March through May and began reopening our corporate offices on a limited basis in June as we continue to prioritize the safety and well-being of our employees. We have incurred, and may incur in the future, costs related to implementing our work-from-home policy as well as additional cleaning fees and supplies related to the COVID-19 pandemic.  

 

The full extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic. At this point, we cannot predict with certainty the duration and severity of the COVID-19 pandemic or its future impact on our business, and our estimates could change in the future.

 

The performance of our business (as it could further be affected by the COVID-19 pandemic) and the level of our indebtedness could prevent us from meeting the obligations under our Credit Agreement or have an adverse effect on our future financial condition, our ability to raise additional capital, or our ability to react to changes in the economy or our industry.

 

In connection with the consummation of the acquisition of Nutrisystem, on March 8, 2019, we entered the Credit Agreement.  As of June 30, 2020, outstanding debt under the Credit Agreement was $1,012.3 million.

 

Our ability to service our indebtedness will depend on our ability to generate cash in the future.  We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs.  If there are prolonged or worsening effects of the COVID-19 pandemic, such as long-term closures of our fitness partner locations, we could be unable to generate revenues and cash flows sufficient to conduct our business, service our outstanding debt and comply with the covenants under the Credit Agreement.  This could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or result in an acceleration of the maturity of a significant portion or all of our then-outstanding debt obligations, which we may be unable to repay or refinance.

 

The Credit Agreement contains a Net Leverage Ratio covenant. Given the significant uncertainty relating to the potential impacts of the COVID-19 pandemic on our business going forward, there are potential scenarios under which we could fail to comply with the Net Leverage Ratio covenant contained in our Credit Agreement.  Our failure to comply with such covenant would result in an event of default that, if not waived, could have a material adverse effect on our financial condition, results of operations or debt service capability. The Credit Agreement also contains various other affirmative and negative covenants customary for financings of this type that, subject to certain exceptions, impose restrictions and limitations on us and certain of our subsidiaries with respect to, among other things, indebtedness; liens; negative pledges; restricted payments (including dividends, distributions, buybacks, redemptions, repurchases with respect to equity interests, and payments, redemptions, retirements, purchases, acquisitions, defeasance, exchange, conversion, cancellation or termination with respect to junior lien, subordinated or unsecured debt); restrictions on subsidiary distributions; loans, advances, guarantees, acquisitions and other investments; mergers and other fundamental changes; sales and other dispositions of assets (including equity interests in subsidiaries); sale/leaseback transactions; transactions with affiliates; conduct of business; amendments and waivers of organizational documents and material junior debt agreements; and changes to fiscal year.

 

Our indebtedness could adversely affect our future financial condition or our ability to react to changes in the economy or industry by, among other things:

 

 

increasing our vulnerability to a downturn in general economic conditions (including any downturn or recession caused by the COVID-19 pandemic), loss of revenue and/or profit margins in our business, or to increases in interest rates, particularly with respect to the portion of our outstanding debt that is subject to variable interest rates;

 

potentially limiting our ability to obtain additional financing or to obtain such financing on favorable terms;

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causing us to dedicate a portion of future cash flow from operations to service or pay down our debt, which reduces the cash available for other purposes, such as operations, capital expenditures, and future business opportunities; and

 

 

possibly limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less leveraged.

 

If our customers experience financial distress, or seek to change or delay payment terms, it could negatively affect our financial position and results.

 

At any given time, one or more of our customers may experience financial difficulty, file for bankruptcy protection or go out of business. Unfavorable economic and financial conditions, such as the current events surrounding the COVID-19 pandemic, could result in an increase in our customers’ financial difficulties that then affect us.  The direct impact on us could include reduced revenues and write-offs of accounts receivable and negatively impact our operating cash flow. While we currently cannot estimate what those effects will be, if they are severe, the indirect impact could include impairments of intangible assets and reduced liquidity, among others.

 

We are reviewing strategic alternatives for our Nutrition business unit, but there can be no assurance that we will be successful in identifying or consummating any strategic alternatives, that strategic alternatives will yield additional value for stockholders, or that exploration of strategic alternatives for our Nutrition business unit will not adversely impact the Company.

 

On May 6, 2020, we announced we are exploring strategic alternatives relating to our Nutrition business unit, including a potential transaction.  If we determine to divest of the Nutrition business unit, we can give no assurance as to whether we will be able to secure a buyer for our Nutrition business unit or, if we do so, whether such divestiture will be at a price or on terms that are favorable to us, and we may incur a loss on disposal.  Speculation regarding any developments related to the review of strategic alternatives for our Nutrition business unit and perceived uncertainties related to the future of the Company could cause our stock price to fluctuate significantly.

 

Our exploration of strategic alternatives for our Nutrition business unit could result in management distraction, incurrence of significant transaction expenses, failure to retain or attract key personnel, vendors or customers, or exposure to potential litigation. If we are unable to mitigate these or other potential risks related to the uncertainty caused by our exploration of strategic alternatives for our Nutrition business unit, it may disrupt our business and could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

We may not be able to realize the anticipated benefits from a divestiture of our Nutrition business unit. There can be no assurance that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in our current stock price. Further, the Board may determine to suspend or terminate the exploration of strategic alternatives for our Nutrition business unit at any time due to various factors.  Any potential transaction or other outcome of this process is also dependent upon a number of factors that may be beyond our control, including among other factors, market conditions (including the impact of the COVID-19 pandemic), industry trends, regulatory limitations and the interest of third parties in our business.

 

Our business strategy relating to the development and introduction of new products and services exposes us to risks such as limited customer and/or market acceptance and additional expenditures that may not result in additional net revenue.

 

An important component of our business strategy is to focus on new products and services that enable us to provide immediate value to our customers.  We cannot predict whether customers and/or the market will accept these new products and services, and if we fail to execute successfully on this strategy or to adapt this strategy as market conditions evolve, our ability to grow revenue and our results of operations may be adversely affected.

 

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If we fail to successfully implement our business strategy, our financial performance and our growth could be materially and adversely affected.

 

Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Implementation of our strategy will require effective management of our operational, financial and human resources and will place significant demands on those resources. See Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations – Business Strategy" in this report for more information regarding our business strategy.  There are risks involved in pursuing our strategy, including the ability to hire or retain the personnel necessary to manage our strategy effectively.

 

In addition to the risks set forth above, implementation of our business strategy could be affected by a number of factors beyond our control, such as epidemics and pandemics (including the responses of governmental authorities to contain such epidemics and pandemics), increased competition, legal developments, government regulation, general economic conditions, increased operating costs or expenses, and changes in industry trends. We may decide to alter or discontinue certain aspects of our business strategy at any time. If we are not able to implement our business strategy successfully, our long-term growth and profitability may be adversely affected. Even if we are able to implement some or all of the initiatives of our business strategy successfully, our operating results may not improve to the extent we anticipate, or at all.

 

We may experience difficulties associated with the implementation and/or integration of new businesses, services (including outsourced services), technologies, solutions, or products.

 

We may face difficulties, costs, and delays in effectively implementing and/or integrating acquired businesses, services (including outsourced services), technologies, solutions, or products into our business.  Implementing internally-developed solutions and products, and/or integrating newly acquired businesses, services (including outsourced services), and technologies could be time-consuming and may strain our resources. Consequently, we may not be successful in implementing and/or integrating these new businesses, services, technologies, solutions, or products and may not achieve anticipated revenue and cost benefits.

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly, and changes in LIBOR reporting practices could lead to an increase in the cost of our indebtedness and adversely affect our results of operations.

 

Borrowings under our Credit Agreement are at variable rates of interest and expose us to interest rate risk.  Interest rates are currently at historically low levels, but if interest rates increase, our debt service obligations with respect to our variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income and cash flows would correspondingly decrease.

 

To mitigate our exposure to future interest rate volatility with respect to our variable rate indebtedness, we have entered into interest rate swaps and may in the future enter into additional interest rate swaps, which involve the exchange of floating for fixed rate interest payments. Considering hedging gains and losses and cash settlement costs, we may not elect to maintain such interest rate swaps, and any swaps may not fully mitigate our interest rate risk.

 

In addition, a transition away from LIBOR as a benchmark for establishing the applicable interest rate may adversely affect our variable rate debt and interest rate swaps.  The Financial Conduct Authority of the United Kingdom has announced that by the end of calendar year 2021 it will no longer require LIBOR submissions, resulting in the possible unavailability or lack of suitability of LIBOR as a benchmark rate. While our borrowing arrangements provide for alternative base rates as well as a method for selecting a benchmark replacement for LIBOR, the consequences of the possibility of LIBOR becoming unavailable or not suitable cannot be entirely predicted at this time. Use of an alternative base rate or a benchmark replacement for LIBOR as a basis for calculating interest with respect to our outstanding variable rate indebtedness or interest rate swap agreements could lead to an increase in the interest we pay and a corresponding increase in the cost of such indebtedness, and could affect our ability to refinance some or all of our existing indebtedness or otherwise have a material adverse impact on our business, financial condition and results of operations.

 

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Changes in macroeconomic conditions and certain market risks may adversely affect our business.

 

Economic difficulties and other macroeconomic conditions (including any downturn or recession caused by the COVID-19 pandemic) could reduce the demand and/or the timing of purchases for certain of our services from customers and potential customers.  In addition, changes in economic conditions could create liquidity and credit constraints. We cannot assure you that we would be able to secure additional financing if needed and, if such funds were available, that the terms and conditions would be acceptable to us.

 

We have a significant amount of goodwill and intangible assets, the value of which could become further impaired.

 

We have recorded significant portions of the purchase price of certain acquisitions as goodwill and/or intangible assets. We review goodwill and intangible assets not subject to amortization for impairment on an annual basis (during the fourth quarter) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.  In the fourth quarter of 2019, we recorded impairment losses of $240.0 million and $137.1 million related to the Nutrisystem tradename and goodwill, respectively.  The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company.  In March 2020, we experienced a significant decline in the Company’s market capitalization and, as discussed above under Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations – Overview”, in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets. During the first quarter of 2020, we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment.  At June 30, 2020, we had approximately $535.1 million and $593.5 million of goodwill and intangible assets, respectively, remaining.  Following the impairment loss, as of June 30, 2020, there is no excess of estimated fair value over carrying value (“headroom”) for the Nutrition reporting unit.  If we determine that the carrying values of our goodwill and/or intangible assets should be further impaired, we may incur additional non-cash charges to earnings, which could have a material adverse effect on our results of operations for the period in which the additional impairment occurs.

 

A failure of our information technology or systems could adversely affect our business.

 

Our ability to deliver our products and services depends on effectively using information technology.  We rely upon our information technology and systems, employees, and third parties for operating and monitoring all major aspects of our business. These technologies and systems and, therefore, our operations could be damaged or interrupted by natural disasters, power loss, network failure, improper operation by our employees, data privacy or security breaches, computer viruses, computer hacking, network penetration or other illegal intrusions, epidemics or pandemics (such as the COVID-19 pandemic), or other unexpected events. Any disruption in the operation of our information technology or systems, regardless of the cause, could adversely impact our operations, which may adversely affect our financial condition, results of operations and cash flows.

 

A cybersecurity incident could result in the loss of confidential data, give rise to remediation and other expenses, expose us to liability under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), consumer protection laws, common law theories or other laws, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business.

 

The nature of our business involves the receipt, storage and use of personal data about the participants in our programs, including individually identifiable health information, as well as employees and customers. Additionally, we rely upon third parties that are not directly under our control to store and use portions of that personal data as well.  The secure maintenance of this and other confidential information or other proprietary information is critical to our business operations. To protect our information systems from attack, damage and unauthorized use, we have implemented multiple layers of security, including technical safeguards, processes, and our people. Our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, threats from malicious persons and groups, new vulnerabilities, technology failures, and advanced attacks against information systems create risk of cybersecurity incidents. We cannot provide assurance that we or our third-party vendors or other service providers will not be subject to cybersecurity incidents, which may result in unauthorized access by third parties, loss, misappropriation, disclosure or corruption of customer, employee, or our information; member

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personal health information; or other data subject to privacy laws. In addition, COVID-19 may have an adverse impact on our information technology systems and our ability to securely preserve confidential information, including as a result of telecommuting issues associated with our employees working remotely.  Such cybersecurity incidents or delays in responding to or remedying damage caused by such incidents may lead to a disruption in our systems or business, costs to modify, enhance, or remediate our cybersecurity measures, liability under privacy, security and consumer protection laws or litigation under these or other laws, including common law theories, and subject us to enforcement actions, fines, regulatory proceedings or litigation against us, damage to our business reputation, a reduction in participation and sales of our products and services, and legal obligations to notify customers or other affected individuals about an incident, which could cause us to incur substantial costs and negative publicity, any of which could have a material adverse effect on our financial condition and results of operations and harm our business reputation.

 

As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices remain a priority for us. We may be required to expend significant additional resources in our efforts to modify or enhance our protective measures against evolving threats or to investigate and remediate any cybersecurity vulnerabilities.

 

Our business is subject to changing privacy and security laws, rules and regulations, including HIPAA, the Payment Card Industry Data Security Standards, the Telephone Consumer Protection Act and other state privacy regulations, which impact our operating costs and for which failure to adhere could negatively impact our business.

 

Our business is subject to various privacy and data security laws, regulations, and codes of conduct that apply to our business units, which may include the rules and regulations of the Payment Card Industry Data Security Standards and the Telephone Consumer Protection Act (“TCPA”).  In addition, we are Health Information Trust Alliance (“HITRUST”) Common Security Framework certified, which is an industry operating standard applied to our data security practices. Some of these state laws and regulations may be inconsistent across jurisdictions and subject to evolving and differing (sometimes conflicting) interpretations and applications. While we are using internal and external resources to monitor compliance with and to continue to modify our data processing practices and policies in order to comply with evolving privacy laws, relevant regulatory authorities could determine that our data handling practices fail to address all the requirements of certain new laws, which could subject us to penalties and/or litigation. Government regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. This increased scrutiny may result in new interpretations of existing laws as well as new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions, thereby further impacting our business.  For example, the California Consumer Privacy Act of 2018 (“CCPA”), went into effect on January 1, 2020, and it applies broadly to information that identifies or is associated with any California household or individual, and compliance with the new law requires that we implement several operational changes, including processes to respond to individuals’ data access and deletion requests.  Failure to comply with the CCPA may result in attorney general enforcement action and damage to our reputation. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. We may also be exposed to litigation, regulatory fines, penalties or other sanctions if the personal, confidential or proprietary information of our customers is mishandled or misused by any of our suppliers, counterparties or other third parties, or if such third-parties do not have appropriate controls in place to protect such personal, confidential or proprietary information.  Additionally, the Federal Trade Commission (“FTC”) and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the collection, use, dissemination and security of data.  The obligations imposed by the CCPA and other similar laws that may be enacted at the federal and state level may require us to modify our business practices and policies and to incur substantial expenditures in order to comply.

 

In order to be successful, we must attract, engage, retain and integrate key employees and have adequate succession plans in place, and failure to do so could have an adverse effect on our ability to manage our business.

 

Our success depends, in large part, on our ability to attract, engage, retain and integrate qualified executives and other key employees throughout all areas of our business. Identifying, developing internally or hiring externally, training and retaining highly skilled managerial and other personnel are critical to our future, and competition for experienced employees can be intense. Failure to successfully recruit executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. The loss of services of any

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key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring may harm our business and results of operations. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key newly hired employees could adversely affect our business and results of operations.

 

We face competition for staffing, which may increase our labor costs and reduce profitability.

 

We compete with other healthcare and services providers in recruiting qualified management, including executives with the required skills and experience to operate and grow our business, and staff personnel for the day-to-day operations of our business. These challenges may require us to enhance wages and benefits to recruit and retain qualified management and other professionals. Difficulties in attracting and retaining qualified management and other professionals, or in controlling labor costs, could have a material adverse effect on our profitability.

 

We are or may become a party to litigation that could potentially force us to pay significant damages and/or harm our reputation.

 

We are subject to certain legal proceedings, which potentially involve large claims and significant defense costs (see Part II, Item 1. "Legal Proceedings" in this report). These legal proceedings and any other claims that we may face in the future, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management. The coverage limits of our insurance policies may not be adequate to cover all such claims and some claims may not be covered by insurance. Additionally, insurance coverage with respect to some claims against us or our directors and officers may not be available on terms that would be favorable to us, or the cost of such coverage could increase in the future.  Further, although we believe that we have conducted our operations in compliance with applicable statutory and contractual requirements and that we have meritorious defenses to outstanding claims, it is possible that resolution of these legal matters could have a material adverse effect on our results of operations.  In addition, legal expenses associated with the defense of these matters may be material to our results of operations in a particular financial reporting period.

 

Third parties may infringe on our brands, trademarks and other intellectual property rights, which may have an adverse impact on our business.

 

We currently rely on a combination of trademark and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights, including our brands. If we fail to successfully enforce our intellectual property rights, the value of our brands, services and products could be diminished and our business may suffer. Our precautions may not prevent misappropriation of our intellectual property. Any legal action that we may bring to protect our brands and other intellectual property could be unsuccessful and expensive and could divert management’s attention from other business concerns. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property, especially in Internet-related businesses, are uncertain and evolving. We cannot assure you that these evolving legal standards will sufficiently protect our intellectual property rights in the future.

 

We may be subject to intellectual property rights claims.

 

Third parties may make claims against us alleging infringement of their intellectual property rights. Any intellectual property claims, regardless of merit, could be time-consuming and expensive to litigate or settle and could significantly divert management’s attention from other business concerns. In addition, if we were unable to successfully defend against such claims, we may have to pay damages, stop selling the service or product or stop using the software, technology or content found to be in violation of a third party’s rights, seek a license for the infringing service, product, software, technology or content or develop alternative non-infringing services, products, software, technology or content. If we cannot license on reasonable terms, develop alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our service and product offerings. Any of these results could reduce our revenue and our ability to compete effectively, increase our costs or harm our business.

 

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Damage to our reputation could harm our business, including our competitive position and business prospects.

 

Our ability to attract and retain customers, members and employees is impacted by our reputation. Harm to our reputation can arise from various sources, including employee misconduct, cyber security breaches, unethical behavior, litigation or regulatory outcomes, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

 

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar anti-bribery laws of other countries in which we provided services prior to the sale of our total population health services (“TPHS”) business.

 

Because of the international operations that we previously conducted as part of our TPHS business that we sold to Sharecare, Inc. in July 2016, we could be adversely affected by violations of the FCPA and similar anti-bribery laws of other countries in which we provided services prior to the sale. The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to government officials or other third parties for the purpose of obtaining or retaining business or gaining any business advantage. While our policies mandated compliance with these anti-bribery laws, we cannot provide assurance that our internal control policies and procedures always protected us from reckless or criminal acts committed by our employees, contractors or agents. Failure to comply with the FCPA and similar legislation prior to the sale of our TPHS business could result in the imposition of civil or criminal fines and penalties and could disrupt our business and adversely affect our results of operations, cash flows and financial condition.

 

Risks Relating to Our Healthcare Segment

 

A significant percentage of Healthcare segment revenues is derived from health plan customers.

