UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form

10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~

March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number

001-37344

Party City Holdco Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		46-0539758
~~Delaware~~		~~46-0539758~~
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

80 Grasslands Road Elmsford, NY		10523
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(914)

345-2020

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, Par Value: $0.01/share	PRTY	New York Stock Exchange

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

☒

☐

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

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule

12b-2

of the Exchange Act. ~~(Check one):~~

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

☐

☒

As of ~~October 25, 2019, 94,461,576~~May 31, 2020, 94,491,352 shares of the Registrant’s common stock were outstanding.

~~Table~~

EXPLANATORY NOTE

On May 8, 2020, Party City Holdco Inc. (the “Company” or “Party City Holdco”) filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the “SEC”) indicating its reliance on the SEC’s March 25, 2020 Order (Release No. 34-88465) (the “Order”). The Order allows for the delay of ~~Contents~~certain filings required under the Securities and Exchange Act of 1934, as amended.

The Company filed the Form 8-K indicating its intension to rely on the Order permitting extensions in filings due to circumstances related to the novel coronavirus (“COVID-19”) pandemic. As stated in the Form 8-K, the Company’s operations and business have experienced disruptions due to the unprecedented conditions surrounding the spread of COVID-19 throughout North America. In particular, COVID-19 and measures implemented to reduce the spread of the virus have limited access to the Company’s facilities and disrupted its normal interactions with its accounting personnel, legal advisors, auditors and others involved in the preparation of the Quarterly Report. Due to the factors listed above, the Company required additional time to finalize its Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2020, (the “Quarterly Report”) by the original deadline of May 13, 2020.

In light of the impact of the factors described above, the Company was unable to compile and review certain information required in order to permit it to timely file the Quarterly Report by May 13, 2020, the original filing deadline, without unreasonable effort or expense. The Company relied on the Order in furnishing the Form 8-K by the original filing deadline of the Quarterly Report.

PARTY CITY HOLDCO INC.

Form

10-Q

~~September 30, 2019~~

March 31, 2020

TABLE OF CONTENTS

			Page
	~~Page~~
PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019		3	4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~		4	5

~~Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Nine Months ended September 30, 2019 and September 30, 2018~~		5

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~		6

~~Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months ended September 30, 2019 and September 30, 2018~~		7

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~		8	7

Notes to Condensed Consolidated Financial Statements		9	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22	21

Item 3. Quantitative and Qualitative Disclosures about Market Risk		38	35

Item 4. Controls and Procedures		38	35

PART II

Item 1. Legal Proceedings		39	36

Item 1A. Risk Factors		39	36

Item 5. Other Information	37

Item 6. Exhibits		39	38

Signature		40	39

~~Table of Contents~~

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31, 2020			December 31, 2019
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	194,433		$	34,917
Accounts receivable, net		116,223			149,109
Inventories, net		629,875			658,419
Prepaid expenses and other current assets		76,698			51,685
Total current assets		1,017,229			894,130
Property, plant and equipment, net		235,577			243,572
Operating lease asset		773,775			802,634
Goodwill		665,129			1,072,330
Trade names		394,221			530,320
Other intangible assets, net		41,960			45,060
Other assets, net		6,904			7,273
Total assets	$	3,134,795		$	3,595,319
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	381,422		$	128,806
Accounts payable		96,383			152,300
Accrued expenses		154,847			150,921
Current portion of operating lease liability		153,614			155,471
Income taxes payable		—			35,905
Current portion of long-term obligations		98,588			71,524
Total current liabilities		884,854			694,927
Long-term obligations, excluding current portion		1,474,854			1,503,987
Long-term portion of operating lease liability		707,734			720,735
Deferred income tax liabilities, net		70,943			126,081
Other long-term liabilities		16,036			16,517
Total liabilities		3,154,421			3,062,247
Redeemable securities		—			3,351
Commitments and contingencies
Stockholders’ equity:
Common stock (94,491,352 and 94,461,576 shares outstanding and 121,708,422 and 121,662,540 shares issued at March 31, 2020 and December 31, 2019, respectively)		1,211			1,211
Additional paid-in capital		933,174			928,573
Retained deficit		(578,732	)		(37,219	)
Accumulated other comprehensive loss		(47,947	)		(35,734	)
Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury		307,706			856,831
Less: Common stock held in treasury, at cost (27,217,070 and 27,200,964 shares at March 31, 2020 and December 31, 2019, respectively)		(327,170	)		(327,086	)
Total Party City Holdco Inc. stockholders’ equity		(19,464	)		529,745
Noncontrolling interests		(162	)		(24	)
Total stockholders’ equity		(19,626	)		529,721
Total liabilities, redeemable securities and stockholders’ equity	$	3,134,795		$	3,595,319