 

A significant percentage of our Healthcare segment revenues is derived from health plan customers. The health plan industry may continue to consolidate, and we cannot assure you that we will be able to retain health plan customers, or continue to provide our products and services to such health plan customers on terms at least as favorable to us as currently provided, if they are acquired by other health plans that already participate in competing programs or are not interested in our programs. Increasing vertical integration efforts involving health plans and healthcare providers or entities that provide wellness services may increase these challenges. Our health plan customers that are part of larger healthcare enterprises may have greater bargaining power, which may lead to further pressure on the prices for our products and services. In addition, a reduction in the number of covered lives enrolled with our health plan customers or in the payments we receive could adversely affect our results of operations. Our health plan customers are subject to continuing competition and reduced reimbursement rates from governmental and private sources, which could lead current or prospective customers to seek reduced fees or choose to reduce or delay the purchase of our services. Finally, health plan customers could offer (and in some cases are offering) services themselves that compete directly with our offerings, stop providing our offerings to certain or all of their members (as one of our customers, United Healthcare, has done), or offer fitness benefits in addition to SilverSneakers and Prime Fitness, which could adversely affect our business and results of operations.

 

We currently derive a significant percentage of our Healthcare segment revenues from three customers.

 

For the year ended December 31, 2019, three customers each comprised more than 10%, and together comprised approximately 45%, of our Healthcare segment’s revenues. Our primary contracts with two of these customers continue through December 31, 2022, and our primary contract with the third customer continues through December 31, 2021.  The loss or restructuring of a contract with any of these three customers or any other significant customers of our Healthcare segment could have a material adverse effect on our business and results of operations.  None of these three contracts allows the customer to terminate for convenience prior to the expiration of the contract.

 

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Our inability to renew and/or maintain contracts with our Healthcare segment customers and/or fitness partner locations under existing terms or restructure these contracts under favorable terms could adversely affect our business and results of operations.

 

If our Healthcare segment customers and/or fitness partner locations choose not to renew their contracts with us (which occurs from time to time), our business and results of operations could be materially adversely affected.  Loss of a significant fitness partner or health plan customer or a reduction in a health plan customer's enrolled lives (including as a result of increased unemployment and the resulting loss of health insurance coverage) could have a material adverse effect on our business and results of operations.  In addition, a restructuring of a contract with a health plan customer and/or fitness partner on terms that aren’t favorable to us could adversely affect our business and results of operations.  Moreover, the businesses of our fitness partner locations have been and will likely continue to be adversely affected by the closure of locations, any public health directives, or social distancing measures applicable upon reopening of locations and reduced overall consumer demand for fitness center use as a result of the COVID-19 pandemic.  If a significant portion of our fitness partner network is unable to return to normal operations within a reasonable period of time as a result of financial or operational stresses brought on by the COVID-19 pandemic, we may be unable to make alternative arrangements with substitute fitness partners on favorable terms or at all.  

 

Reductions in Medicare Advantage health plan reimbursement rates or changes in plan designs may negatively impact our Healthcare segment business and results of operations.

 

A significant portion of our Healthcare segment revenue is indirectly derived from the monthly premium payments paid by the U.S. Department of Health and Human Services to our health plan customers for services they provide to Medicare Advantage beneficiaries.  As a result, our results of operations are, in part, dependent on government funding levels for Medicare Advantage programs. An executive order issued in October 2019 seeks to encourage innovative Medicare Advantage benefit structures and plan designs, including through changes to supplemental benefits.  Any changes that limit or reduce Medicare Advantage reimbursement levels, such as reductions in or limitations of reimbursement amounts or rates under these programs, reductions in funding of these programs, expansion of benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage affecting the services that we provide, could have a material adverse effect on our Healthcare segment health plan customers, and as a result, on our business and results of operations.

 

Our results of operations could be adversely affected by severe or unexpected weather, epidemics, pandemics or outbreaks of disease.

 

Adverse weather conditions or other extreme changes in the weather may cause people to refrain, or prevent people, from visiting fitness partner locations and using our Healthcare segment services.  Additionally, widespread health epidemics or outbreaks of disease, such as influenza or COVID-19, may cause members to avoid public gathering places and negatively impact their use of our services.  As some of the fees that we charge our customers are based on member participation, a decrease in member participation could adversely affect our business and results of operations.

 

Compliance with existing or newly adopted federal and state laws and regulations or new or revised interpretations of such requirements could adversely affect our results of operations or may require us to spend substantial amounts, and the failure to comply with applicable laws and regulations could subject us to penalties or negatively impact our ability to provide services.

 

Our Healthcare segment customers are subject to considerable state and federal government regulation, and a substantial majority of our Healthcare segment business involves providing services to Medicare Advantage beneficiaries. As a result, we are subject directly to various federal laws and regulations, including the federal False Claims Act, billing and reimbursement requirements and other provisions related to fraud and abuse. In addition, our contracts with Medicare Advantage plans require us to comply with a number of regulatory provisions and to permit these health plan customers to perform compliance audits of our processes and programs. Many of these regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in unintended consequences that could impact our ability to effectively deliver services. Further, we are required to comply with most requirements of the HIPAA privacy and security laws and regulations and may be subject to criminal or civil penalties for violations of these regulations. Certain of our services, including health utilization management and certain claims payment functions, require licensure and may be regulated by government agencies. We are subject to a variety of legal requirements in order to obtain and maintain such licenses, but little guidance is available to determine the scope of some of these requirements.

 

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We continually monitor the extent to which federal and state legislation and regulations govern our operations. New federal or state laws or regulations or new interpretations of existing requirements that affect our operations could have a material adverse effect on our results of operations. If we are found to have violated applicable laws, to have caused any of our Healthcare segment customers to submit false claims or make false statements, or to have failed to comply with our contractual compliance obligations, we could be required to restructure our Healthcare segment operations, be subject to contractual penalties, including termination of our Healthcare segment customer agreements, and be subject to significant civil and criminal penalties.

 

Healthcare reform efforts may result in a reduction to our revenues from government health programs and private insurance companies or otherwise directly or indirectly impact our business.

 

The healthcare industry is subject to various political, regulatory, scientific, and technological influences. Efforts at federal and state levels of government have resulted in laws and regulations intended to effect significant change within the healthcare system. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”), the most prominent of these efforts, affects coverage, delivery, and reimbursement of healthcare services. Among other effects, several of its provisions may increase the costs and/or reduce the revenues of our customers or prospective customers. For example, the ACA eliminates pre-existing condition exclusions by commercial health plans, bans annual benefit limits, and mandates minimum medical loss ratios for health plans.  On April 27, 2020, the United States Supreme Court held that Congress owes health insurers approximately $12 billion as startup costs incurred in the first three years of the ACA.  Since this decision, judgments and stipulations for judgment have been entered for individual insurers identifying the amount owed by the federal government.

 

However, there is substantial uncertainty regarding the net effect and future of the ACA. The presidential administration and Congress have made significant changes to the ACA, its implementation and its interpretation.  Effective January 2019, Congress eliminated the penalty associated with the ACA’s individual mandate.  As a result, a federal court in Texas ruled in December 2018 that the individual mandate was unconstitutional and determined that the rest of the ACA was, therefore, invalid.  In December 2019, the Fifth Circuit Court of Appeals upheld this decision with respect to the individual mandate but remanded for further consideration of how this affects the rest of the law. The law remains in effect pending appeal.  It is possible that the reforms imposed by the ACA or uncertainty regarding significant changes or court challenges to the law will adversely affect the profitability of our Healthcare segment customers and cause our Healthcare segment customers or prospective customers to reduce or delay the purchase of our services or to demand reduced fees. Because of this uncertainty and many other variables, including the ACA’s complexity and the difficulty of predicting the impact of changes on other healthcare industry participants and the ultimate outcome of court challenges, we are unable to predict all of the ways in which the ACA could impact us. Furthermore, we could also be impacted by other legislative and regulatory healthcare reform initiatives.  For example, beginning in 2020, the Creating High-quality Results and Outcomes Necessary to Improve Chronic (CHRONIC) Care Act of 2018 allows Medicare Advantage plans to cover supplemental benefits that are not primarily health-related, but that have the reasonable expectation of improving or maintaining health. Additionally, some presidential candidates and members of Congress have proposed measures that would expand government-sponsored coverage, including single-payor proposals (often referred to as "Medicare for All"). Further, the outcome of the 2020 federal election and its potential impact on health reform efforts is unknown.  

 

Risks Relating to Our Nutrition Segment

 

Our Nutrition segment's future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures and our ability to select effective markets and media in which to advertise.

 

Our Nutrition segment's future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures, including our ability to:

 

 

create greater awareness of our Nutrition segment brands and programs;

 

identify the most effective and efficient levels of spending in each market, media and specific media vehicle;

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determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures;

 

effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs;

 

acquire cost-effective advertising;

 

select the most effective markets, media and specific media vehicles in which to advertise; and

 

convert Nutrition segment customer inquiries into actual orders.

 

Our planned marketing expenditures for our Nutrition segment may not result in increased revenue or generate sufficient levels of brand name and program awareness. We may not be able to manage our Nutrition segment's marketing expenditures on a cost-effective basis whereby our Nutrition segment customer acquisition costs may exceed the contribution profit generated from each additional customer.

 

Our Nutrition segment relies on third parties to provide it with adequate food supply, freight and fulfillment and Internet and networking services, the loss or disruption of any of which could cause our revenue, earnings or reputation to suffer.

 

Food Manufacturers and Other Suppliers. Our Nutrition segment relies solely on third-party manufacturers to supply all of the food and other products we sell as well as packaging materials. If we are unable to obtain sufficient quantity, quality and variety of food, other products and packaging materials in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our Nutrition segment customers’ orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of our brands.

 

Freight and Fulfillment. Currently, all of our Nutrition segment customer order fulfillment is handled by one third-party provider.  Also, almost all of our direct to consumer Nutrition segment customer orders are shipped by one third-party provider and almost all of our orders for Nutrition segment retail programs were shipped by another third-party provider. Should these providers be unable to service our needs for even a short duration, our revenue and business could be adversely affected. Additionally, the cost and time associated with replacing these providers on short notice would add to our costs. Any replacement fulfillment provider would also require startup time, which could cause us to lose sales and market share.

 

Internet and Networking. Our Nutrition segment business also depends on a number of third parties for Internet access and networking, and we have limited control over these third parties. Should our Nutrition segment's network connections go down, our ability to fulfill orders would be delayed. Further, if our Nutrition segment's websites or call center become unavailable for a noticeable period of time due to Internet or communication failures, our business could be adversely affected, including harm to our brands and loss of sales.

 

Therefore, we are dependent on these third parties. The services we require from these parties may be disrupted by a number of factors, including the following:

 

 

labor disruptions;

 

delivery problems;

 

financial condition or results of operations;

 

internal inefficiencies;

 

equipment failure;

 

severe weather;

 

fire;

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natural or man-made disasters; and

 

with respect to our food suppliers, shortages of ingredients or United States Department of Agriculture ("USDA") or United States Food and Drug Administration (“FDA”) compliance issues.

 

Further, the COVID-19 pandemic (or another regional or global epidemic or pandemic, depending upon its location, duration and severity), could severely affect our Nutrition segment’s business, including as a result of impacts associated with preventive and precautionary measures that we and other businesses and governments may take. A regional or global epidemic or pandemic could also adversely affect our business by disrupting the operations of our call center, creating negative popular sentiment among consumers of delivered food, or by disrupting or delaying our third-party providers' ability to, among other things (i) supply the products that we sell as well as packaging materials, (ii) fulfill and deliver Nutrition segment customer orders and (iii) provide Internet and networking services.  In addition, any significant change in the pricing or payment terms that we have with our third-party providers could adversely affect our liquidity. The COVID-19 pandemic has caused, and may cause in the future, delays in fulfilling orders for our Nutrition segment’s products at our warehouses due to employees of our fulfillment provider testing positive for COVID-19.  Due to the COVID-19 pandemic, we have incurred, and may incur in the future, charges related to increased labor rates and overtime for employees of our fulfillment provider, as well as additional shipping and related charges if it is necessary to transfer the fulfillment of certain orders to other warehouses that are farther from the customer’s delivery destination.

 

We may be subject to claims that our Nutrition segment personnel are unqualified to provide proper weight loss advice.

 

We offer counseling options from weight loss counselors, registered dietitians and certified diabetes educators with varying levels of training. We may be subject to claims from our Nutrition segment customers alleging that our personnel lack the qualifications necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our Nutrition segment personnel have provided inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for matters other than weight loss. Such claims could result in lawsuits, damage to our reputation and divert management’s attention from our business, which would adversely affect our business.

 

We may be subject to health-related claims from our customers.

 

Our Nutrition segment's weight loss programs do not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our Nutrition segment customers. Many people who are overweight suffer from other physical conditions, and our target customers could be considered a high-risk population. A Nutrition segment customer who experiences health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by participating in our weight management programs or by consuming one or more of our individual products. For example, our Nutrition segment's predecessor businesses suffered substantial losses due to health-related claims and related publicity. If we become subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely be lengthy and costly, and adversely affect our results of operations. Further, our general liability insurance may not cover claims of these types.

 

The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources pursues a weight management program similar to ours, our Nutrition segment business could be significantly affected.

 

Competition is intense in the weight management industry and we must remain competitive in the areas of program efficacy, price, taste, customer service and brand recognition. The competitors of our Nutrition segment include companies selling pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some of our Nutrition segment's competitors are significantly larger than we are and have substantially greater resources. Our Nutrition segment business could be adversely affected if someone with significant resources decided to imitate our weight management programs. For example, if a major supplier of pre-packaged foods decided to enter this market and made a substantial investment of resources in advertising and training diet counselors, our Nutrition segment business could be significantly affected. Any increased competition from new entrants into our Nutrition segment's industry or any increased success by existing competition could result in reductions in our Nutrition segment sales or prices, or both, which could have an adverse effect on our business and results of operations.

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We are dependent on certain third-party agreements for a percentage of revenue.

 

Our Nutrition segment has agreements with certain third-party retailers. Under these agreements, these third parties control when and how often our Nutrition segment products are offered, and we are not guaranteed any minimum level of sales. Our Nutrition segment's largest third-party retailer has indicated to us that they will be reducing orders for, and the promotion of, our Nutrition segment products in 2020. If any third party elects not to renew their agreement with us or further reduces orders for our Nutrition segment products or the promotion of our Nutrition segment products, our revenue will suffer.

 

In addition, our third-party retailers may decide to stop selling our Nutrition segment products upon written notice, which may result in an increased level of reclamation claims. In the event any retailer terminates its relationship with us and the level of reclamation claims exceeds the estimated amount reserved on our balance sheet at the time of sale to the retailer, we will have to record an expense for the excess claims, which could adversely impact our results of operations and financial condition. Additionally, in certain instances, we could be prohibited from selling our Nutrition segment products through competitors of these third parties for a specified time after the termination of the agreements.

 

Furthermore, some retailers are experiencing fewer than usual customer visits at their locations as a result of the COVID-19 pandemic, which has adversely affected and could continue to adversely affect the sales of our products at those retailers.

 

New weight loss products or services may put us at a competitive disadvantage.

 

On an ongoing basis, many existing and potential providers of weight loss solutions, including many pharmaceutical firms with significantly greater financial and operating resources than we have, are developing new products and services. The creation of a weight loss solution, such as a drug therapy, that is perceived to be safe, effective and “easier” than a portion-controlled meal plan would put our Nutrition segment at a disadvantage in the marketplace and our results of operations could be negatively affected.

 

If our Nutrition segment’s efforts to attract and retain customer subscriptions are not successful, our business will be adversely affected.

 

Our Nutrition segment’s ability to continue to attract customer subscriptions will depend in part on our ability to consistently provide customers with compelling food choices that are desirable in taste and quality, effectively market our products, and offer convenience and value to our customers. The relative offerings, pricing, and other factors of our Nutrition segment’s competitors may adversely impact our ability to attract and retain customer subscriptions. If our Nutrition segment’s customers do not perceive our products to be of value, we may not be able to attract and retain customers. We must continually add new customer subscriptions both to replace canceled subscriptions and to grow our business beyond our current customer base. Further, if excessive numbers of our Nutrition segment’s customers cancel their subscriptions, we may be required to incur significantly higher marketing expenditures than we currently anticipate to replace these customers with new customers, and our results of operations may be adversely affected.

 

We may be subject to litigation from our competitors.

 

Our Nutrition segment's competitors may pursue litigation against us based on our advertising or other marketing practices regardless of its merit and chances of success, especially if we engage in comparative advertising, which includes advertising that directly or indirectly mentions a competitor or a competitor’s weight loss program in comparison to our Nutrition segment programs. While we would defend ourselves against any such claims, our defense may ultimately be unsuccessful. Also, defending against such claims, regardless of their merit and ultimate outcome, may be lengthy and costly, strain our resources and divert management’s attention from their core responsibilities, which would have a negative impact on our business. 

 

59


 

We have launched and expect to continue to launch new weight loss and nutrition programs and brands which may not be successful due to the failure of such programs or brands to achieve anticipated levels of market acceptance, which could adversely affect our Nutrition segment business, financial condition and results of operations.

 

There are a number of risks inherent in any new program or brand introduction, which could prevent us from achieving revenue growth and increasing our Nutrition segment's overall market share in the commercial weight loss and nutrition markets. Any new program or brand may fail to achieve the anticipated level of market acceptance or appeal to customer tastes and preferences. In addition, introduction costs, including product testing and marketing, may be greater than anticipated. If the new program or brand is not successful or falls short of anticipated market acceptance, we may be adversely affected by continued expenses and the diversion of management time to this initiative. Any or all of such events could have adverse effects on our business, financial condition and results of operations.

 

If we do not continue to receive referrals from existing Nutrition segment customers, our Nutrition segment's customer acquisition cost may increase.

 

We rely on word-of-mouth advertising for a portion of our new Nutrition segment customers. If our brands suffer or the number of customers acquired through referrals drops due to other circumstances, our costs associated with acquiring new Nutrition segment customers and generating revenue will increase, which will, in turn, have an adverse effect on our profitability.

 

We use third-party marketing vendors to promote our Nutrition segment products. If the spokespersons affiliated with the third-party marketing vendors suffer adverse publicity or elect to not renew, our revenue could be adversely affected.

 

Our Nutrition segment's marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons, to promote our weight loss programs. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from a segment of our Nutrition segment customer base, whether weight loss related or not. If so, such events may reduce the effectiveness of his or her endorsement and, in turn, adversely affect our revenue and results of operations. Additionally, if a spokesperson elects not to renew their agreement with us, our revenue may suffer.

 

Changes in customer preferences could negatively impact our operating results.

 

Our Nutrition segment programs feature frozen and ready-to-go food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our Nutrition segment programs versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in customer tastes and preferences away from our frozen or ready-to-go food and support and counseling services, and any failure to provide innovative responses to these changes, may have a materially adverse impact on our business, financial condition, operating results and cash flows.  

 

Our success is also dependent on our food innovation including maintaining a robust array of food items and improving the quality of existing items. If we do not continually expand our food items or provide customers with items that are desirable in taste and quality, our business could be adversely impacted.

 

The seasonal nature of the business of our Nutrition segment could cause our operating results to fluctuate.

 

The business of our Nutrition segment is seasonal, with revenue generally greatest (and advertising expenses generally highest) in the first calendar quarter, also known as diet season. Weak performance during diet season could negatively impact our Nutrition segment’s performance for the remainder of the year. This seasonality could cause the market price of our Common Stock to fluctuate as the results of an interim financial period may not be indicative of our full year results. Seasonality also impacts relative revenue and profitability of each quarter of the year, both on a quarter-to-quarter and year-over-year basis.

 

60


 

The weight loss industry is subject to adverse publicity, which could harm our Nutrition segment business.

 

The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our Nutrition segment's predecessor businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging that the Nutrisystem weight loss program in use at that time led to gall bladder disease. This publicity was a factor that contributed to the bankruptcy of our Nutrition segment's predecessor businesses in 1993. In addition, our Nutrition segment's predecessor businesses were severely impacted by significant litigation and damaging publicity related to their customers’ use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our Nutrition segment's predecessor businesses to close all of their company-owned weight loss centers.

 

Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that is perceived as unfavorable or that question certain weight loss programs, products or methods could result in a decline in our revenue. Because of our dependence on customer perceptions, adverse publicity associated with illness or other undesirable effects resulting from the consumption of our Nutrition segment products or similar products by competitors, whether or not accurate, could also damage customer confidence in our Nutrition segment weight loss programs and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user’s failure to use such products or services appropriately.

 

The industry in which our Nutrition segment operates is subject to governmental regulation that could increase in severity and hurt results of operations.

 

The industry in which our Nutrition segment operates is subject to federal, state and other governmental regulation. Certain federal and state agencies, such as the FTC, regulate and enforce such laws relating to advertising, disclosures to customers, privacy, customer pricing and billing arrangements and other customer protection matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or new laws or regulations could result in liability, adverse publicity and restrictions on our business operations. Some advertising practices in the weight loss industry, in particular, have led to investigations from time to time by the FTC and other governmental agencies and many companies in the weight loss industry, including our Nutrition segment's predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. In addition, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising require us and other weight loss companies to use a statement as to what the typical weight loss a customer can expect to achieve on our Nutrition segment programs when using a customer’s weight loss testimonial in advertising. Federal and state regulation of advertising practices generally, and in the weight loss industry in particular, may increase in scope or severity in the future, which could have a material adverse impact on our business.

 

Other aspects of the industry in which our Nutrition segment operates are also subject to government regulation. For example, the manufacturing, labeling and distribution of food products, including dietary supplements, are subject to strict USDA and FDA requirements and food manufacturers are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food preparation and other matters. If federal, state, local or foreign regulation of the weight loss industry increases for any reason, then we may be required to incur significant expenses, as well as modify our operations to comply with new regulatory requirements, which could harm our operating results. Additionally, remedies available in any potential administrative or regulatory actions may include product recalls and requiring us to refund amounts paid by all affected customers or pay other damages, which could be substantial. 

 

Laws and regulations directly applicable to communications, operations or commerce over the Internet such as those governing intellectual property, privacy, libel and taxation, are becoming more prevalent and some remain unsettled. If we are required to comply with new laws or regulations or new interpretations of existing laws or regulations, or if we are unable to comply with these laws, regulations or interpretations, our business could be adversely affected.

 

61


 

Future laws or regulations, including laws or regulations affecting our marketing and advertising practices, relations with customers, employees, service providers, or our services and products, may have an adverse impact on us.

 

The sale of ingested products involves product liability and other risks.

Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability claims if the use of our Nutrition segment products results in illness or injury. The foods that we resell in the U.S. are subject to laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, including dietary supplements, as well as our Nutrition segment's predecessor businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by diverting the attention of senior management from the operation of our business. We may also be subject to claims that our Nutrition segment products contain contaminants, are improperly labeled, include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for us and adversely affect our results of operations. In addition, the products we distribute, or certain components of those products, may be subject to product recalls or other deficiencies. Any negative publicity associated with these actions would adversely affect our brands and may result in decreased product sales and, as a result, lower revenue and profits.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The stock repurchase activity for the second quarter of 2020 was as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of Shares Purchased (1)

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)

 

 

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)

 

4/1/2020 - 4/30/2020

 

 

66

 

 

$

5.27

 

 

 

 

 

$

 

5/1/2020 - 5/31/2020

 

 

589

 

 

 

5.35

 

 

 

 

 

 

 

6/1/2020 - 6/30/2020

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

655

 

 

$

5.34

 

 

 

 

 

 

 

 

 

 

(1)

Total shares purchased include shares attributable to the withholding of shares by Tivity Health to satisfy the payment of tax obligations related to the vesting of restricted shares.

 

(2)

We had no publicly announced plans or open market repurchase programs for shares of our Common Stock during the three months ended June 30, 2020.

 

62


 

Item 6. Exhibits

 

(a)

Exhibits

 

10.1

 

Employment Agreement by and between the Company and Richard M. Ashworth, dated May 20, 2020 [incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 22, 2020, File No. 000-19364]

 

 

 

10.2

 

Form of Restricted Stock Unit Award Agreement for Richard M. Ashworth (Inducement Award), dated June 1, 2020 [incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated May 22, 2020, File No. 000-19364]

 

 

 

10.3

 

Form of Restricted Stock Unit Award Agreement for Richard M. Ashworth, dated June 1, 2020 [incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated May 22, 2020, File No. 000-19364]

 

 

 

10.4

 

Form of Market Stock Unit Award Agreement for Richard M. Ashworth, dated June 1, 2020 [incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated May 22, 2020, File No. 000-19364]

 

 

 

31.1

 

Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Richard M. Ashworth, Chief Executive Officer.*

 

 

 

31.2

 

Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Adam Holland, Chief Financial Officer.*

 

 

 

32

 

Certification Pursuant to 18 U.S.C section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 made by Richard M. Ashworth, Chief Executive Officer, and Adam Holland, Chief Financial Officer.*

 

 

 

101

 

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Stockholders' Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements.

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (included in Exhibit 101 hereto).

 

 

 

*

 

Filed herewith

 

63


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

 

 

Tivity Health, Inc.

 

 

 

 

(Registrant)

 

 

 

 

 

Date:

  August 7, 2020

 

By

/s/ Adam Holland

 

 

 

 

 

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

64

tvty-ex311_8.htm

Exhibit 31.1

CERTIFICATION

 

I, Richard M. Ashworth, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Tivity Health, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:    August 7, 2020

 

 

/s/ Richard M. Ashworth

 

Richard M. Ashworth

 

Chief Executive Officer

 

 

tvty-ex312_6.htm

Exhibit 31.2

CERTIFICATION

 

I, Adam Holland, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Tivity Health, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:    August 7, 2020

 

 

/s/ Adam Holland

 

Adam Holland

 

Chief Financial Officer

 

 

tvty-ex32_7.htm

Exhibit 32

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Tivity Health, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Richard M. Ashworth, Chief Executive Officer of the Company, and Adam Holland, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Richard M. Ashworth

Richard M. Ashworth

Chief Executive Officer

August 7, 2020

 

 

/s/ Adam Holland

Adam Holland

Chief Financial Officer

August 7, 2020

 

 

 

v3.20.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2020
Aug. 04, 2020
Cover [Abstract]    
Entity Registrant Name TIVITY HEALTH, INC.  
Entity Central Index Key 0000704415  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Current Reporting Status Yes  
Entity Shell Company false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Trading Symbol TVTY  
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2020  
Entity Common Stock, Shares Outstanding   48,560,369
Entity File Number 000-19364  
Entity Tax Identification Number 62-1117144  
Entity Address, Address Line One 701 Cool Springs Boulevard  
Entity Address, City or Town Franklin  
Entity Address, State or Province TN  
Entity Address, Postal Zip Code 37067  
City Area Code 800  
Local Phone Number 869-5311  
Entity Interactive Data Current Yes  
Title of 12(b) Security Common Stock - $.001 par value  
Security Exchange Name NASDAQ  
Document Quarterly Report true  
Document Transition Report false  
Entity Incorporation, State or Country Code DE  
v3.20.2
CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 60,274 $ 2,486
Accounts receivable, net 36,339 97,596
Inventories 22,088 36,407
Prepaid expenses 15,058 18,255
Other current assets 8,110 6,993
Total current assets 141,869 161,737
Property and equipment, net of accumulated depreciation of $53,525 and $42,510 respectively 52,436 52,909
Right-of-use assets, operating leases 35,300 41,518
Right-of-use assets, finance leases 1,356 1,680
Intangible assets, net 593,520 689,686
Goodwill, net 535,135 654,635
Other assets 21,554 23,740
Total assets 1,381,170 1,625,905
Current liabilities:    
Accounts payable 35,492 46,480
Accrued salaries and benefits 10,539 13,071
Accrued liabilities 42,020 55,663
Deferred revenue 12,440 12,037
Income taxes payable 7,835 405
Current portion of operating lease liabilities 13,157 13,131
Current portion of finance lease liabilities 644 624
Current portion of long-term debt 9,775  
Current portion of other long-term liabilities 15,664 4,947
Total current liabilities 147,566 146,358
Long-term debt 1,002,547 1,048,127
Long-term operating lease liabilities 23,515 30,321
Long-term finance lease liabilities 753 1,080
Long-term deferred tax liability 137,205 160,846
Other long-term liabilities 31,863 12,263
Commitments and contingent liabilities
Stockholders' equity:    
Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding
Common Stock $.001 par value, 120,000,000 shares authorized, 48,548,741 and 48,156,786 shares outstanding, respectively 48 48
Additional paid-in capital 505,760 504,419
Accumulated deficit (406,840) (237,284)
Treasury stock, at cost, 2,254,953 shares in treasury (28,182) (28,182)
Accumulated other comprehensive loss (33,065) (12,091)
Total stockholders' equity 37,721 226,910
Total liabilities and stockholders' equity $ 1,381,170 $ 1,625,905
v3.20.2
CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Accumulated depreciation $ 53,525 $ 42,510
Stockholders' equity:    
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized (in shares) 5,000,000 5,000,000
Preferred stock, shares outstanding (in shares) 0 0
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized (in shares) 120,000,000 120,000,000
Common stock, shares outstanding (in shares) 48,548,741 48,156,786
Treasury stock (in shares) 2,254,953 2,254,953
v3.20.2
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Revenues:        
Total revenues [1] $ 262,598 $ 340,377 $ 600,253 $ 554,471
Cost of revenue:        
Total cost of revenue 118,241 194,758 317,397 335,097
Marketing expenses 51,105 54,603 138,177 78,751
Selling, general and administrative expenses 23,471 29,667 51,480 56,852
Depreciation and amortization 12,919 9,084 27,682 12,666
Impairment loss     199,500  
Restructuring and related charges 1,009 2,352 1,752 3,943
Operating income (loss) 55,853 49,913 (135,735) 67,162
Interest expense 21,235 23,661 42,898 31,328
Income (loss) before income taxes 34,618 26,252 (178,633) 35,834
Income tax expense (benefit) 6,107 8,115 (9,038) 13,483
Net income (loss) $ 28,511 $ 18,137 $ (169,595) $ 22,351
Earnings (loss) per share:        
Basic $ 0.59 $ 0.38 $ (3.49) $ 0.49
Diluted [2] $ 0.58 $ 0.37 $ (3.49) $ 0.49
Comprehensive income (loss) $ 27,366 $ 5,901 $ (190,569) $ 10,115
Weighted average common shares and equivalents:        
Basic 48,711 47,790 48,662 45,165
Diluted [2] 48,794 48,461 48,662 45,719
Services        
Revenues:        
Total revenues $ 79,856 $ 157,481 $ 239,548 $ 314,008
Cost of revenue:        
Total cost of revenue 31,886 111,073 147,034 224,916
Products        
Revenues:        
Total revenues 182,742 182,896 360,705 240,463
Cost of revenue:        
Total cost of revenue $ 86,355 $ 83,685 $ 170,363 $ 110,181
[1] The figure for total segments equals the consolidated figure for such item.
[2] The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.
v3.20.2
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Services        
Depreciation $ 2,240 $ 1,503 $ 4,071 $ 2,859
Products        
Depreciation and amortization $ 8,587 $ 5,861 $ 19,280 $ 7,488
v3.20.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement Of Income And Comprehensive Income [Abstract]        
Net income (loss) $ 28,511 $ 18,137 $ (169,595) $ 22,351
Net change in fair value of interest rate swaps, net of income tax benefit of $393, $4,068, $7,195, and $4,068, respectively (1,145) (12,236) (20,974) (12,236)
Comprehensive income (loss) $ 27,366 $ 5,901 $ (190,569) $ 10,115
v3.20.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement Of Income And Comprehensive Income [Abstract]        
Net change in fair value of interest rate swaps, income tax benefit $ 393 $ 4,068 $ 7,195 $ 4,068
v3.20.2
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Treasury Stock
Accumulated Other Comprehensive Loss
Balance at Dec. 31, 2018 $ 369,001 $ 41 $ 347,487 $ 49,655 $ (28,182)  
Comprehensive income (loss) 10,115     22,351   $ (12,236)
Issuance of Common Stock in connection with Merger 132,838 6 132,832      
Share-based compensation replacement awards related to Merger and attributable to pre-combination services 9,107   9,107      
Exercise of stock options 370   370      
Tax withholding for share-based compensation (1,135)   (1,135)      
Share-based employee compensation expense 9,257   9,257      
Other (247)   (129) (118)    
Balance at Jun. 30, 2019 529,306 47 497,789 71,888 (28,182) (12,236)
Balance at Mar. 31, 2019 517,164 47 491,548 53,751 (28,182)  
Comprehensive income (loss) 5,901     18,137   (12,236)
Exercise of stock options 137   137      
Tax withholding for share-based compensation (794)   (794)      
Share-based employee compensation expense 6,898   6,898      
Balance at Jun. 30, 2019 529,306 47 497,789 71,888 (28,182) (12,236)
Balance at Dec. 31, 2019 226,910 48 504,419 (237,284) (28,182) (12,091)
Comprehensive income (loss) (190,569)     (169,595)   (20,974)
Exercise of stock options 601   601      
Tax withholding for share-based compensation (2,949)   (2,949)      
Share-based employee compensation expense 3,689   3,689      
Other 39     39    
Balance at Jun. 30, 2020 37,721 48 505,760 (406,840) (28,182) (33,065)
Balance at Mar. 31, 2020 7,624 48 503,049 (435,371) (28,182) (31,920)
Comprehensive income (loss) 27,366     28,511   (1,145)
Tax withholding for share-based compensation (154)   (154)      
Share-based employee compensation expense 2,865   2,865      
Other 20     20    
Balance at Jun. 30, 2020 $ 37,721 $ 48 $ 505,760 $ (406,840) $ (28,182) $ (33,065)
v3.20.2
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash flows from operating activities:    
Net income (loss) $ (169,595) $ 22,351
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 27,682 12,666
Amortization and write-off of deferred loan costs 2,315 3,073
Amortization of debt discount 2,049 389
Share-based employee compensation expense 3,689 9,257
Impairment of goodwill and intangible assets 199,500  
Deferred income taxes (16,447) 10,789
Decrease (increase) in accounts receivable, net 61,257 (3,754)
Decrease in inventory 14,319 8,719
Decrease in other current assets 1,363 1,057
Increase (decrease) in accounts payable 9,411 (5,872)
(Decrease) increase in accrued salaries and benefits (2,532) 570
Decrease in other current liabilities (5,925) (8,266)
Increase (decrease) in deferred revenue 403 (2,725)
Other 3,454 1,345
Net cash flows provided by operating activities 130,943 49,599
Cash flows from investing activities:    
Acquisition of property and equipment (10,362) (8,918)
Business acquisitions, net of cash acquired   (1,062,818)
Net cash flows used in investing activities (10,362) (1,071,736)
Cash flows from financing activities:    
Proceeds from issuance of long-term debt 196,525 1,399,945
Payments of long-term debt (236,375) (347,879)
Payments related to tax withholding for share-based compensation (2,949) (1,135)
Exercise of stock options 601 370
Deferred loan costs   (30,189)
Principal payments related to financing leases (306) (22)
Change in cash overdraft and other (20,289) 3,530
Net cash flows (used in) provided by financing activities (62,793) 1,024,620
Effect of exchange rate changes on cash   (12)
Net increase in cash and cash equivalents 57,788 2,471
Cash and cash equivalents, beginning of period 2,486 1,933
Cash and cash equivalents, end of period $ 60,274 $ 4,404
v3.20.2
Basis of Presentation and Recent Developments
6 Months Ended
Jun. 30, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Basis of Presentation and Recent Developments

1.

Basis of Presentation and Recent Developments

 

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Tivity Health®, Inc. and its wholly-owned subsidiaries, including the results of Nutrisystem®, Inc. (“Nutrisystem”) acquired on March 8, 2019 (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.  In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Due to the significant uncertainty relating to the potential future impacts of the coronavirus pandemic on our business and the overall market, actual results could differ from those estimates, including, but not limited to, estimates of fair value of goodwill and indefinite-lived intangible assets, allowances for doubtful accounts, and valuation allowances on deferred tax assets.  Our consolidated statements of operations include results of Nutrisystem from March 8, 2019 forward.  We have reclassified certain items in prior periods to conform to current classifications.

 

Following the acquisition of Nutrisystem (the “Merger”), we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment is comprised of our legacy business and includes SilverSneakers® senior fitness, Prime® Fitness, WholeHealth Living® and Wisely WellTM.  The Nutrition segment is comprised of Nutrisystem’s legacy business and includes the Nutrisystem® and the South Beach Diet® programs.

 

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes.  You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Developments

 

In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus, which causes the disease known as “COVID-19”.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and COVID-19 continues to spread throughout the United States and other countries.  Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. Such measures have resulted in significantly reduced demand for many businesses that have continued in operation.  

 

By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location. A substantial number of our fitness partner locations remained closed through April, with some locations reopening in May and additional locations reopening in June.  For the month of June 2020, approximately 66% of our fitness partner locations reported at least one visit from our SilverSneakers program.  For the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.   

 

We do not believe that COVID-19-related developments had a material impact on the results of operations or cash flows of our Nutrition segment for the first or second quarters of 2020.  While overall we did not experience any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we experienced delays in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19.  As a result, we incurred incremental expense of $1.3 million in the second quarter related to increased labor rates and

overtime for employees of our fulfillment provider as well as additional shipping and related charges as we transferred the fulfillment of certain orders to other warehouses that were farther from the customer’s delivery destination.

 

We have taken a number of actions in response to the pandemic, including the following:

 

 

Given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our Revolving Credit Facility as a precautionary measure to increase our cash position and maintain financial flexibility. We repaid such $75 million in full in June 2020.  As of June 30, 2020, outstanding debt under our credit agreement was $1,012.3 million, and we had $60.3 million of cash and cash equivalents.  In July 2020, we repaid $24.8 million of principal on the term loans under our credit agreement, resulting in our next required quarterly installment being due in December 2021. As of June 30, 2020, we had a working capital deficit of $5.7 million.  While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement (as defined below) will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

 

 

We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include implementing remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements.

 

 

We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other COVID-19-related legislation, curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  

 

 

o

In April 2020, we furloughed 13% of our approximately 1,000 employees. In June 2020, some of these furloughed employees’ positions were eliminated (in addition to other position eliminations, resulting in approximately 8% of our employees being terminated), and we extended the furlough for substantially all of the remaining furloughed employees through the end of 2020. Also in June 2020, we placed an additional 2% of our total employees on furlough through the end of 2020.  

 

 

o

Also in April 2020, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  In June 2020, the Compensation Committee determined to extend such reductions in base salary through December 31, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who stood for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  In June 2020, the Board determined to extend such reduction in cash compensation to the Board through December 31, 2020.