September 30,
2019

December 31,
2018

(Note 2) (Unaudited)

(Note 2)

ASSETS

Current assets:

Cash and cash equivalents
$
34,572
$
58,909

Accounts receivable, net

168,124

146,983

Inventories, net

760,179

756,038

Prepaid expenses and other current assets

75,919

61,905

Assets held for sale

172,189

—

Total current assets

1,210,983

1,023,835

Property, plant and equipment, net

241,413

321,044

Operating lease asset

827,817

—

Goodwill

1,358,137

1,656,950

Trade names

534,611

568,031

Other intangible assets, net

46,258

60,164

Other assets, net

12,578

12,323

Total assets
$
4,231,797
$
3,642,347

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Loans and notes payable
$
461,016
$
302,751

Accounts payable

140,112

208,149

Accrued expenses

166,609

161,228

Liabilities held for sale

48,618

Current portion of operating lease liability

140,781

—

Income taxes payable

—

25,993

Current portion of long-term obligations

13,498

13,316

Total current liabilities

970,634

711,437

Long-term obligations, excluding current portion

1,564,098

1,621,963

Long-term portion of operating lease liability

747,079

—

Deferred income tax liabilities, net

147,904

174,427

Other long-term liabilities

16,305

87,548

Total liabilities

3,446,020

2,595,375

Redeemable securities

3,351

3,351

Commitments and contingencies

Stockholders’ equity:

Common stock (94,448,333 and 93,622,934 shares outstanding and 121,629,237 and 120,788,159 shares issued at September 30, 2019 and December 31, 2018, respectively)

1,211

1,208

Additional
paid-in
capital

928,749

922,476

Retained earnings

231,597

495,777

Accumulated other comprehensive loss

(52,043
)
(49,201
)

Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury

1,109,514

1,370,260

Less: Common stock held in treasury, at cost (27,180,904 and 27,165,225 shares at September 30, 2019 and December 31, 2018)

(327,086
)
(326,930
)

Total Party City Holdco Inc. stockholders’ equity

782,428

1,043,330

Noncontrolling interests

(2
)
291

Total stockholders’ equity

782,426

1,043,621

Total liabilities, redeemable securities and stockholders’ equity
$
4,231,797
$
3,642,347

See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended March 31,
	2020			2019
Revenues:
Net sales	$	412,461		$	511,102
Royalties and franchise fees		1,582			2,014
Total revenues		414,043			513,116
Cost of sales		296,757			339,042
Wholesale selling expenses		15,458			17,961
Retail operating expenses		88,166			95,018
Franchise expenses		3,309			3,303
General and administrative expenses		59,996			41,925
Art and development costs		5,322			5,929
Development stage expenses		2,029			2,226
Store impairment and restructuring charges		17,728			18,009
Goodwill and intangibles impairment		536,648			—
Total expenses		1,025,413			523,413
Loss from operations		(611,370	)		(10,297	)
Interest expense, net		25,120			29,257
Other expense, net		5,676			1,254
Loss before income taxes		(642,166	)		(40,808	)
Income tax benefit		(100,498	)		(10,519	)
Net loss		(541,668	)		(30,289	)
Less: Net loss attributable to noncontrolling interests		(155	)		(71	)
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	$	(30,218	)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(5.80	)	$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(5.80	)	$	(0.32	)
Weighted-average number of common shares-Basic		93,395,609			93,174,553
Weighted-average number of common shares-Diluted		93,395,609			93,174,553
Dividends declared per share	$	—		$	—
Comprehensive loss	$	(553,881	)	$	(26,637	)
Less: Comprehensive loss attributable to noncontrolling interests		(155	)		(62	)
Comprehensive loss attributable to common shareholders of Party City Holdco Inc.	$	(553,726	)	$	(26,575	)