 

 

o

Effective at the end of July 2020, the Compensation Committee suspended the Company matching contribution to the Company’s 401(k) plan.

 

As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).  Through this evaluation, management concluded that the fair value of goodwill allocated to the

Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment. There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

v3.20.2
Recent Relevant Accounting Standards
6 Months Ended
Jun. 30, 2020
New Accounting Pronouncements And Changes In Accounting Principles [Abstract]  
Recent Relevant Accounting Standards

2.

Recent Relevant Accounting Standards

 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”.  ASC 848 contains temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, such as a transition away from the use of LIBOR.  ASC 848 was effective for the Company as of January 1, 2020.  The provisions of ASC 848 are available through December 31, 2022, at which time the reference rate replacement activity is expected to have been completed.  The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level.  The accounting relief provided by ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. Modifications that are unrelated to reference rate reform will scope out a given contract.  ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable.  For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis.  In March 2020, we elected the expedient that allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform.  In addition, we have the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848.  In June 2020, we elected to (i) continue the method of assessing effectiveness as documented in the original hedge documentation and (ii) apply the expedient wherein the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument.  We will also apply the aforementioned elections to any future designated cash flow hedging relationship.

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" (“ASU 2018-16”), which adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. As of March 31, 2020, the benchmark interest rate in our existing interest rate swap agreements is LIBOR. The adoption of this standard did not have an impact on our financial position, results of operations, or cash flows. 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.  ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted ASU 2017-04 on October 1, 2019.  As further discussed in Note 12, we recorded impairment losses related to goodwill during the fourth quarter of 2019 and the first quarter of 2020.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820.  ASU 2018-13 is effective for fiscal years beginning on or after December 15, 2019, including interim periods therein, and is generally required to be applied retrospectively, except for certain components that are to be applied prospectively.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement. This standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal

years. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires companies to measure credit losses for financial assets held at the reporting date utilizing a methodology that reflects current expected credit losses over the lifetime of such assets.  ASU 2016-13 was effective for the Company on January 1, 2020 and is generally required to be applied using the modified retrospective approach, with limited exceptions for specific instruments.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

v3.20.2
Revenue Recognition
6 Months Ended
Jun. 30, 2020
Revenue From Contract With Customer [Abstract]  
Revenue Recognition

3.

Revenue Recognition

 

We account for revenue from contracts with customers in accordance with Accounting Standards Codification (“ASC”) Topic 606.  The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.

 

Healthcare Segment

 

Our Healthcare segment earns revenue from three programs, SilverSneakers senior fitness, Prime Fitness and WholeHealth Living.  We provide the SilverSneakers senior fitness program to members of Medicare Advantage and Medicare Supplement plans through our contracts with such plans.  We offer Prime Fitness, a fitness facility access program, through contracts with commercial health plans, employers, and other sponsoring organizations that allow their members to individually purchase the program.  We sell our WholeHealth Living program primarily to health plans.

 

Except for Prime Fitness, our Healthcare segment’s customer contracts generally have initial terms of approximately three years.  Some contracts allow the customer to terminate early and/or determine on an annual basis to which of their members they will offer our programs.  For Prime Fitness, our contracts with commercial health plans, employers, and other sponsoring organizations generally have initial terms of approximately three years, while individuals who purchase the Prime Fitness program through these organizations may cancel at any time (on a monthly basis) after an initial period of one to three months.  The significant majority of our Healthcare segment’s customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term.  There are generally no performance obligations that are unsatisfied at the end of a particular month.  There was no material revenue recognized during the three and six months ended June 30, 2020 from performance obligations satisfied in a prior period.

 

Our fees within the Healthcare segment are variable month to month and are generally billed per member per month (“PMPM”) or billed based on a combination of PMPM and member visits to a network location.  We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month.  We bill for member visits approximately one month in arrears once actual member visits are known.  Payments from customers are typically due within 30 days of invoice date.  When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period. At June 30, 2020 and December 31, 2019, $0.7 million and $0.5 million, respectively, of such costs were capitalized. During the three and six months ended June 30, 2020 and 2019, the amortization of such capitalized costs was immaterial.

 

Our Healthcare segment’s customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month.  The allocated consideration corresponds directly with the value to our customers of our services completed for the month.  Under the majority of our Healthcare segment’s contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. ASC 606-10-50-14(b) provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.

 

Although we evaluate our financial performance and make resource allocation decisions based upon the results of our two reportable segments, we believe the following information depicts how our Healthcare segment revenues and cash flows are affected by economic factors.  

 

The following table sets forth Healthcare revenue disaggregated by program.  Revenue from our SilverSneakers program is predominantly contracted with Medicare Advantage and Medicare Supplement plans.

 

(In thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

SilverSneakers

 

$

49,157

 

 

$

122,899

 

 

$

170,764

 

 

$

245,922

 

Prime Fitness

 

 

19,047

 

 

 

29,751

 

 

 

51,858

 

 

 

58,494

 

WholeHealth Living

 

 

4,747

 

 

 

4,467

 

 

 

9,796

 

 

 

9,041

 

Other (1)

 

 

8,972

 

 

 

364

 

 

 

9,197

 

 

 

551

 

 

 

$

81,923

 

 

$

157,481

 

 

$

241,615

 

 

$

314,008

 

 

 

(1)

For the three and six months ended June 30, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer as well as $2.1 million of Wisely Well revenue.

 

Sales and usage-based taxes are excluded from revenues.

 

Nutrition Segment

 

Our Nutrition segment earns revenue from four sources: direct to consumer, retail, QVC and other.  Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties.  As explained in more detail below, revenue is recognized upon satisfaction of the performance obligation by transferring control over a product to a Nutrition segment customer.  Direct-mail advertising costs are expensed as incurred.  We recognize an asset for the carrying amount of product to be returned and for costs to obtain a contract if the amortization is more than one year in duration.  We expense costs to obtain a contract as incurred if the amortization period is less than one year.

 

We sell pre-packaged foods directly to weight loss program participants primarily through the Internet and telephone (referred to as the direct to consumer channel), through QVC (a television shopping network), and select retailers. Pre-packaged foods include both frozen and non-frozen (ready-to-go), shelf-stable products.

 

Products sold through the direct to consumer channel, both frozen and non-frozen, may be sold separately (a la carte) or as part of a packaged monthly meal plan for which Nutrition segment customers pay at the point of sale. Products sold through QVC are payable by QVC upon our shipment of the product to the end consumer. For both the direct to consumer channel and QVC, we recognize revenue at a point in time, i.e., at the shipping point.  Direct to consumer customers may return unopened ready-to-go Nutrisystem products within 30 days after purchase in order to receive a refund or credit. Frozen Nutrisystem products are refundable only if the order is canceled within 14 days after delivery.  South Beach Diet products are not refundable.   

 

Products sold to retailers include both frozen and non-frozen products and are payable by the retailer upon receipt. We recognize revenue at a point in time, i.e., when the retailers take possession of the product. Certain retailers have the right to return unsold products.

 

We account for the shipment of frozen and non-frozen, ready-to-go products as separate performance obligations. The consideration, including variable consideration for product returns, is allocated between frozen and non-frozen products based on their standalone selling prices. The amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data.

 

In addition to our pre-packaged foods, we sell prepaid gift cards through a wholesaler that are redeemable through the Internet or telephone. Prepaid gift cards represent grants of rights to goods to be provided in the future to gift card buyers. The wholesaler has the right to return all unsold prepaid gift cards. The wholesaler’s retail selling price of the gift cards is deferred in the balance sheet and recognized as revenue when we have satisfied our performance obligation, i.e., when a gift card holder redeems the gift card with us. We recognize breakage amounts (the estimated amount of unused gift cards) as revenue, in proportion to the actual gift card redemptions exercised by gift card holders in relation to the total expected redemptions of gift cards. We utilize historical experience in estimating the total expected breakage and period over which the gift cards will be redeemed.

 

Sales and other taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a Nutrition segment customer are excluded from revenue and presented on a net basis.  After control over a product has transferred to a Nutrition segment customer, shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in revenue and cost of revenue in the accompanying consolidated statements of operations. Revenue from shipping and handling charges was $6.5 million and $13.0 million for the three and six months ended June 30, 2020, respectively, and $6.3 million and $8.1 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively.

 

The following table sets forth Nutrition segment revenue, from March 8, 2019 forward, disaggregated by the source of revenue:

 

(In thousands)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Nutrisystem direct to consumer

 

$

165,118

 

 

$

155,976

 

 

$

320,509

 

 

$

203,977

 

South Beach Diet direct to consumer

 

 

8,650

 

 

 

14,464

 

 

$

21,414

 

 

 

19,118

 

Retail

 

 

3,902

 

 

 

8,728

 

 

 

9,350

 

 

 

13,032

 

QVC

 

 

2,901

 

 

 

3,522

 

 

 

7,088

 

 

 

4,044

 

Other

 

 

104

 

 

 

206

 

 

 

277

 

 

 

292

 

 

 

$

180,675

 

 

$

182,896

 

 

$

358,638

 

 

$

240,463

 

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Contract assets

 

$

243

 

 

$

95

 

Contract liabilities

 

$

10,937

 

 

$

10,911

 

 

The contract assets primarily relate to unbilled accounts receivable and are included as other current assets in the accompanying consolidated balance sheet. The contract liabilities (deferred revenue) primarily relate to sale of prepaid gift cards and unshipped foods, which are deferred until such time as the Company has satisfied its performance obligations.

 

Significant changes in the contract liabilities (deferred revenue) balance during the period are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2020

 

Revenue recognized that was included in the contract liability (deferred revenue) balance on January 1, 2020

 

$

(2,395

)

 

$

(8,112

)

Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue, and (decreases) due to returns

 

$

(71

)

 

$

8,138

 

 

The following table includes estimated revenue from the prepaid gift cards expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period:

 

(In thousands)

 

 

 

 

Remaining 2020

 

$

1,789

 

2021

 

 

1,901

 

2022

 

 

1,192

 

2023

 

 

468

 

2024

 

 

297

 

2025

 

 

220

 

 

 

$

5,867

 

 

We apply the practical expedient in subtopic ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

We review the reserves for our Nutrition segment customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment. The provision for estimated returns for the three and six months ended June 30, 2020 was $4.1 million and $9.3 million, respectively, and $5.6 million and $7.0 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively. At June 30, 2020 and December 31, 2019, the reserve for estimated returns incurred but not received and processed was $1.4 million and $0.8 million, respectively, and has been included in accrued liabilities in the accompanying consolidated balance sheet.

v3.20.2
Inventories
6 Months Ended
Jun. 30, 2020
Inventory Disclosure [Abstract]  
Inventories

4.

Inventories

 

Inventories consist principally of packaged food held in external fulfillment locations. We value inventories at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. We continually assess quantities of inventory on hand to identify excess or obsolete inventory and record a provision for any estimated loss. We estimate the reserve for excess and obsolete inventory primarily on forecasted demand and/or our ability to sell the products, our ability to introduce new products, future production requirements, and changes in consumer behavior. The reserve for excess and obsolete inventory was $2.0 million and $1.8 million at June 30, 2020 and December 31, 2019, respectively.

v3.20.2
Intangible Assets and Goodwill
6 Months Ended
Jun. 30, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets and Goodwill

5.

Intangible Assets and Goodwill

 

The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company.  In March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets.  Through this evaluation, management concluded that the fair value of goodwill allocated to the Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and in the first quarter of 2020, we recorded impairment losses of $80.0 million and $119.5 million related to the Nutrisystem tradename and goodwill, respectively (see Note 12).  A reconciliation of our goodwill balance is as follows:

 

(In thousands)

 

Healthcare

 

 

Nutrition

 

 

Consolidated

 

Balance, January 1, 2020

 

$

334,680

 

 

$

319,955

 

 

$

654,635

 

Impairment loss

 

 

 

 

 

(119,500

)

 

$

(119,500

)

Balance, June 30, 2020

 

$

334,680

 

 

$

200,455

 

 

$

535,135

 

 

At June 30, 2020 and December 31, 2019, intangible assets not subject to amortization consist of tradenames of $509.0 million and $589.0 million, respectively.

 

v3.20.2
Marketing Expenses
6 Months Ended
Jun. 30, 2020
Marketing And Advertising Expense [Abstract]  
Marketing Expenses

6.

Marketing Expenses

 

Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $45.1 million and $122.4 million for the three and six months ended June 30, 2020, respectively, and $47.3 million and $67.5 million for the three and six months ended June 30, 2019 (from March 8, 2019 forward), respectively. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on the cost per customer acquired, depending upon the terms.  All other advertising costs are charged to expense as incurred or the first time the advertising takes place. At June 30, 2020 and December 31, 2019, $0.3 million and $5.0 million, respectively, of costs have been prepaid for future advertisements and promotions.

v3.20.2
Share-Based Compensation
6 Months Ended
Jun. 30, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-Based Compensation

7.

Share-Based Compensation

 

We currently have five types of share-based awards outstanding to our employees and directors: stock options, restricted stock awards, restricted stock units, performance-based stock units, and market stock units.  We believe that our share-based awards align the interests of our employees and directors with those of our stockholders. Vesting terms for each of these award types generally range from one to four years.

 

We recognize share-based compensation expense for the market stock units if the requisite service period is rendered, even if the market condition is never satisfied. For the three and six months ended June 30, 2020, we recognized total share-based compensation costs of $2.9 million and $3.7 million, respectively.  For the three and six months ended June 30, 2019, we recognized total share-based compensation costs of $6.9 million and $9.3 million, respectively, including $0.5 million and $0.6 million, respectively, recorded to restructuring and related charges.  We account for forfeitures as they occur.  

v3.20.2
Income Taxes
6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

8.

Income Taxes

 

For the three months ended June 30, 2020 and 2019, we had an effective income tax rate of 17.6% and 30.9%, respectively. During the second quarter of 2020, our effective income tax rate was lower than our statutory rate, primarily due to a change in the estimated annual effective income tax rate.  During the second quarter of 2019, we had nondeductible expenses related to the acquisition of Nutrisystem that caused an increase in our effective income tax rate.

For the six months ended June 30, 2020 and 2019, we had an effective tax benefit rate of 5.1% and an effective income tax rate of 37.6%, respectively. For the six months ended June 30, 2020, our effective tax benefit rate was lower than our statutory benefit rate primarily due to the nondeductible goodwill impairment loss of $119.5 million recorded during the first quarter.  For the six months ended June 30, 2019, our effective income tax rate increased due to nondeductible expenses related to the acquisition of Nutrisystem as well as two adjustments related to the acquisition that collectively increased our income tax expense for such period by approximately $2.7 million: (i) we evaluated the realizability of beginning-of-the-year deferred tax assets and increased the valuation allowance on deferred tax assets related to state net operating loss carryforwards by $1.8 million, and (ii) we recorded a $0.9 million reduction in deferred tax assets related to state income tax credits.

We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions.  Tax years remaining subject to examination in the U.S. Federal jurisdiction include 2016 to present.

v3.20.2
Leases
6 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Leases

9.

Leases

We maintain lease agreements principally for our office spaces and certain equipment. In addition, certain of our contracts, such as those with our fulfillment vendor related to our warehouse space or contracts with certain equipment vendors, contain embedded leases.  We maintain three sublease agreements with respect to two of our office locations, each of which continues through the initial term of our master lease agreement.  Such sublease income and payments, while they reduce our rent expense, are not considered in the value of the right-of-use asset or lease liability. With the exception of two finance leases related to a network server and office equipment, all of our leases are classified as operating leases.  In the aggregate, our leases generally have remaining lease terms of one to five years, some of which include options to extend the lease for additional periods.  

The following table shows the components of lease expense for the three and six months ended June 30, 2020 and 2019:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased

   assets

 

$

162

 

 

$

12

 

 

$

324

 

 

$

24

 

Interest of lease liabilities

 

 

22

 

 

 

2

 

 

 

47

 

 

 

4

 

Operating lease cost

 

 

3,675

 

 

 

3,804

 

 

 

7,350

 

 

 

6,520

 

Short-term lease cost

 

 

137

 

 

 

116

 

 

 

266

 

 

 

149

 

Total lease cost before subleases

 

$

3,996

 

 

$

3,934

 

 

$

7,987

 

 

$

6,697

 

Sublease income

 

 

(1,363

)

 

 

(1,356

)

 

 

(2,764

)

 

 

(2,700

)

Total lease cost, net

 

$

2,633

 

 

$

2,578

 

 

$

5,223

 

 

$

3,997

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash paid for amounts included in the

   measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow attributable to operating leases

 

$

(2,545

)

 

$

(3,561

)

 

$

(5,611

)

 

$

(5,108

)

Operating cash flow attributable to

   finance leases

 

 

(22

)

 

 

(2

)

 

 

(47

)

 

 

(4

)

Financing cash flow attributable to

   finance leases

 

 

(155

)

 

 

(11

)

 

 

(306

)

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental noncash information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for

   operating lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

48,972

 

Right-of-use assets obtained in exchange for

   finance lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

181

 

 

 

(1)

No new leases were entered into during the six months ended June 30, 2019.  Amounts shown are due to the adoption of ASC 842 and reflect balances as of January 1, 2019 for the Healthcare segment and as of March 8, 2019 for the Nutrition segment (i.e., the date of our acquisition of Nutrisystem).

 

v3.20.2
Debt
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Debt

10.

Debt

The Company's debt, net of unamortized deferred loan costs and original issue discount, consisted of the following at June 30, 2020 and December 31, 2019:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Term Loan A

 

$

280,000

 

 

$

288,750

 

Term Loan B

 

 

775,000

 

 

 

786,250

 

Revolving Credit Facility

 

 

 

 

 

19,850

 

 

 

 

1,055,000

 

 

 

1,094,850

 

Less: deferred loan costs and original issue discount

 

 

(42,678

)

 

 

(46,723

)

     Total debt

 

 

1,012,322

 

 

 

1,048,127

 

Less: current portion

 

 

(9,775

)

 

 

 

     Total non-current portion of debt

 

$

1,002,547

 

 

$

1,048,127

 

  

Credit Facility

In connection with the consummation of the Merger, on March 8, 2019, we entered into a new Credit and Guaranty Agreement (the “Credit Agreement”) with a group of lenders, Credit Suisse AG, Cayman Islands Branch, as general administrative agent, term facility agent and collateral agent, and SunTrust Bank, as revolving facility agent and swingline lender.  The Credit Agreement provides us with (i) a $350.0 million term loan A facility (“Term Loan A”), (ii) an $830.0 million term loan B facility (“Term Loan B” and, together with Term Loan A, the “Term Loans”), (iii) a $125.0 million revolving credit facility that includes a $35.0 million sublimit for swingline loans and a $50.0 million sublimit for letters of credit (the “Revolving Credit Facility”; Term Loan A, Term Loan B and the Revolving Credit Facility are sometimes herein referred to collectively as the “Credit Facilities”), and (iv) uncommitted incremental accordion facilities in an aggregate amount at any date equal to the greater of $125.0 million or 50% of our consolidated EBITDA for the then-preceding four fiscal quarters, plus additional amounts based on, among other things, satisfaction of certain financial ratio requirements.  As of June 30, 2020, outstanding debt under the Credit Agreement was $1,012 million, and availability under the Revolving Credit Facility totaled $124.5 million as calculated under the most restrictive covenant.

We are required to repay Term Loan A loans in consecutive quarterly installments, each in the amount of 2.50% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2024, at which time the entire outstanding principal balance of such loans is due and payable in full. We are required to repay Term Loan B loans in consecutive quarterly installments, each in the amount of 0.75% of the aggregate initial amount of such loans, payable beginning on June 30, 2019 and on the last day of each succeeding quarter thereafter until maturity on March 8, 2026, at which time the entire outstanding principal balance of such loans is due and payable in full. We are permitted to make voluntary prepayments of borrowings under the Term Loans at any time without penalty.  From March 8, 2019 through June 30, 2020, we made payments of $125.0 million on the Term Loans, which included prepayments of all amounts due through March 31, 2021, excluding any Excess Cash Flow Payments that may be required, as described below.  We are required to repay in full any outstanding swingline loans and revolving loans under the Revolving Credit Facility on March 8, 2024.  In addition, the Credit Agreement contains provisions that, beginning with fiscal 2019, may require annual excess cash flow (as defined in the Credit Agreement and generally designed to equal cash generated by our business in excess of cash used in the business) to be applied towards the Term Loans. We are required to make prepayments on the Term Loans equal to our excess cash flow for a given fiscal year multiplied by the following excess cash flow percentages (such resulting payment an “Excess Cash Flow Payment”) based on our Net Leverage Ratio (as defined below) on the last day of such fiscal year: (a) 75% if the Net Leverage Ratio is greater than 3.75:1, (b) 50% if the Net Leverage Ratio is equal to or less than 3.75:1 but greater than 3.25:1 (c) 25% if the Net Leverage Ratio is equal to or less than 3.25:1 but greater than 2.75:1, and (d) 0% if the Net Leverage Ratio is equal to or less than 2.75:1. Any such potential mandatory prepayments are reduced by voluntary prepayments.  We were not required to make an Excess Cash Flow Payment for fiscal 2019.

The Credit Agreement contains a financial covenant that requires us to maintain maximum ratios or levels of consolidated total net debt to consolidated adjusted EBITDA, calculated as provided in the Credit Agreement (the “Net Leverage Ratio”), of 5.75:1.00 for all test dates occurring on or after December 31, 2019 but prior to December 31, 2020, 5.25:1.00 for all test dates occurring on or after December 31, 2020 but prior to December 31, 2021, and 4.75:1.00 for all test dates occurring on or after December 31, 2021.  As of June 30, 2020, we were in compliance with all of the covenant requirements of the Credit Agreement, and our Net Leverage Ratio was equal to 4.08.

Based on our current assumptions with respect to the COVID-19 pandemic, including, among other things, the duration of the temporary closures of our fitness partner locations and the average monthly total participation levels of our members after such locations reopen, we currently believe we will be in compliance with the Net Leverage Ratio covenant over the next 12 months; however, given the significant uncertainty relating to the potential impacts of the COVID-19 pandemic on our business going forward, there are potential scenarios under which we could fail to comply with the Net Leverage Ratio covenant.  Our failure to comply with the Net Leverage Ratio covenant would result in an event of default that, if not waived, could have a material adverse effect on our financial condition, results of operations or debt service capability. We will continue to monitor our projected ability to comply with all covenants under the Credit Agreement, including the Net Leverage Ratio, which could include seeking an amendment to or waiver of the Net Leverage Ratio covenant if necessary.

Borrowings under the Credit Agreement bear interest at variable rates based on a margin or spread in excess of either (1) one-month, two-month, three-month or six-month LIBOR (or, with the approval of all lenders holding the particular class of loans, 12-month LIBOR), which may not be less than zero, or (2) the greatest of (a) the prime lending rate of the agent bank for the particular facility, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the “Base Rate”), as selected by the Company. The LIBOR margin for Term Loan A loans is 4.25%, the LIBOR margin for Term Loan B loans is 5.25% and the LIBOR margin for revolving loans varies between 3.75% and 4.25%, depending on our total Net Leverage Ratio. The Base Rate margin for Term Loan A loans is 3.25%, the Base Rate margin for Term Loan B loans is 4.25% and the Base Rate margin for revolving loans varies between 2.75% and 3.25%, depending on our total Net Leverage Ratio.  In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2% plus a spread, as described in the preceding sentences.  As of June 30, 2020, these interest rate swap agreements had current notional amounts totaling $800.0 million.

The Credit Agreement also provides for annual commitment fees ranging between 0.250% and 0.500% of the unused commitments under the Revolving Credit Facility, depending on our total Net Leverage Ratio, and annual letter of credit fees on the daily outstanding availability under outstanding letters of credit at the applicable LIBOR margin for the Revolving Credit Facility, depending on our total Net Leverage Ratio.

Extensions of credit under the Credit Agreement are secured by guarantees from substantially all of the Company’s active material domestic subsidiaries and by security interests in substantially all of Company’s and such subsidiaries’ assets.

The Credit Agreement contains a financial covenant that requires us to maintain specified maximum ratios or levels of consolidated total net debt to EBITDA, calculated as provided in the Credit Agreement. The Credit Agreement also contains various other affirmative and negative covenants customary for financings of this type that, subject to certain exceptions, impose restrictions and limitations on the Company and certain of the Company’s subsidiaries with respect to, among other things, indebtedness; liens; negative pledges; restricted payments (including dividends, distributions, buybacks, redemptions, repurchases with respect to equity interests, and payments, redemptions, retirements, purchases, acquisitions, defeasance, exchange, conversion, cancellation or termination with respect to junior lien, subordinated or unsecured debt); restrictions on subsidiary distributions; loans, advances, guarantees, acquisitions and other investments; mergers and other fundamental changes; sales and other dispositions of assets (including equity interests in subsidiaries); sale/leaseback transactions; transactions with affiliates; conduct of business; amendments and waivers of organizational documents and material junior debt agreements; and changes to fiscal year.

v3.20.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2020
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

11.

Commitments and Contingencies

 

Shareholder Lawsuits: Weiner Lawsuit, Consolidated Derivative Lawsuit, and Witmer Lawsuit

 

On November 6, 2017, United Healthcare issued a press release announcing expansion of its fitness benefits (“United Press Release”), and the market price of the Company's shares of common stock, par value $.001 per

share (“Common Stock”) dropped on that same day. In connection with the United Press Release, four lawsuits were filed against the Company. As further described below, three of the four lawsuits have been dismissed.  We are currently not able to predict the probable outcome of the remaining matter or to reasonably estimate a range of potential loss, if any.  We intend to vigorously defend ourselves against the remaining complaint.

 

On November 20, 2017, Eric Weiner, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased Common Stock between February 24, 2017 and November 3, 2017 (“Weiner Lawsuit”).  The Weiner Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming as defendants the Company, the Company's chief executive officer, chief financial officer and a former executive who served as both chief accounting officer and interim chief financial officer.  The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the United Press Release.  The complaint seeks monetary damages on behalf of the purported class.  On April 3, 2018, the Court entered an order appointing the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, designated counsel for the lead plaintiff, and established certain deadlines for the case.  On June 4, 2018, plaintiff filed a first amended complaint.   The Court denied the Company’s Motion to Dismiss on March 18, 2019 and the Company’s Motion to Reconsider on May 22, 2019. On January 29, 2020, the Court granted lead plaintiff’s motion to certify the class. On July 23, 2020, the United States Court of Appeals for the Sixth Circuit denied the Company’s application for permission to appeal the class certification ruling.  The case is currently set for trial on May 18, 2021.

 

On January 26, 2018 and August 24, 2018, individuals claiming to be stockholders of the Company filed shareholder derivative actions, on behalf of the Company, in the U.S. District Court for the Middle District of Tennessee, naming the Company as a nominal defendant and certain current and former executives and directors as defendants.  On October 15, 2018, the two complaints were consolidated (the “Consolidated Derivative Lawsuit”).  On May 15, 2019, a consolidated amended complaint was filed. The consolidated amended complaint asserts claims for violation of Section 10(b), 14(a), and 29(b) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. Plaintiffs seek to recover damages on behalf of the Company, certain corporate governance and internal procedural reforms, and other equitable relief. On June 14, 2019, the defendants filed a Motion to Dismiss all claims and the plaintiffs filed their opposition to the Motion to Dismiss on July 17, 2019. On October 22, 2019, the Consolidated Derivative Lawsuit was dismissed with prejudice. On November 20, 2019, plaintiffs filed a notice of appeal with the United States Circuit Court for the Sixth Circuit.  The parties have entered into a Memorandum of Understanding (“MOU”) to resolve the Consolidated Derivative Lawsuit, and on May 19, 2020, the case was remanded to the District Court to review for approval a forthcoming stipulation of settlement based on the terms set forth in the MOU.

 

Shareholder Lawsuits: Strougo, Cobb, and Delaware Lawsuits

 

On February 25, 2020, Robert Strougo, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased Common Stock between March 8, 2019 and February 19, 2020 (the "Strougo Lawsuit").  The Strougo Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming the Company, the Company's chief financial officer and former chief executive officer as defendants.  The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the performance of the Nutrisystem business that the Company acquired on March 8, 2019.  The complaint seeks monetary damages on behalf of the purported class.  Three parties have filed a motion seeking to be appointed lead plaintiff and counsel, but the Court has not ruled on those motions.  Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.

 

On April 9, 2020, John Cobb, claiming to be a stockholder of the Company, filed a derivative complaint in the United States District Court for the Middle District of Tennessee naming the Company as a nominal defendant and certain directors and the Company’s former chief executive officer and current chief financial officer as defendants (the “Cobb Lawsuit”). The complaint asserted claims for breach of Section 14(a) of the Exchange Act, breach of fiduciary duty, waste of corporate assets, failure of internal controls, and unjust enrichment, largely tracking the factual allegations in the Strougo Lawsuit. The plaintiff seeks monetary damages on behalf of the Company, restitution, and certain corporate governance and internal procedural reforms. On June 9, 2020, the United States Magistrate Judge approved the parties’ stipulation to a stay the case pending the resolution of defendants’ anticipated motion to dismiss in the Strougo case.  Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.  

 

In July 2020, three putative derivative complaints were filed in the United States District Court for the District of Delaware by the following individuals claiming to be stockholders of the Company: Patrick Yerby, Thomas R. Conte, Melvyn Klein, and Mark Ridendour (the “Delaware Derivative Lawsuits”).  The complaints largely track the allegations, named defendants, asserted claims, and requested relief of the Cobb Lawsuit.  Once the Delaware Derivative Lawsuits are consolidated by the District Court, the Company intends to seek a stay similar to that entered in the Cobb Lawsuit.

 

Given the uncertainty of litigation and the preliminary stage of the case, we are not currently able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any.  We intend to vigorously defend ourselves against the Strougo Lawsuit, Cobb Lawsuit, and Delaware Derivative Lawsuit.

 

Trademark Lawsuit: Pacific Packaging Lawsuit

 

On May 31, 2019, Pacific Packaging Concepts, Inc. (“Pacific Packaging”) filed a complaint in the U.S. District Court for the Central District of California, Western Division, naming as defendants two subsidiaries of the Company; Nutrisystem, Inc. and Nutri/System IPHC, Inc. In its complaint, Pacific Packaging alleged that the defendants’ use of Pacific Packaging’s federally registered trademark, Fresh Start, in advertisements for its weight management program and shakes constitutes federal trademark infringement, counterfeit trademark infringement, false designation of origin, federal trademark dilution, unfair competition, false advertising, common law unfair competition, and common law trademark infringement. The complaint seeks injunctive relief and monetary damages in an unspecified amount.  On August 29, 2019, the defendants filed their Answer to Complaint. Given the uncertainty of litigation and the preliminary stage of the case, we are currently not able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any. We intend to vigorously defend ourselves against this complaint.

 

Other

 

Additionally, from time to time, we are subject to contractual disputes, claims and legal proceedings that arise in the ordinary course of our business.  Some of the legal proceedings pending against us as of the date of this report are expected to be covered by insurance policies.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future.  We expense legal costs as incurred. 

v3.20.2
Fair Value Measurements
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements

12.

Fair Value Measurements

We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

Level 1: 

Quoted prices in active markets for identical assets or liabilities;

 

Level 2: 

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3: 

Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019.  

 

 

 

Level 2

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

44,407

 

 

$

16,238

 

The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using internal models and third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

We measure certain assets at fair value on a nonrecurring basis in the fourth quarter of each year, including the following:

 

reporting units measured at fair value as part of a goodwill impairment test; and

 

indefinite-lived intangible assets measured at fair value for impairment assessment.

Each of these assets above is classified as Level 3 within the fair value hierarchy.  The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company. In March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).

We estimated the fair value of each reporting unit using a combination of a discounted cash flow model and a market-based approach, and we reconciled the aggregate fair value of our reporting units to our consolidated market capitalization.  Estimating fair value requires significant judgments, including management’s estimate of future cash flows of each reporting unit (which is dependent on internal forecasts of projected income), estimation of the long-term growth rates of future revenues for our reporting units, the terminal growth rate of revenue, the tax rate, and determination of the weighted average cost of capital, as well as relevant comparable company revenue and earnings multiples and market participant acquisition premium for the market-based approaches. Changes in these estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each reporting unit.  There is significant uncertainty relating to the potential future impacts of the COVID-19 pandemic on our business and the overall market.

Certain significant inputs used in the estimation of fair value were adversely impacted by the changing market and economic conditions discussed above, most notably the weighted average cost of capital, resulting in a lower estimated fair value for each of our reporting units.  Before we performed the impairment analysis during the first quarter, the estimated fair value of the Nutrition reporting unit was equal to its carrying value due to an impairment loss we recorded in the fourth quarter of 2019.  Because there was no excess of estimated fair value over carrying value (“headroom”) for the Nutrition reporting unit at the beginning of 2020, the decrease in the estimated fair value of the Nutrition reporting unit during the first quarter of 2020 resulted in an impairment of the carrying value of

goodwill for the Nutrition reporting unit, and we recorded a $119.5 million goodwill impairment loss.  None of the impaired goodwill is deductible for tax purposes, and there is no cash tax benefit related to the impairment.  For the Healthcare reporting unit, the fair value of the reporting unit exceeded its carrying amount, and we determined that the carrying value of goodwill was not impaired.

Also during the first quarter of 2020, we estimated the fair value of indefinite-lived intangible assets, which consisted of two tradenames (the Nutrisystem tradename and the SilverSneakers tradename), using the relief-from-royalty method, which required significant assumptions such as the long-term growth rate of future revenues, the royalty rate for such revenue, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradenames. Similar to the goodwill impairment analysis described above, the discount rate used in the estimation of fair value of the tradenames was adversely impacted by the changing market and economic conditions discussed above, resulting in a lower estimated fair value for each tradename.    

Due to an impairment loss recorded in the fourth quarter of 2019 related to the Nutrisystem tradename and goodwill, the estimated fair value of the Nutrisystem tradename was equal to its carrying value at the beginning of 2020.  The decrease in the estimated fair value of the Nutrisystem tradename during the first quarter of 2020 resulted in an impairment of tradename, and we recorded an $80.0 million impairment loss related to the Nutrisystem tradename. None of this impairment loss is deductible for tax purposes, and there is no cash tax benefit related to the impairment.  Based on our impairment assessment of the SilverSneakers tradename, we determined that the carrying value of the tradename was not impaired as of the measurement date.

There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

Fair Value of Other Financial Instruments

The estimated fair value of each class of financial instruments at June 30, 2020 was as follows:

Cash and cash equivalents The carrying amount of $60.3 million approximates fair value due to the short maturity of those instruments (less than three months).

Debt The estimated fair value of outstanding borrowings under the Credit Agreement, which includes term loan facilities and a revolving credit facility (see Note 10), is determined based on the fair value hierarchy as discussed above.

The Term Loans are actively traded and therefore are classified as Level 1 valuations. The estimated fair value is based on quotes as of June 30, 2020 from dealers who stand ready and willing to transact at those prices. The Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for similar instruments.  The estimated fair value and carrying amount of outstanding borrowings under the Term Loans at June 30, 2020 were $921.2 million and $1,012.3 million, respectively.  There were no outstanding borrowings under the Revolving Credit Facility at June 30, 2020.  

v3.20.2
Derivative Instruments and Hedging Activities
6 Months Ended
Jun. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

13.

Derivative Instruments and Hedging Activities

We use derivative instruments to manage differences in the amount, timing, and duration of our known or expected cash payments related to our outstanding debt (i.e., interest rate risk).  These derivatives are designated and qualify as a hedge of the exposure to variability in expected future cash flows and are therefore considered cash flow hedges.  We account for derivatives in accordance with FASB ASC Topic 815, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet at fair value as either an asset or liability.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We classify cash flows from settlement of our cash flow hedges in the same category as the cash flows from the related hedged items, generally within the operating activities in the consolidated statements of cash flows.  We do not use derivatives for trading or speculative purposes and currently do not have any derivatives that are not designated as hedges.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.  The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance by such counterparties. However, at June 30, 2020, we do not anticipate nonperformance by these counterparties. Our interest rate swap agreements with each of the counterparties contain a provision whereby if we either default or are capable of being declared in default on any of our indebtedness, whether or not such default results in repayment of the indebtedness being accelerated by the lender, then we could also be declared in default on our derivative obligations.

Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024.  Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2% plus a spread (see Note 10).  As of June 30, 2020, these interest rate swap agreements had current notional amounts totaling $800.0 million.  

We record derivatives that are designated and qualify as cash flow hedges at estimated fair value in the consolidated balance sheet, with the related gains and losses recorded in accumulated other comprehensive income or loss ("accumulated OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earningsAmounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as we make interest payments on our variable-rate debt.  As of June 30, 2020, we expect to reclassify $15.8 million from accumulated OCI as an increase to interest expense within the next 12 months due to the scheduled payment of interest associated with our debt.

The estimated gross fair values of derivative instruments and their classification on the consolidated balance sheet at June 30, 2020 and December 31, 2019 were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

Current portion of long-term liabilities

 

$

15,664

 

 

$

4,947

 

Other long-term liabilities

 

 

28,743

 

 

 

11,291

 

 

 

$

44,407

 

 

$

16,238

 

 

The following table presents the effect of cash flow hedge accounting on accumulated OCI as of June 30, 2020 and 2019:

 

(In thousands)

 

For the Three Months

Ended

 

 

For the Six Months

Ended

 

Derivatives in Cash Flow Hedging Relationships

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Loss related to effective portion of derivatives

   recognized in accumulated OCI, gross of

   tax effect

 

$

5,020

 

 

$

16,144

 

 

$

32,772

 

 

$

16,144

 

Gain (loss) related to effective portion of

   derivatives reclassified from accumulated

   OCI to interest expense, gross of tax effect

 

$

(3,482

)

 

$

160

 

 

$

(4,603

)

 

$

160

 

 

v3.20.2
Earnings (Loss) Per Share
6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Earnings (Loss) Per Share

14.  Earnings (Loss) Per Share

We use the two-class method to calculate earnings per share as the unvested restricted stock awards outstanding under our equity incentive plan are participating shares with nonforfeitable rights to dividends. Under the two-class method, we compute earnings per share of Common Stock by dividing the sum of distributed earnings to common stockholders (currently not applicable as we do not pay dividends) and undistributed earnings allocated to common stockholders by the weighted average number of outstanding shares of Common Stock for the period.  In applying the two-class method, we allocate undistributed earnings to both shares of Common Stock and participating securities based on the number of weighted average shares outstanding during the period. Any undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses.  Following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019:

 

(In thousands except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

28,511

 

 

$

18,137

 

 

$

(169,595

)

 

$

22,351

 

Net income allocated to unvested restricted stock

 

 

(20

)

 

 

(93

)

 

 

 

 

 

(77

)

Net income (loss) allocated to shares of Common Stock

 

$

28,491

 

 

$

18,044

 

 

$

(169,595

)

 

$

22,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for basic income (loss) per share

 

 

48,711

 

 

 

47,790

 

 

 

48,662

 

 

 

45,165

 

Effect of dilutive stock options and

   restricted stock units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

8

 

 

 

93

 

 

 

 

 

 

110

 

Restricted stock units

 

 

75

 

 

 

578

 

 

 

 

 

 

444

 

Shares used for diluted income (loss) per share (1)

 

 

48,794

 

 

 

48,461

 

 

 

48,662

 

 

 

45,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.38

 

 

$

(3.49

)

 

$

0.49

 

Diluted (1)

 

$

0.58

 

 

$

0.37

 

 

$

(3.49

)

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities outstanding not included in the

   computation of earnings per share

   because their effect is anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

235

 

 

 

71

 

 

 

202

 

 

 

76

 

Restricted stock units

 

 

750

 

 

 

288

 

 

 

544

 

 

 

172

 

Restricted stock awards

 

 

32

 

 

 

128

 

 

 

35

 

 

 

64

 

Performance-based stock units

 

 

95

 

 

 

 

 

 

64

 

 

 

 

Market-based stock units

 

 

49

 

 

 

 

 

 

25

 

 

 

 

 

 

(1)

The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.