Three Months Ended
September 30,

2019

2018

Revenues:

Net sales
$
538,345
$
550,840

Royalties and franchise fees

1,886

2,206

Total revenues

540,231

553,046

Cost of sales

373,413

349,641

Wholesale selling expenses

16,084

17,538

Retail operating expenses

111,595

103,833

Franchise expenses

3,274

862

General and administrative expenses

43,062

42,239

Art and development costs

5,927

5,573

Development stage expenses

2,728

1,622

Store impairment and restructuring charges

2,574

—

Goodwill impairment

259,100

—

Total expenses

817,757

521,308

(Loss) income from operations

(277,526
)
31,738

Interest expense, net

29,424

27,705

Other expense, net

2,047

5,696

Loss before income taxes

(308,997
)
(1,663
)
Income tax (benefit) expense

(27,252
)
777

Net loss

(281,745
)
(2,440
)
Add: Net loss attributable to redeemable securities holder

—

(8
)
Less: Net loss attributable to noncontrolling interests

(212
)
(28
)

Net loss attributable to common shareholders of Party City Holdco Inc.
$
(281,533
) $
(2,420
)

Net loss per share attributable to common shareholders of Party City Holdco Inc.–Basic
$
(3.02
) $
(0.03
)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Diluted
$
(3.02
) $
(0.03
)
Weighted-average number of common shares-Basic

93,346,448

96,494,565

Weighted-average number of common shares-Diluted

93,346,448

96,494,565

Dividends declared per share
$
0.00
$
0.00

Comprehensive loss
$
(288,573
) $
(2,003
)
Add: Comprehensive loss attributable to redeemable securities holder

—

(8
)
Less: Comprehensive loss attributable to noncontrolling interests

(213
)
(35
)

Comprehensive loss attributable to common shareholders of Party City Holdco Inc.
$
(288,360
) $
(1,976
)

See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND COMPREHENSIVE (LOSS) INCOME~~

STOCKHOLDERS’ EQUITY

(Unaudited)

(In ~~thousands, except share and per share data)~~thousands)

	Common Stock		Additional Paid-in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2019	$	1,211	$	928,573	$	(37,219	)	$	(35,734	)	$	856,831		$	(327,086	)	$	529,745		$	(24	)	$	529,721
Net loss		—		—		(541,513	)		—			(541,513	)		—			(541,513	)		(155	)		(541,668	)
Stock option expense		—		354		—			—			354			—			354			—			354
Restricted stock units – time – based		—		621		—			—			621			—			621			—			621
Director – non-cash compensation		—		75		—			—			75			—			75			—			75
Warrant expense (see Note 19 – Kazzam, LLC)		—		1,033		—			—			1,033			—			1,033			—			1,033
Acquired non-controlling interest		—		2,518		—			—			2,518			—			2,518			17			2,535
Treasury Stock purchases		—		—		—			—			—			(84	)		(84	)		—			(84	)
Foreign currency adjustments		—		—		—			(12,201	)		(12,201	)		—			(12,201	)		—			(12,201	)
Impact of foreign exchange contracts, net		—		—		—			(12	)		(12	)		—			(12	)		—			(12	)
Balance at March 31, 2020	$	1,211	$	933,174	$	(578,732	)	$	(47,947	)	$	307,706		$	(327,170	)	$	(19,464	)	$	(162	)	$	(19,626	)

	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2018	$	1,208	$	922,476	$	495,777		$	(49,201	)	$	1,370,260		$	(326,930	)	$	1,043,330		$	291		$	1,043,621
Cumulative effect of change in accounting principle, net (see Note 2)		—		662		(503	)		—			159			—			159			—			159
Balance at December 31, 2018, as adjusted	$	1,208	$	923,138	$	495,274		$	(49,201	)	$	1,370,419		$	(326,930	)	$	1,043,489		$	291		$	1,043,780
Net loss		—		—		(30,218	)		—			(30,218	)		—			(30,218	)		(71	)		(30,289	)
Stock option expense		—		370		—			—			370			—			370			—			370
Restricted stock units – time based		—		392		—			—			392			—			392			—			392
Director – non-cash compensation		—		77		—			—			77			—			77			—			77
Warrant expense		—		129		—			—			129			—			129			—			129
Exercise of stock options		2		1,086		—			—			1,088			—			1,088			—			1,088
Acquired non-controlling interest		—		41		—			—			41			—			41			71			112
Treasury Stock purchases		—		—		—			—			—			(156	)		(156	)		—			(156	)
Foreign currency adjustments		—		—		—			4,156			4,156			—			4,156			9			4,165
Impact of foreign exchange contracts, net		—		—		—			(513	)		(513	)		—			(513	)		—			(513	)
Balance at March 31, 2019	$	1,210	$	925,233	$	465,056		$	(45,558	)	$	1,345,941		$	(327,086	)	$	1,018,855		$	300		$	1,019,155

Nine Months Ended
September 30,

2019

2018

Revenues:

Net sales
$
1,611,149
$
1,614,049

Royalties and franchise fees

6,089

7,832

Total revenues

1,617,238

1,621,881

Cost of sales

1,065,511

996,084

Wholesale selling expenses

50,929

53,581

Retail operating expenses

302,756

285,019

Franchise expenses

9,813

8,624

General and administrative expenses

126,497

136,230

Art and development costs

17,568

17,278

Development stage expenses

7,966

5,620

Gain on sale/leaseback transaction

(58,381
)
—

Store impairment and restructuring charges

25,817

—

Goodwill impairment

259,100

—

Total expense

1,807,576

1,502,436

(Loss)
i
ncome from operations

(190,338
)
119,445

Interest expense, net

88,857

76,481

Other expense, net

6,643

9,076

(Loss) income before income taxes

(285,838
)
33,888

Income tax (benefit) expense

(21,809
)
9,443

Net (loss) income

(264,029
)
24,445

Add: Net income attributable to redeemable securities holder

—

402

Less: Net loss attributable to noncontrolling interests

(352
)
(87
)

Net (loss) income attributable to common shareholders of Party City Holdco Inc.
$
(263,677
) $
24,934

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Basic
$
(2.83
) $
0.26

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Diluted
$
(2.83
) $
0.26

Weighted-average number of common shares-Basic

93,271,392

96,449,011

Weighted-average number of common shares-Diluted

93,271,392

97,684,290

Dividends declared per share
$
0.00
$
0.00

Comprehensive (loss) income
$
(266,883
) $
20,889

Add: Comprehensive income attributable to redeemable securities holder

—

402

Less: Comprehensive loss attributable to noncontrolling interests

(364
)
(108
)

Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc.
$
(266,519
) $
21,399

See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~

CASH FLOWS

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2020			2019
Cash flows used in operating activities:
Net loss	$	(541,668	)	$	(30,289	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization expense		17,752			21,341
Amortization of deferred financing costs and original issuance discounts		1,202			1,143
Provision for doubtful accounts		1,119			371
Deferred income tax benefit		(54,991	)		(9,383	)
Change in operating lease liability/asset		(389	)		(19,693	)
Undistributed income in equity method investments		(144	)		(198	)
Loss on disposal of assets		40			94
Non-cash adjustment for store impairment and restructuring charges		16,277			18,009
Goodwill and intangibles impairment		536,648			—
Non-employee equity-based compensation (see Note 19 – Kazzam, LLC)		1,033			129
Stock option expense		354			370
Restricted stock unit expense – time-based		621			392
Directors – non-cash compensation		75			77
Changes in operating assets and liabilities, net of effects of acquired businesses:
Decrease in accounts receivable		27,635			8,022
Decrease (increase) in inventories		23,205			(6,426	)
Increase in prepaid expenses and other current assets		(26,661	)		(7,935	)
Decrease in accounts payable, accrued expenses and income taxes payable		(76,138	)		(76,911	)
Net cash used in operating activities		(74,030	)		(100,887	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions, net of cash acquired		—			(545	)
Capital expenditures		(10,726	)		(12,393	)
Proceeds from disposal of property and equipment		7			10
Net cash used in investing activities		(10,719	)		(12,928	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(3,932	)		(23,495	)
Proceeds from loans, notes payable and long-term obligations		253,030			114,260
Stock repurchases		(85	)		(156	)
Exercise of stock options		—			1,088
Net cash provided by financing activities		249,013			91,697
Effect of exchange rate changes on cash and cash equivalents		(4,863	)		2,216
Net decrease in cash and cash equivalents and restricted cash		159,401			(19,902	)
Cash and cash equivalents and restricted cash at beginning of period		35,176			59,219
Cash and cash equivalents and restricted cash at end of period	$	194,577		$	39,317
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	35,927		$	42,484
Cash paid during the period for income taxes, net of refunds	$	11,368		$	3,708

~~Three months ended September 30, 2019 and September 30, 2018:~~

Common
Stock

Additional
Paid-in

Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total Party
City Holdco
Inc.
Stockholders’
Equity Before
Common Stock
Held In
Treasury

Common
Stock Held In
Treasury

Total Party
City Holdco
Inc.
Stockholders’
Equity

Non-
Controlling
Interests

Total
Stockholders’
Equity

Balance at June 30, 2019
$
  1,210
$
926,838
$
  513,130
$
  (45,216
) $
1,395,962
$
  (327,086
)
$
  1,068,876
$
211
$
  1,069,087

Net loss

—

—

(281,533
)
—

(281,533
)
—

(281,533
)
(212
)
(281,745
)
Stock option expense

—

409

—

—

409

—

409

—

409

Restricted stock units – time-

based

—

610

—

—

610

—

610

—

610

Restricted stock units – performance-based

—

560

—

—

560

—

560

—

560

Director –
non-cash

compensation

—

148

—

—

148

—

148

—

148

Warrant expense

—

128

—

—

128

—

128

—

128

Exercise of stock options

1

56

—

—

57

—

57

—

57

Foreign currency

adjustments

—

—

—

(6,920
)
(6,920
)
—

(6,920
)
(1
)
(6,921
)
Impact of foreign exchange contracts, net

—

—

—

93

93

—

93

—

93

Balance at September 30, 2019
$
1,211
$
  928,749
$
231,597
$
(52,043
) $
1,109,514
$
  (327,086
) $
782,428
$
(2
) $
782,426

Common
Stock

Additional
Paid-in

Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total Party
City Holdco
Inc.
Stockholders’
Equity Before
Common Stock
Held In
Treasury

Common
Stock Held In
Treasury

Total Party
City Holdco
Inc.
Stockholders’
Equity

Non-
Controlling
Interests

Total
Stockholders’
Equity

Balance at June 30, 2018
$
1,199
$
919,845
$
399,872
$
(39,797
) $
1,281,119
$
(286,733
) $
994,386
$
282
$
994,668