 

Market stock units and performance stock units outstanding are considered contingently issuable shares, and certain of these stock units were excluded from the calculations of diluted earnings per share for all periods presented as the performance criteria had not been met as of the end of the reporting periods.

v3.20.2
Accumulated OCI
6 Months Ended
Jun. 30, 2020
Accumulated Other Comprehensive Income Loss Net Of Tax [Abstract]  
Accumulated OCI

15. Accumulated OCI

 

The following tables summarize the changes in accumulated OCI, net of tax, for the six months ended June 30, 2020:

 

(In thousands)

 

Net Change in Fair Value of Interest Rate Swaps

 

Accumulated OCI, net of tax, as of January 1, 2020

 

$

(12,091

)

Other comprehensive income (loss) before reclassifications, net of tax of $8,370

 

 

(24,402

)

Amounts reclassified from accumulated OCI, net of tax of $1,175

 

 

3,428

 

Accumulated OCI, net of tax, as of June 30, 2020

 

$

(33,065

)

 

The following table presents details about reclassifications out of accumulated OCI for the six months ended June 30, 2020:

 

(In thousands)

 

Six Months Ended June, 2020

 

 

Statement of Operations Classification

Interest rate swaps

 

$

4,603

 

 

Interest expense

 

 

 

(1,175

)

 

Income tax expense

 

 

$

3,428

 

 

Net of tax

 

See Note 13 for a further discussion of our interest rate swaps.

v3.20.2
Segment Disclosures and Concentrations of Risk
6 Months Ended
Jun. 30, 2020
Segment Reporting [Abstract]  
Segment Disclosures and Concentrations of Risk

16. Segment Disclosures and Concentrations of Risk  

 

Background and Basis of Organization

 

Following the acquisition of Nutrisystem in March 2019, we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment derives its revenues from SilverSneakers senior fitness, Prime Fitness and WholeHealth Living.  The Nutrition segment provides weight management products and services and derives its revenues from Nutrisystem and South Beach Diet products. Prior to the acquisition of Nutrisystem, we had one reportable segment.   

 

Segment Revenues, Profit or Loss, and Assets

 

Our chief operating decision maker evaluates performance and allocates resources based on each segment’s EBITDA excluding acquisition and integration costs, impairment loss, restructuring and related charges, CEO transition costs, and direct, incremental costs related to COVID-19.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transactions between the segments primarily consist of payments made by one segment on behalf of the other segment, which are recorded as current assets and eliminated in consolidation. Intersegment revenues and costs related to Wisely Well totaled $1.9 million for the three and six months ended June 30, 2020. The following tables present information about reported segment revenues and profit or loss, net of intersegment eliminations, as well as reconciliations of each such amount to consolidated totals:

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

81,923

 

 

$

180,675

 

 

$

262,598

 

 

$

157,481

 

 

$

182,896

 

 

$

340,377

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

 

 

$

34,618

 

 

 

 

 

 

 

 

 

 

$

26,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

2,049

 

 

 

 

 

 

 

 

 

 

 

8,999

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

1,745

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,009

 

 

 

 

 

 

 

 

 

 

 

2,352

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

21,235

 

 

 

 

 

 

 

 

 

 

 

23,661

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

12,919

 

 

 

 

 

 

 

 

 

 

 

9,084

 

 

Adjusted EBITDA

 

$

41,472

 

 

$

33,363

 

 

$

74,835

 

 

$

35,681

 

 

$

34,667

 

 

$

70,348

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

241,615

 

 

$

358,638

 

 

$

600,253

 

 

$

314,008

 

 

$

240,463

 

 

$

554,471

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income (loss) before income taxes

 

 

 

 

 

 

 

 

 

$

(178,633

)

 

 

 

 

 

 

 

 

 

$

35,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

4,844

 

 

 

 

 

 

 

 

 

 

 

26,049

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

199,500

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

4,332

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,752

 

 

 

 

 

 

 

 

 

 

 

3,943

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

42,898

 

 

 

 

 

 

 

 

 

 

 

31,328

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

27,682

 

 

 

 

 

 

 

 

 

 

 

12,666

 

 

Adjusted EBITDA

 

$

71,719

 

 

$

31,916

 

 

$

103,635

 

 

$

61,810

 

 

$

48,010

 

 

$

109,820

 

 

 

 

(1)

The figure for total segments equals the consolidated figure for such item.

 

Our total assets by segment were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Healthcare

 

$

527,353

 

 

$

526,013

 

Nutrition

 

 

853,817

 

 

 

1,099,892

 

Total assets

 

$

1,381,170

 

 

$

1,625,905

 

 

Concentrations of Risk

As of June 30, 2020, we were subject to concentration of revenue risk related to the services that we provide.  For the three and six months ended June 30, 2020, a significant portion (19% and 28%, respectively) of our consolidated revenues was derived from our SilverSneakers senior fitness offering, in which a meaningful amount of our fees is earned based on member visits to fitness partner locations.  Due to widespread closures of our partner locations beginning in March 2020 related to the COVID-19 pandemic, there was a significant decrease in member participation and the related revenues during March 2020, with visits decreasing sharply by the end of March. A substantial number of our fitness partner locations remained closed for at least a portion of the second quarter.  During the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.  These adverse impacts to revenue were somewhat mitigated by a reduction in cost of services as our visit costs decreased in a corresponding manner.

v3.20.2
Basis of Presentation and Recent Developments (Policies)
6 Months Ended
Jun. 30, 2020
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Basis of Presentation and Recent Developments

 

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Tivity Health®, Inc. and its wholly-owned subsidiaries, including the results of Nutrisystem®, Inc. (“Nutrisystem”) acquired on March 8, 2019 (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.  In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period.  By their nature, estimates are subject to an inherent degree of uncertainty.  Due to the significant uncertainty relating to the potential future impacts of the coronavirus pandemic on our business and the overall market, actual results could differ from those estimates, including, but not limited to, estimates of fair value of goodwill and indefinite-lived intangible assets, allowances for doubtful accounts, and valuation allowances on deferred tax assets.  Our consolidated statements of operations include results of Nutrisystem from March 8, 2019 forward.  We have reclassified certain items in prior periods to conform to current classifications.

 

Following the acquisition of Nutrisystem (the “Merger”), we organize and manage our operations within two reportable segments, based on the types of products and services they offer: Healthcare and Nutrition.  The Healthcare segment is comprised of our legacy business and includes SilverSneakers® senior fitness, Prime® Fitness, WholeHealth Living® and Wisely WellTM.  The Nutrition segment is comprised of Nutrisystem’s legacy business and includes the Nutrisystem® and the South Beach Diet® programs.

 

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes.  You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Developments

 

In January 2020, the Secretary of the U.S. Department of Health and Human Services (“HHS”) declared a national public health emergency due to a novel strain of coronavirus, which causes the disease known as “COVID-19”.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and COVID-19 continues to spread throughout the United States and other countries.  Many state and local governments, together with public health officials, have recommended and mandated precautions to mitigate the spread of COVID-19, including ordering closure of certain businesses and imposing stay-at-home orders and social distancing guidelines for individuals. Such measures have resulted in significantly reduced demand for many businesses that have continued in operation.  

 

By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location. A substantial number of our fitness partner locations remained closed through April, with some locations reopening in May and additional locations reopening in June.  For the month of June 2020, approximately 66% of our fitness partner locations reported at least one visit from our SilverSneakers program.  For the second quarter of 2020, the average monthly total participation levels of our SilverSneakers members were significantly below historical levels, and we also experienced a decline in paid subscribers for Prime Fitness, each of which adversely impacted revenues in our Healthcare segment.   

 

We do not believe that COVID-19-related developments had a material impact on the results of operations or cash flows of our Nutrition segment for the first or second quarters of 2020.  While overall we did not experience any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we experienced delays in fulfilling orders for our Nutrition segment’s products at certain of our warehouses due to some employees of our fulfillment provider testing positive for COVID-19.  As a result, we incurred incremental expense of $1.3 million in the second quarter related to increased labor rates and

overtime for employees of our fulfillment provider as well as additional shipping and related charges as we transferred the fulfillment of certain orders to other warehouses that were farther from the customer’s delivery destination.

 

We have taken a number of actions in response to the pandemic, including the following:

 

 

Given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our Revolving Credit Facility as a precautionary measure to increase our cash position and maintain financial flexibility. We repaid such $75 million in full in June 2020.  As of June 30, 2020, outstanding debt under our credit agreement was $1,012.3 million, and we had $60.3 million of cash and cash equivalents.  In July 2020, we repaid $24.8 million of principal on the term loans under our credit agreement, resulting in our next required quarterly installment being due in December 2021. As of June 30, 2020, we had a working capital deficit of $5.7 million.  While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement (as defined below) will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

 

 

We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include implementing remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements.

 

 

We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other COVID-19-related legislation, curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  

 

 

o

In April 2020, we furloughed 13% of our approximately 1,000 employees. In June 2020, some of these furloughed employees’ positions were eliminated (in addition to other position eliminations, resulting in approximately 8% of our employees being terminated), and we extended the furlough for substantially all of the remaining furloughed employees through the end of 2020. Also in June 2020, we placed an additional 2% of our total employees on furlough through the end of 2020.  

 

 

o

Also in April 2020, the Compensation Committee of the Company’s Board of Directors (the “Board”) approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  In June 2020, the Compensation Committee determined to extend such reductions in base salary through December 31, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who stood for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  In June 2020, the Board determined to extend such reduction in cash compensation to the Board through December 31, 2020.

 

 

o

Effective at the end of July 2020, the Compensation Committee suspended the Company matching contribution to the Company’s 401(k) plan.

 

As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill (for each of our reporting units) and indefinite-lived intangible assets (which consist of the Nutrisystem tradename and the SilverSneakers tradename).  Through this evaluation, management concluded that the fair value of goodwill allocated to the

Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment. There were no impairment triggers during the second quarter of 2020 related to our goodwill or indefinite-lived intangible assets.

Recent Relevant Accounting Standards

 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”.  ASC 848 contains temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, such as a transition away from the use of LIBOR.  ASC 848 was effective for the Company as of January 1, 2020.  The provisions of ASC 848 are available through December 31, 2022, at which time the reference rate replacement activity is expected to have been completed.  The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level.  The accounting relief provided by ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. Modifications that are unrelated to reference rate reform will scope out a given contract.  ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable.  For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis.  In March 2020, we elected the expedient that allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform.  In addition, we have the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848.  In June 2020, we elected to (i) continue the method of assessing effectiveness as documented in the original hedge documentation and (ii) apply the expedient wherein the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument.  We will also apply the aforementioned elections to any future designated cash flow hedging relationship.

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" (“ASU 2018-16”), which adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. As of March 31, 2020, the benchmark interest rate in our existing interest rate swap agreements is LIBOR. The adoption of this standard did not have an impact on our financial position, results of operations, or cash flows. 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.  ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted ASU 2017-04 on October 1, 2019.  As further discussed in Note 12, we recorded impairment losses related to goodwill during the fourth quarter of 2019 and the first quarter of 2020.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which changes the fair value measurement disclosure requirements of ASC 820.  ASU 2018-13 is effective for fiscal years beginning on or after December 15, 2019, including interim periods therein, and is generally required to be applied retrospectively, except for certain components that are to be applied prospectively.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement. This standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal

years. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires companies to measure credit losses for financial assets held at the reporting date utilizing a methodology that reflects current expected credit losses over the lifetime of such assets.  ASU 2016-13 was effective for the Company on January 1, 2020 and is generally required to be applied using the modified retrospective approach, with limited exceptions for specific instruments.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

v3.20.2
Revenue Recognition (Tables)
6 Months Ended
Jun. 30, 2020
Summary of Information about Contract Assets and Contract Liabilities from Contracts with Customers

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Contract assets

 

$

243

 

 

$

95

 

Contract liabilities

 

$

10,937

 

 

$

10,911

 

Significant changes in the contract liabilities (deferred revenue) balance during the period are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2020

 

Revenue recognized that was included in the contract liability (deferred revenue) balance on January 1, 2020

 

$

(2,395

)

 

$

(8,112

)

Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue, and (decreases) due to returns

 

$

(71

)

 

$

8,138

 

Summary of Revenue from Prepaid Gift Cards Expected to be Recognized in Future Related to Performance Obligation Unsatisfied or Partially Satisfied

The following table includes estimated revenue from the prepaid gift cards expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period:

 

(In thousands)

 

 

 

 

Remaining 2020

 

$

1,789

 

2021

 

 

1,901

 

2022

 

 

1,192

 

2023

 

 

468

 

2024

 

 

297

 

2025

 

 

220

 

 

 

$

5,867

 

Healthcare  
Summary of Revenue Disaggregated

The following table sets forth Healthcare revenue disaggregated by program.  Revenue from our SilverSneakers program is predominantly contracted with Medicare Advantage and Medicare Supplement plans.

 

(In thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

SilverSneakers

 

$

49,157

 

 

$

122,899

 

 

$

170,764

 

 

$

245,922

 

Prime Fitness

 

 

19,047

 

 

 

29,751

 

 

 

51,858

 

 

 

58,494

 

WholeHealth Living

 

 

4,747

 

 

 

4,467

 

 

 

9,796

 

 

 

9,041

 

Other (1)

 

 

8,972

 

 

 

364

 

 

 

9,197

 

 

 

551

 

 

 

$

81,923

 

 

$

157,481

 

 

$

241,615

 

 

$

314,008

 

 

 

(1)

For the three and six months ended June 30, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer as well as $2.1 million of Wisely Well revenue.

Nutrition  
Summary of Revenue Disaggregated

The following table sets forth Nutrition segment revenue, from March 8, 2019 forward, disaggregated by the source of revenue:

 

(In thousands)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Nutrisystem direct to consumer

 

$

165,118

 

 

$

155,976

 

 

$

320,509

 

 

$

203,977

 

South Beach Diet direct to consumer

 

 

8,650

 

 

 

14,464

 

 

$

21,414

 

 

 

19,118

 

Retail

 

 

3,902

 

 

 

8,728

 

 

 

9,350

 

 

 

13,032

 

QVC

 

 

2,901

 

 

 

3,522

 

 

 

7,088

 

 

 

4,044

 

Other

 

 

104

 

 

 

206

 

 

 

277

 

 

 

292

 

 

 

$

180,675

 

 

$

182,896

 

 

$

358,638

 

 

$

240,463

 

v3.20.2
Intangible Assets and Goodwill (Tables)
6 Months Ended
Jun. 30, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Schedule of Reconciliation of Our Goodwill A reconciliation of our goodwill balance is as follows:

 

(In thousands)

 

Healthcare

 

 

Nutrition

 

 

Consolidated

 

Balance, January 1, 2020

 

$

334,680

 

 

$

319,955

 

 

$

654,635

 

Impairment loss

 

 

 

 

 

(119,500

)

 

$

(119,500

)

Balance, June 30, 2020

 

$

334,680

 

 

$

200,455

 

 

$

535,135

 

 

At June 30, 2020 and December 31, 2019, intangible assets not subject to amortization consist of tradenames of $509.0 million and $589.0 million, respectively.

 

v3.20.2
Leases (Tables)
6 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Schedule of Components of Lease Expense

The following table shows the components of lease expense for the three and six months ended June 30, 2020 and 2019:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of leased

   assets

 

$

162

 

 

$

12

 

 

$

324

 

 

$

24

 

Interest of lease liabilities

 

 

22

 

 

 

2

 

 

 

47

 

 

 

4

 

Operating lease cost

 

 

3,675

 

 

 

3,804

 

 

 

7,350

 

 

 

6,520

 

Short-term lease cost

 

 

137

 

 

 

116

 

 

 

266

 

 

 

149

 

Total lease cost before subleases

 

$

3,996

 

 

$

3,934

 

 

$

7,987

 

 

$

6,697

 

Sublease income

 

 

(1,363

)

 

 

(1,356

)

 

 

(2,764

)

 

 

(2,700

)

Total lease cost, net

 

$

2,633

 

 

$

2,578

 

 

$

5,223

 

 

$

3,997

 

Schedule of Supplemental Cash Flow Information Related to Leases

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash paid for amounts included in the

   measurement of lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow attributable to operating leases

 

$

(2,545

)

 

$

(3,561

)

 

$

(5,611

)

 

$

(5,108

)

Operating cash flow attributable to

   finance leases

 

 

(22

)

 

 

(2

)

 

 

(47

)

 

 

(4

)

Financing cash flow attributable to

   finance leases

 

 

(155

)

 

 

(11

)

 

 

(306

)

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental noncash information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for

   operating lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

48,972

 

Right-of-use assets obtained in exchange for

   finance lease liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

181

 

 

 

(1)

No new leases were entered into during the six months ended June 30, 2019.  Amounts shown are due to the adoption of ASC 842 and reflect balances as of January 1, 2019 for the Healthcare segment and as of March 8, 2019 for the Nutrition segment (i.e., the date of our acquisition of Nutrisystem).

v3.20.2
Debt (Tables)
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Summary of Debt, Net of Unamortized Deferred Loan Costs And Original Issue Discount

The Company's debt, net of unamortized deferred loan costs and original issue discount, consisted of the following at June 30, 2020 and December 31, 2019:

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Term Loan A

 

$

280,000

 

 

$

288,750

 

Term Loan B

 

 

775,000

 

 

 

786,250

 

Revolving Credit Facility

 

 

 

 

 

19,850

 

 

 

 

1,055,000

 

 

 

1,094,850

 

Less: deferred loan costs and original issue discount

 

 

(42,678

)

 

 

(46,723

)

     Total debt

 

 

1,012,322

 

 

 

1,048,127

 

Less: current portion

 

 

(9,775

)

 

 

 

     Total non-current portion of debt

 

$

1,002,547

 

 

$

1,048,127

 

  

v3.20.2
Fair Value Measurements (Tables)
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Schedule of Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019.  

 

 

 

Level 2

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

$

44,407

 

 

$

16,238

 

v3.20.2
Derivative Instruments and Hedging Activities (Tables)
6 Months Ended
Jun. 30, 2020
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Schedule of Estimated Gross Fair Values of Derivative Instruments and Their Classification on Consolidated Balance Sheet

The estimated gross fair values of derivative instruments and their classification on the consolidated balance sheet at June 30, 2020 and December 31, 2019 were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Liabilities:

 

 

 

 

 

 

 

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

Current portion of long-term liabilities

 

$

15,664

 

 

$

4,947

 

Other long-term liabilities

 

 

28,743

 

 

 

11,291

 

 

 

$

44,407

 

 

$

16,238

 

Schedule of Effect of Cash Flow Hedge Accounting on Accumulated OCI

The following table presents the effect of cash flow hedge accounting on accumulated OCI as of June 30, 2020 and 2019:

 

(In thousands)

 

For the Three Months

Ended

 

 

For the Six Months

Ended

 

Derivatives in Cash Flow Hedging Relationships

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Loss related to effective portion of derivatives

   recognized in accumulated OCI, gross of

   tax effect

 

$

5,020

 

 

$

16,144

 

 

$

32,772

 

 

$

16,144

 

Gain (loss) related to effective portion of

   derivatives reclassified from accumulated

   OCI to interest expense, gross of tax effect

 

$

(3,482

)

 

$

160

 

 

$

(4,603

)

 

$

160

 

v3.20.2
Earnings (Loss) Per Share (Tables)
6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Reconciliation of the Numerator and Denominator of Basic and Diluted Earnings (Loss) Per Share Following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019:

(In thousands except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

28,511

 

 

$

18,137

 

 

$

(169,595

)

 

$

22,351

 

Net income allocated to unvested restricted stock

 

 

(20

)

 

 

(93

)

 

 

 

 

 

(77

)

Net income (loss) allocated to shares of Common Stock

 

$

28,491

 

 

$

18,044

 

 

$

(169,595

)

 

$

22,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for basic income (loss) per share

 

 

48,711

 

 

 

47,790

 

 

 

48,662

 

 

 

45,165

 

Effect of dilutive stock options and

   restricted stock units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

8

 

 

 

93

 

 

 

 

 

 

110

 

Restricted stock units

 

 

75

 

 

 

578

 

 

 

 

 

 

444

 

Shares used for diluted income (loss) per share (1)

 

 

48,794

 

 

 

48,461

 

 

 

48,662

 

 

 

45,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.38

 

 

$

(3.49

)

 

$

0.49

 

Diluted (1)

 

$

0.58

 

 

$

0.37

 

 

$

(3.49

)

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive securities outstanding not included in the

   computation of earnings per share

   because their effect is anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualified stock options

 

 

235

 

 

 

71

 

 

 

202

 

 

 

76

 

Restricted stock units

 

 

750

 

 

 

288

 

 

 

544

 

 

 

172

 

Restricted stock awards

 

 

32

 

 

 

128

 

 

 

35

 

 

 

64

 

Performance-based stock units

 

 

95

 

 

 

 

 

 

64

 

 

 

 

Market-based stock units

 

 

49

 

 

 

 

 

 

25

 

 

 

 

 

 

(1)

The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.

v3.20.2
Accumulated OCI (Tables)
6 Months Ended
Jun. 30, 2020
Accumulated Other Comprehensive Income Loss Net Of Tax [Abstract]  
Changes in Accumulated OCI

The following tables summarize the changes in accumulated OCI, net of tax, for the six months ended June 30, 2020:

 

(In thousands)

 

Net Change in Fair Value of Interest Rate Swaps

 

Accumulated OCI, net of tax, as of January 1, 2020

 

$

(12,091

)

Other comprehensive income (loss) before reclassifications, net of tax of $8,370

 

 

(24,402

)

Amounts reclassified from accumulated OCI, net of tax of $1,175

 

 

3,428

 

Accumulated OCI, net of tax, as of June 30, 2020

 

$

(33,065

)

Schedule of Reclassifications Out of Accumulated OCI

The following table presents details about reclassifications out of accumulated OCI for the six months ended June 30, 2020:

 

(In thousands)

 

Six Months Ended June, 2020

 

 

Statement of Operations Classification

Interest rate swaps

 

$

4,603

 

 

Interest expense

 

 

 

(1,175

)

 

Income tax expense

 

 

$

3,428

 

 

Net of tax

v3.20.2
Segment Disclosures and Concentrations of Risk (Tables)
6 Months Ended
Jun. 30, 2020
Segment Reporting [Abstract]  
Schedule of Reported Segment Revenues and Profit or Loss, Net of Intersegment Eliminations, and Reconciliation The following tables present information about reported segment revenues and profit or loss, net of intersegment eliminations, as well as reconciliations of each such amount to consolidated totals:

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

81,923

 

 

$

180,675

 

 

$

262,598

 

 

$

157,481

 

 

$

182,896

 

 

$

340,377

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income before income taxes

 

 

 

 

 

 

 

 

 

$

34,618

 

 

 

 

 

 

 

 

 

 

$

26,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

2,049

 

 

 

 

 

 

 

 

 

 

 

8,999

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

1,745

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,009

 

 

 

 

 

 

 

 

 

 

 

2,352

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

21,235

 

 

 

 

 

 

 

 

 

 

 

23,661

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

12,919

 

 

 

 

 

 

 

 

 

 

 

9,084

 

 

Adjusted EBITDA

 

$

41,472

 

 

$

33,363

 

 

$

74,835

 

 

$

35,681

 

 

$

34,667

 

 

$

70,348

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

2019

 

 

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Healthcare

 

 

Nutrition

 

 

Total

Segments

 

 

Revenues

 

$

241,615

 

 

$

358,638

 

 

$

600,253

 

 

$

314,008

 

 

$

240,463

 

 

$

554,471

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated income (loss) before income taxes

 

 

 

 

 

 

 

 

 

$

(178,633

)

 

 

 

 

 

 

 

 

 

$

35,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition and integration costs

 

 

 

 

 

 

 

 

 

 

4,844

 

 

 

 

 

 

 

 

 

 

 

26,049

 

 

Impairment loss

 

 

 

 

 

 

 

 

 

 

199,500

 

 

 

 

 

 

 

 

 

 

 

 

 

CEO transition costs

 

 

 

 

 

 

 

 

 

 

4,332

 

 

 

 

 

 

 

 

 

 

 

 

 

COVID-19 costs

 

 

 

 

 

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

 

 

 

 

 

 

 

 

 

 

1,752

 

 

 

 

 

 

 

 

 

 

 

3,943

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

42,898

 

 

 

 

 

 

 

 

 

 

 

31,328

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

27,682

 

 

 

 

 

 

 

 

 

 

 

12,666

 

 

Adjusted EBITDA

 

$

71,719

 

 

$

31,916

 

 

$

103,635

 

 

$

61,810

 

 

$

48,010

 

 

$

109,820

 

 

 

 

(1)

The figure for total segments equals the consolidated figure for such item.

Schedule of Total Assets by Segment

Our total assets by segment were as follows:

 

(In thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Healthcare

 

$

527,353

 

 

$

526,013

 

Nutrition

 

 

853,817

 

 

 

1,099,892

 

Total assets

 

$

1,381,170

 

 

$

1,625,905

 

v3.20.2
Basis of Presentation and Recent Developments - Additional Information (Details)
1 Months Ended 3 Months Ended 6 Months Ended
Mar. 07, 2019
Segment
Jul. 31, 2020
USD ($)
Jun. 30, 2020
USD ($)
Apr. 30, 2020
Employee
Jun. 30, 2020
USD ($)
Mar. 31, 2020
USD ($)
Jun. 30, 2020
USD ($)
Segment
Dec. 31, 2019
USD ($)
Jun. 30, 2019
USD ($)
Dec. 31, 2018
USD ($)
Basis Of Presentation And Recent Developments [Line Items]                    
Number of reportable segments | Segment 1           2      
Outstanding debt     $ 1,012,322,000   $ 1,012,322,000   $ 1,012,322,000 $ 1,048,127,000    
Cash and cash equivalents     60,274,000   60,274,000   60,274,000 $ 2,486,000 $ 4,404,000 $ 1,933,000
Working capital deficit     5,700,000   5,700,000   $ 5,700,000      
Percentage of employees furloughed       13.00%            
Number of employees | Employee       1,000            
Percentage of employees terminated             8.00%      
Percentage of additional employees furloughed             2.00%      
Impairment of goodwill and intangible assets             $ 199,500,000      
Impairment loss of intangibles         0          
Impairment loss of goodwill         0 $ 119,500,000 119,500,000      
Nutrisystem                    
Basis Of Presentation And Recent Developments [Line Items]                    
Impairment loss of goodwill             119,500,000      
Nutrisystem | Tradename                    
Basis Of Presentation And Recent Developments [Line Items]                    
Impairment loss of intangibles           80,000,000.0 $ 80,000,000.0      
Executive Officers and Other Employees                    
Basis Of Presentation And Recent Developments [Line Items]                    
Percentage of reduction in base salary       25.00%            
Non-management Members of Board                    
Basis Of Presentation And Recent Developments [Line Items]                    
Percentage of reduction in annual cash retainer and annual committee retainers payable             100.00%      
Reduction period of annual cash retainer and annual committee retainers payable             4 months      
Revolving Credit Facility                    
Basis Of Presentation And Recent Developments [Line Items]                    
Borrowed under revolving credit facility used to increase cash position     0   0   $ 0      
Credit Agreement                    
Basis Of Presentation And Recent Developments [Line Items]                    
Outstanding debt     $ 1,012,300,000   1,012,300,000   1,012,300,000      
Credit Agreement | Subsequent Event                    
Basis Of Presentation And Recent Developments [Line Items]                    
Repayment of principal on the term loan   $ 24,800,000                
COVID-19                    
Basis Of Presentation And Recent Developments [Line Items]                    
Incremental expense incurred due to shortage of workers         $ 1,300,000          
COVID-19 | Credit Agreement | Revolving Credit Facility                    
Basis Of Presentation And Recent Developments [Line Items]                    
Borrowed under revolving credit facility used to increase cash position           $ 75,000,000        
Repayment of revolving credit facility             $ 75,000,000      
SilverSneakers                    
Basis Of Presentation And Recent Developments [Line Items]                    
Percentage of fitness partner locations having at least one visit     66.00%              
v3.20.2
Revenue Recognition - Additional Information (Details)
3 Months Ended 4 Months Ended 6 Months Ended
Mar. 07, 2019
Segment
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
Segment
Program
Obligation
Source
Jun. 30, 2019
USD ($)
Dec. 31, 2019
USD ($)
Disaggregation Of Revenue [Line Items]              
Number of reportable segments | Segment 1       2    
Revenue, Practical Expedient, Initial Application and Transition, Qualitative Assessment         true    
Revenue [1]   $ 262,598,000 $ 340,377,000   $ 600,253,000 $ 554,471,000  
Healthcare              
Disaggregation Of Revenue [Line Items]              
Number of programs | Program         3    
Number of performance obligations | Obligation         1    
Number of performance obligation unsatisfied | Obligation         0    
Revenue recognized from performance obligations satisfied in prior period   0     $ 0    
Period of billing in arrears once timing of services to customers is known         1 month    
Number of days for customer to make payment after being invoiced         30 days    
Capitalized costs   700,000     $ 700,000   $ 500,000
Number of reportable segments | Segment         2    
Revenue   81,923,000 157,481,000   $ 241,615,000 314,008,000  
Nutrition              
Disaggregation Of Revenue [Line Items]              
Number of sources for revenue recognition | Source         4    
Description of return of obligation         Direct to consumer customers may return unopened ready-to-go Nutrisystem products within 30 days after purchase in order to receive a refund or credit.    
Return of purchase order to refund or credit, period         30 days    
Purchase order canceled of delivery, period         14 days    
Revenue   180,675,000 182,896,000   $ 358,638,000 $ 240,463,000  
Provision for estimated returns   4,100,000 5,600,000 $ 7,000,000.0 9,300,000    
Nutrition | Accrued Liabilities              
Disaggregation Of Revenue [Line Items]              
Reserve for estimated returns   1,400,000     1,400,000   $ 800,000
Nutrition | Shipping and Handling Charges              
Disaggregation Of Revenue [Line Items]              
Revenue   $ 6,500,000 $ 6,300,000 $ 8,100,000 $ 13,000,000.0    
[1] The figure for total segments equals the consolidated figure for such item.
v3.20.2
Revenue Recognition - Summary of Revenue Disaggregated by Program (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Disaggregation Of Revenue [Line Items]        
Revenue [1] $ 262,598 $ 340,377 $ 600,253 $ 554,471
Other        
Disaggregation Of Revenue [Line Items]        
Revenue 6,800   6,800  
Healthcare        
Disaggregation Of Revenue [Line Items]        
Revenue 81,923 157,481 241,615 314,008
Healthcare | SilverSneakers        
Disaggregation Of Revenue [Line Items]        
Revenue 49,157 122,899 170,764 245,922
Healthcare | Prime Fitness        
Disaggregation Of Revenue [Line Items]        
Revenue 19,047 29,751 51,858 58,494
Healthcare | WholeHealth Living        
Disaggregation Of Revenue [Line Items]        
Revenue 4,747 4,467 9,796 9,041
Healthcare | Other        
Disaggregation Of Revenue [Line Items]        
Revenue [2] $ 8,972 $ 364 $ 9,197 $ 551
[1] The figure for total segments equals the consolidated figure for such item.
[2]

For the three and six months ended June 30, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer as well as $2.1 million of Wisely Well revenue.

v3.20.2
Revenue Recognition - Summary of Revenue Disaggregated by Program (Parenthetical) (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Disaggregation Of Revenue [Line Items]        
Revenue [1] $ 262,598 $ 340,377 $ 600,253 $ 554,471
Other        
Disaggregation Of Revenue [Line Items]        
Revenue 6,800   6,800  
Well-Being Program        
Disaggregation Of Revenue [Line Items]        
Revenue $ 2,100   $ 2,100  
[1] The figure for total segments equals the consolidated figure for such item.
v3.20.2
Revenue Recognition - Summary of Revenue Disaggregated by Source (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Disaggregation Of Revenue [Line Items]        
Revenue [1] $ 262,598 $ 340,377 $ 600,253 $ 554,471
Other        
Disaggregation Of Revenue [Line Items]        
Revenue 6,800   6,800  
Nutrition        
Disaggregation Of Revenue [Line Items]        
Revenue 180,675 182,896 358,638 240,463
Nutrition | Nutrisystem Direct to Consumer        
Disaggregation Of Revenue [Line Items]        
Revenue 165,118 155,976 320,509 203,977
Nutrition | South Beach Diet Direct to Consumer        
Disaggregation Of Revenue [Line Items]        
Revenue 8,650 14,464 21,414 19,118
Nutrition | Retail        
Disaggregation Of Revenue [Line Items]        
Revenue 3,902 8,728 9,350 13,032
Nutrition | QVC        
Disaggregation Of Revenue [Line Items]        
Revenue 2,901 3,522 7,088 4,044
Nutrition | Other        
Disaggregation Of Revenue [Line Items]        
Revenue $ 104 $ 206 $ 277 $ 292
[1] The figure for total segments equals the consolidated figure for such item.
v3.20.2
Revenue Recognition - Summary of Information about Receivables, Contract Assets and Contract Liabilities from Contracts with Customers (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Revenue From Contract With Customer [Abstract]    
Contract assets $ 243 $ 95
Contract liabilities $ 10,937 $ 10,911
v3.20.2
Revenue Recognition - Summary of Significant Changes in Contract Liabilities (Deferred Revenue) Balance (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2020
Revenue From Contract With Customer [Abstract]    
Revenue recognized that was included in the contract liability (deferred revenue) balance on January 1, 2020 $ (2,395) $ (8,112)
Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue, and (decreases) due to returns $ (71) $ 8,138
v3.20.2
Revenue Recognition - Summary of Revenue from Prepaid Gift Cards Expected to be Recognized in Future Related to Performance Obligation Unsatisfied or Partially Satisfied (Details)
$ in Thousands
Jun. 30, 2020
USD ($)
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 5,867
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2020-07-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 1,789
Revenue, remaining performance obligation, expected timing of satisfaction, period 6 months
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2021-01-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 1,901
Revenue, remaining performance obligation, expected timing of satisfaction, period 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2022-01-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 1,192
Revenue, remaining performance obligation, expected timing of satisfaction, period 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2023-01-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 468
Revenue, remaining performance obligation, expected timing of satisfaction, period 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2024-01-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 297
Revenue, remaining performance obligation, expected timing of satisfaction, period 1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2025-01-01  
Disaggregation Of Revenue [Line Items]  
Revenue, remaining performance obligation, amount $ 220
Revenue, remaining performance obligation, expected timing of satisfaction, period 1 year
v3.20.2
Revenue Recognition - Summary of Revenue from Prepaid Gift Cards Expected to be Recognized in Future Related to Performance Obligation Unsatisfied or Partially Satisfied (Details 1)
$ in Thousands
Jun. 30, 2020
USD ($)
Revenue From Contract With Customer [Abstract]  
Revenue, remaining performance obligation, amount $ 5,867
v3.20.2
Revenue Recognition - Additional Information (Details 1)
6 Months Ended
Jun. 30, 2020
Revenue From Contract With Customer [Abstract]  
Revenue, practical expedient, financing component [true false] true
v3.20.2
Inventories - Additional Information (Details) - USD ($)
$ in Millions
Jun. 30, 2020
Dec. 31, 2019
Inventory Disclosure [Abstract]    
Reserve for excess and obsolete inventory $ 2.0 $ 1.8
v3.20.2
Intangible Assets and Goodwill - Additional Information (Details) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2020
Dec. 31, 2019
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]        
Impairment loss of intangibles $ 0      
Impairment loss of goodwill 0 $ 119,500,000 $ 119,500,000  
Tradename        
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]        
Intangible assets not subject to amortization $ 509,000,000.0   $ 509,000,000.0 $ 589,000,000.0
Nutrisystem        
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]        
Impairment loss of goodwill   119,500,000    
Nutrisystem | Tradename        
Schedule Of Finite And Indefinite Lived Intangible Assets [Line Items]        
Impairment loss of intangibles   $ 80,000,000.0    
v3.20.2
Intangible Assets and Goodwill - Reconciliation of Goodwill Balance (Details) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2020
Goodwill [Line Items]      
Beginning balance   $ 654,635,000 $ 654,635,000
Impairment loss $ 0 (119,500,000) (119,500,000)
Ending balance 535,135,000   535,135,000
Healthcare      
Goodwill [Line Items]      
Beginning balance   334,680,000 334,680,000
Ending balance 334,680,000   334,680,000
Nutrition      
Goodwill [Line Items]      
Beginning balance   319,955,000 319,955,000
Impairment loss   $ (119,500,000) (119,500,000)
Ending balance $ 200,455,000   $ 200,455,000
v3.20.2
Marketing Expenses - Additional Information (Details) - USD ($)
$ in Millions
3 Months Ended 4 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2020
Dec. 31, 2019
Marketing And Advertising Expense [Abstract]          
Media expense $ 45.1 $ 47.3 $ 67.5 $ 122.4  
Prepaid for future advertisements and promotions $ 0.3   $ 0.3 $ 0.3 $ 5.0
v3.20.2
Share-Based Compensation - Additional Information (Details)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
Type
Jun. 30, 2019
USD ($)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Types of share based awards | Type     5  
Share based awards, description     We currently have five types of share-based awards outstanding to our employees and directors: stock options, restricted stock awards, restricted stock units, performance-based stock units, and market stock units.  
Share-based compensation costs $ 2.9 $ 6.9 $ 3.7 $ 9.3
Restructuring and Related Charges        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based compensation costs   $ 0.5   $ 0.6
Minimum        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Each of share based awards, vesting period     1 year  
Maximum        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Each of share based awards, vesting period     4 years  
v3.20.2
Income Taxes- Additional Information (Details) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Operating Loss Carryforwards [Line Items]          
Effective tax rate 17.60%   30.90% 5.10% 37.60%
Increase in income tax expense       $ 2,700,000  
Impairment loss of goodwill $ 0 $ 119,500,000   $ 119,500,000  
Earliest Tax Year          
Operating Loss Carryforwards [Line Items]          
Open tax year       2016  
State          
Operating Loss Carryforwards [Line Items]          
Increase in valuation allowance on deferred tax assets related to net operating loss carryforwards       $ 1,800,000  
Reduction in deferred tax asset related to income tax credits       $ (900,000)  
v3.20.2
Leases - Additional Information (Details)
6 Months Ended
Jun. 30, 2020
Agreement
Lessee Lease Description [Line Items]  
Number of sublease agreements 3
Minimum  
Lessee Lease Description [Line Items]  
Remaining lease terms 1 year
Maximum  
Lessee Lease Description [Line Items]  
Remaining lease terms 5 years
v3.20.2
Leases - Schedule of Components of Lease Expense (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Leases [Abstract]        
Amortization of leased assets $ 162 $ 12 $ 324 $ 24
Interest of lease liabilities 22 2 47 4
Operating lease cost 3,675 3,804 7,350 6,520
Short-term lease cost 137 116 266 149
Total lease cost before subleases 3,996 3,934 7,987 6,697
Sublease income (1,363) (1,356) (2,764) (2,700)
Total lease cost, net $ 2,633 $ 2,578 $ 5,223 $ 3,997
v3.20.2
Leases - Schedule of Supplemental Cash Flow Information Related to Leases (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Cash paid for amounts included in the measurement of lease liabilities        
Operating cash flow attributable to operating leases $ (2,545) $ (3,561) $ (5,611) $ (5,108)
Operating cash flow attributable to finance leases (22) (2) (47) (4)
Financing cash flow attributable to finance leases $ (155) $ (11) $ (306) (22)
Supplemental noncash information:        
Right-of-use assets obtained in exchange for operating lease liabilities [1]       48,972
Right-of-use assets obtained in exchange for finance lease liabilities [1]       $ 181
[1] No new leases were entered into during the six months ended June 30, 2019.  Amounts shown are due to the adoption of ASC 842 and reflect balances as of January 1, 2019 for the Healthcare segment and as of March 8, 2019 for the Nutrition segment (i.e., the date of our acquisition of Nutrisystem).
v3.20.2
Debt - Summary of Debt, Net of Unamortized Deferred Loan Costs And Original Issue Discount (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Debt Instrument [Line Items]    
Debt, net of unamortized original issue discount $ 1,055,000 $ 1,094,850
Less: deferred loan costs and original issue discount (42,678) (46,723)
Total debt 1,012,322 1,048,127
Less: current portion (9,775)  
Total non-current portion of debt 1,002,547 1,048,127
Term Loan A    
Debt Instrument [Line Items]    
Debt, net of unamortized original issue discount 280,000 288,750
Term Loan B    
Debt Instrument [Line Items]    
Debt, net of unamortized original issue discount $ 775,000 786,250
Revolving Credit Facility    
Debt Instrument [Line Items]    
Debt, net of unamortized original issue discount   $ 19,850
v3.20.2
Debt - Credit Facility - Additional Information (Details)
1 Months Ended 6 Months Ended 16 Months Ended
Mar. 08, 2019
USD ($)
May 31, 2019
Agreement
Jun. 30, 2020
USD ($)
Jun. 30, 2020
USD ($)
Dec. 31, 2019
USD ($)
Line Of Credit Facility [Line Items]          
Outstanding debt     $ 1,012,322,000 $ 1,012,322,000 $ 1,048,127,000
Interest Rate Swap Agreements          
Line Of Credit Facility [Line Items]          
Number of agreements held for maturity | Agreement   8      
Derivative maturity month and year   2024-05      
Derivative, notional amount     800,000,000.0 800,000,000.0  
Interest Rate Swap Agreements | LIBOR          
Line Of Credit Facility [Line Items]          
Derivative, fixed interest rate   2.20%      
Revolving Credit Facility          
Line Of Credit Facility [Line Items]          
Available borrowing capacity     $ 124,500,000 124,500,000  
Credit Agreement          
Line Of Credit Facility [Line Items]          
Initiation date     Mar. 08, 2019    
Outstanding debt     $ 1,012,300,000 1,012,300,000  
Debt instrument, prepayments description     We are required to make prepayments on the Term Loans equal to our excess cash flow for a given fiscal year multiplied by the following excess cash flow percentages (such resulting payment an “Excess Cash Flow Payment”) based on our Net Leverage Ratio (as defined below) on the last day of such fiscal year: (a) 75% if the Net Leverage Ratio is greater than 3.75:1, (b) 50% if the Net Leverage Ratio is equal to or less than 3.75:1 but greater than 3.25:1 (c) 25% if the Net Leverage Ratio is equal to or less than 3.25:1 but greater than 2.75:1, and (d) 0% if the Net Leverage Ratio is equal to or less than 2.75:1    
Net leverage ratio for next twelve month     5.75    
Net leverage ratio in year two     5.25    
Net leverage ratio thereafter     4.75    
Net leverage ratio one     4.08    
Credit Agreement | Federal Funds Rate          
Line Of Credit Facility [Line Items]          
Basis spread on variable rate 0.50%        
Credit Agreement | One-Month LIBOR          
Line Of Credit Facility [Line Items]          
Basis spread on variable rate 1.00%        
Credit Agreement | Net Leverage Ratio Greater Than 3.75:1          
Line Of Credit Facility [Line Items]          
Excess cash flow percentage     75.00%    
Net leverage ratio     375.00%    
Credit Agreement | Net Leverage Ratio Equal To or Less Than 3.75:1 but Greater Than 3.25:1          
Line Of Credit Facility [Line Items]          
Excess cash flow percentage     50.00%    
Net leverage ratio     325.00%    
Credit Agreement | Net Leverage Ratio Equal To or Less Than 3.25:1 but Greater Than 2.75:1          
Line Of Credit Facility [Line Items]          
Excess cash flow percentage     25.00%    
Net leverage ratio     275.00%    
Credit Agreement | Net Leverage Ratio Equal To or Less Than 2.75:1          
Line Of Credit Facility [Line Items]          
Excess cash flow percentage     0.00%    
Credit Agreement | Minimum          
Line Of Credit Facility [Line Items]          
Unused commitment fee percentage 0.25%        
Credit Agreement | Minimum | LIBOR          
Line Of Credit Facility [Line Items]          
Variable rate basis 0.00%        
Credit Agreement | Maximum          
Line Of Credit Facility [Line Items]          
Unused commitment fee percentage 0.50%        
Credit Agreement | Revolving Credit Facility          
Line Of Credit Facility [Line Items]          
Maximum borrowing capacity $ 125,000,000.0        
Maturity date     Mar. 08, 2024    
Credit Agreement | Revolving Credit Facility | Minimum | LIBOR          
Line Of Credit Facility [Line Items]          
Margin rate 3.75%        
Credit Agreement | Revolving Credit Facility | Minimum | Base Rate          
Line Of Credit Facility [Line Items]          
Margin rate 2.75%        
Credit Agreement | Revolving Credit Facility | Maximum | LIBOR          
Line Of Credit Facility [Line Items]          
Margin rate 4.25%        
Credit Agreement | Revolving Credit Facility | Maximum | Base Rate          
Line Of Credit Facility [Line Items]          
Margin rate 3.25%        
Credit Agreement | Swingline Sub Facility          
Line Of Credit Facility [Line Items]          
Maximum borrowing capacity $ 35,000,000.0        
Maturity date     Mar. 08, 2024    
Credit Agreement | Letters of Credit Sub Facility          
Line Of Credit Facility [Line Items]          
Maximum borrowing capacity 50,000,000.0        
Credit Agreement | Term Loan Facility A          
Line Of Credit Facility [Line Items]          
Debt instrument, face amount $ 350,000,000.0        
Periodic principal payment as percentage of aggregate principal amount 2.50%        
Maturity date     Mar. 08, 2024    
Credit Agreement | Term Loan Facility A | LIBOR          
Line Of Credit Facility [Line Items]          
Margin rate 4.25%        
Credit Agreement | Term Loan Facility A | Base Rate          
Line Of Credit Facility [Line Items]          
Margin rate 3.25%        
Credit Agreement | Term Loan Facility B          
Line Of Credit Facility [Line Items]          
Debt instrument, face amount $ 830,000,000.0        
Periodic principal payment as percentage of aggregate principal amount 0.75%        
Maturity date     Mar. 08, 2026    
Credit Agreement | Term Loan Facility B | LIBOR          
Line Of Credit Facility [Line Items]          
Margin rate 5.25%        
Credit Agreement | Term Loan Facility B | Base Rate          
Line Of Credit Facility [Line Items]          
Margin rate 4.25%        
Credit Agreement | Uncommitted Incremental Accordion Facility | Minimum          
Line Of Credit Facility [Line Items]          
Maximum borrowing capacity $ 125,000,000.0        
Percentage of consolidated EBITDA requirement 50.00%        
Credit Agreement | Term Loans          
Line Of Credit Facility [Line Items]          
Payments on term loans       $ 125,000,000.0  
Maturity date       Mar. 31, 2021  
v3.20.2
Commitments and Contingencies - Additional Information - (Details)
Nov. 06, 2017
Lawsuit
$ / shares
Jun. 30, 2020
$ / shares
Dec. 31, 2019
$ / shares
Commitments And Contingencies Disclosure [Abstract]      
Common stock, par value (in dollars per share) | $ / shares $ 0.001 $ 0.001 $ 0.001
Number of lawsuits filed 4    
Number of lawsuits dismissed 3    
v3.20.2
Fair Value Measurements - Schedule of Assets and Liabilities Measured at Fair Value on a Recurring Basis (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Interest Rate Swap Agreements | Fair Value, Measurements, Recurring | Level 2    
Liabilities:    
Liabilities measured at fair value $ 44,407 $ 16,238
v3.20.2
Fair Value Measurements - Additional Information (Details)
3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Mar. 31, 2020
USD ($)
Tradename
Jun. 30, 2020
USD ($)
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Impairment loss of goodwill $ 0 $ 119,500,000 $ 119,500,000
Number of tradenames | Tradename   2  
Impairment loss of intangibles 0    
Revolving Credit Facility      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Line of credit 0   0
Term Loans      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Debt instrument fair value 921,200,000   921,200,000
Debt instrument carrying amount 1,012,300,000   1,012,300,000
Carrying Value      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Cash and cash equivalents $ 60,300,000   60,300,000
Nutrition      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Impairment loss of goodwill   $ 119,500,000 119,500,000
Nutrisystem      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Impairment loss of goodwill     119,500,000
Nutrisystem | Tradename      
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]      
Impairment loss of intangibles   $ 80,000,000.0 $ 80,000,000.0
v3.20.2
Derivative Instruments and Hedging Activities - Additional Information (Details) - Cash Flow Hedges - Derivatives Designated as Hedging Instruments - Interest Rate Swap Agreements
1 Months Ended
May 31, 2019
Agreement
Jun. 30, 2020
USD ($)
Derivative [Line Items]    
Number of amortizing interest rate swap agreements | Agreement 8  
Derivative maturity month and year 2024-05  
Derivative, fixed interest rate 2.20%  
Derivative, notional amount   $ 800,000,000.0
Derivative amount reclassify from accumulated OCI to interest expense within next 12 months   $ 15,800,000
v3.20.2
Derivative Instruments and Hedging Activities - Schedule of Estimated Gross Fair Values of Derivative Instruments and Their Classification on Consolidated Balance Sheet (Details) - Cash Flow Hedges - Derivatives Designated as Hedging Instruments - Interest Rate Swap Agreements - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Liabilities:    
Derivative liabilities $ 44,407 $ 16,238
Current Portion of Long-term Liabilities    
Liabilities:    
Current portion of long-term liabilities 15,664 4,947
Other Long-term Liabilities    
Liabilities:    
Other long-term liabilities $ 28,743 $ 11,291
v3.20.2
Derivative Instruments and Hedging Activities - Schedule of Effect of Cash Flow Hedge Accounting on Accumulated OCI (Details) - Cash Flow Hedges - Derivatives Designated as Hedging Instruments - Interest Rate Swap Agreements - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Derivative Instruments Gain Loss [Line Items]        
Loss related to effective portion of derivatives recognized in accumulated OCI, gross of tax effect $ 5,020 $ 16,144 $ 32,772 $ 16,144
Interest Expense        
Derivative Instruments Gain Loss [Line Items]        
Gain (loss) related to effective portion of derivatives reclassified from accumulated OCI to interest expense, gross of tax effect $ (3,482) $ 160 $ (4,603) $ 160
v3.20.2
Earnings (Loss) Per Share - Reconciliation of the Numerator and Denominator of Basic and Diluted Earnings (Loss) Per Share (Details) - USD ($)
$ / shares in Units, shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Numerator [Abstract]        
Net income (loss) $ 28,511 $ 18,137 $ (169,595) $ 22,351
Net income allocated to unvested restricted stock (20) (93)   (77)
Net income (loss) allocated to shares of Common Stock $ 28,491 $ 18,044 $ (169,595) $ 22,274
Denominator [Abstract]        
Shares used for basic income (loss) per share 48,711 47,790 48,662 45,165
Effect of dilutive stock options and restricted stock units outstanding [Abstract]        
Shares used for diluted income (loss) per share [1] 48,794 48,461 48,662 45,719
Earnings (loss) per share, Basic $ 0.59 $ 0.38 $ (3.49) $ 0.49
Earnings (loss) per share, Diluted [1] $ 0.58 $ 0.37 $ (3.49) $ 0.49
Non-Qualified Stock Options        
Effect of dilutive stock options and restricted stock units outstanding [Abstract]        
Effect of dilutive stock options and restricted stock units outstanding (in shares) 8 93   110
Restricted Stock Units (RSUs)        
Effect of dilutive stock options and restricted stock units outstanding [Abstract]        
Effect of dilutive stock options and restricted stock units outstanding (in shares) 75 578   444
Market-based stock units        
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]        
Dilutive securities outstanding not included in the computation of earnings per share because their effect is anti-dilutive (in shares) 49   25  
Non-Qualified Stock Options        
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]        
Dilutive securities outstanding not included in the computation of earnings per share because their effect is anti-dilutive (in shares) 235 71 202 76
Restricted Stock Units (RSUs)        
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]        
Dilutive securities outstanding not included in the computation of earnings per share because their effect is anti-dilutive (in shares) 750 288 544 172
Restricted Stock Awards        
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]        
Dilutive securities outstanding not included in the computation of earnings per share because their effect is anti-dilutive (in shares) 32 128 35 64
Performance-Based Stock Units        
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]        
Dilutive securities outstanding not included in the computation of earnings per share because their effect is anti-dilutive (in shares) 95   64  
[1] The impact of potentially dilutive securities for the six months ended June 30, 2020 was not considered because the impact would be anti-dilutive.
v3.20.2
Accumulated OCI - Changes in Accumulated OCI, Net of Tax (Details) - Net Change in Fair Value of Interest Rate Swaps
$ in Thousands
6 Months Ended
Jun. 30, 2020
USD ($)
Changes in accumulated OCI, net of tax [Roll Forward]  
Balance $ (12,091)
Other comprehensive income (loss) before reclassifications, net (24,402)
Amounts reclassified from accumulated OCI, net of tax 3,428
Balance $ (33,065)
v3.20.2
Accumulated OCI - Changes in Accumulated OCI, Net of Tax (Parenthetical) (Details)
$ in Thousands
6 Months Ended
Jun. 30, 2020
USD ($)
Accumulated Other Comprehensive Income Loss Net Of Tax [Abstract]  
Other comprehensive income before reclassifications, tax $ 8,370
Amounts reclassified from accumulated OCI, tax $ 1,175
v3.20.2
Accumulated OCI - Schedule of Reclassifications Out of Accumulated OCI (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]        
Interest expense $ 21,235 $ 23,661 $ 42,898 $ 31,328
Income tax expense $ (6,107) $ (8,115) 9,038 $ (13,483)
Interest Rate Swap Agreements        
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]        
Net of tax     3,428  
Reclassifications Out of Accumulate OCI        
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]        
Income tax expense     (1,175)  
Net of tax     3,428  
Reclassifications Out of Accumulate OCI | Interest Rate Swap Agreements        
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]        
Interest expense     $ 4,603  
v3.20.2
Segment Disclosures and Concentrations of Risk - Additional Information (Details)
$ in Millions
3 Months Ended 6 Months Ended
Mar. 07, 2019
Segment
Jun. 30, 2020
USD ($)
Jun. 30, 2020
USD ($)
Segment
Entity Wide Revenue Major Customer [Line Items]      
Number of reportable segments | Segment 1   2
Wisely Well      
Entity Wide Revenue Major Customer [Line Items]      
Intersegment revenues and costs | $   $ 1.9 $ 1.9
SilverSneakers Senior Fitness      
Entity Wide Revenue Major Customer [Line Items]      
Percentage of concentration risk   19.00% 28.00%
v3.20.2
Segment Disclosures and Concentrations of Risk - Schedule of Reported Segment Revenues and Profit or Loss, Net of Intersegment Eliminations, and Reconciliation (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Segment Reporting Information [Line Items]        
Revenue [1] $ 262,598 $ 340,377 $ 600,253 $ 554,471
Income (loss) before income taxes 34,618 26,252 (178,633) 35,834
Acquisition and integration costs 2,049 8,999 4,844 26,049
Impairment loss     199,500  
COVID-19 costs 1,260   1,260  
Restructuring and related charges 1,009 2,352 1,752 3,943
Interest expense 21,235 23,661 42,898 31,328
Depreciation and amortization 12,919 9,084 27,682 12,666
Adjusted EBITDA 74,835 70,348 103,635 109,820
CEO        
Segment Reporting Information [Line Items]        
CEO transition costs 1,745   4,332  
Healthcare        
Segment Reporting Information [Line Items]        
Revenue 81,923 157,481 241,615 314,008
Adjusted EBITDA 41,472 35,681 71,719 61,810
Nutrition        
Segment Reporting Information [Line Items]        
Revenue 180,675 182,896 358,638 240,463
Adjusted EBITDA $ 33,363 $ 34,667 $ 31,916 $ 48,010
[1] The figure for total segments equals the consolidated figure for such item.
v3.20.2
Segment Disclosures and Concentrations of Risk - Schedule of Total Assets by Segment (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Segment Reporting Information [Line Items]    
Total assets $ 1,381,170 $ 1,625,905
Healthcare    
Segment Reporting Information [Line Items]    
Total assets 527,353 526,013
Nutrition    
Segment Reporting Information [Line Items]    
Total assets $ 853,817 $ 1,099,892