Net loss

—

—

(2,412
)
—

(2,412
)
—

(2,412
)
(28
)
(2,440
)
Net loss attributable to
redeemable securities
holder

—

—

(8
)
—

(8
)
—

(8
)
—

(8
)
Stock option expense

—

550

—

—

550

—

550

—

550

Restricted stock units – time-based

1

469

—

—

470

—

470

—

470

Restricted stock units – performance-based

5

884

—

—

889

—

889

—

889

Director –
non-cash

compensation

—

137

—

—

137

—

137

—

137

Warrant expense

—

(84
)
—

—

(84
)
—

(84
)
—

(84
)
Exercise of stock options

—

396

—

—

396

—

396

—

396

Foreign currency

adjustments

—

—

—

419

419

—

419

(7
)
412

Impact of foreign exchange contracts, net

—

—

—

25

25

—

25

—

25

Balance at September 30, 2018
$
1,205
$
922,197
$
397,452
$
  (39,353
) $
1,281,501
$
  (286,733
) $
994,768
$
247
$
995,015

See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~

~~PARTY CITY HOLDCO INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~(Unaudited)~~

~~(In thousands)~~

~~Nine months ended September 30, 2019 and September 30, 2018:~~

Common
Stock

Additional
Paid-in

Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total Party
City Holdco
Inc.
Stockholders’
Equity Before
Common Stock
Held In
Treasury

Common
Stock
Held In
Treasury

Total Party
City Holdco
Inc.
Stockholders’
Equity

Non-
Controlling
Interests

Total
Stockholders’
Equity

Balance at December 31, 2018
$
1,208
$
922,476
$
  495,777
$
  (49,201
) $
1,370,260
$
(326,930
) $
  1,043,330
$
291
$
  1,043,621

Cumulative effect of change in
accounting principle, net (see

Note 2)

—

662

(503
)
—

159

—

159

—

159

Balance at December 31, 2018, as
adjusted
$
1,208
$
923,138
$
495,274
$
  (49,201
) $
1,370,419
$
(326,930
) $
1,043,489
$
291
$
1,043,780

Net loss

—

—

(263,677
)
—

(263,677
)
—

(263,677
)
(352
)
(264,029
)
Stock option expense

—

1,150

—

—

1,150

—

1,150

—

1,150

Restricted stock units – time
-

based

—

1,543

—

—

1,543

—

1,543

—

1,543

Restricted stock units –
performance-based

—

1,036

—

—

1,036

—

1,036

—

1,036

Director –
non-cas
h

compensation

—

313

—

—

313

—

313

—

313

Warrant expense

—

386

—

—

386

—

386

—

386

Exercise of stock options

3

1,142

—

—

1,145

—

1,145

—

1,145

Acquired
non-controlling

interest

—

41

—

—

41

—

41

71

112

Treasury stock purchases

—

—

—

—

—

(156
)
(156
)
—

(156
)
Foreign currency adjustments

—

—

—

(2,208
)
(2,208
)
—

(2,208
)
(12
)
(2,220
)
Impact of foreign exchange
contracts, net

—

—

—

(634
)
(634
)
—

(634
)
—

(634
)

Balance at September 30, 2019
$
  1,211
$
  928,749
$
231,597
$
  (52,043
) $
1,109,514
$
  (327,086
) $
782,428
$
(2
) $
782,426

Common
Stock

Additional
Paid-in

Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total Party
City Holdco
Inc.
Stockholders’
Equity Before
Common Stock
Held In
Treasury

Common
Stock
Held In
Treasury

Total Party
City Holdco
Inc.
Stockholders’
Equity

Non-
Controlling
Interests

Total
Stockholders’
Equity

Balance at December 31, 2017
$
1,198
$
917,192
$
372,596
$
  (35,818
) $
1,255,168
$
(286,733
) $
968,435
$
355
$
968,790

Cumulative effect of change in
accounting principle, net

—

—

(78
)
—

(78
)
—

(78
)
—

(78
)

Balance at December 31, 2017, as
adjusted
$
1,198
$
917,192
$
372,518
$
  (35,818
) $
1,255,090
$
(286,733
) $
968,357
$
355
$
968,712

Net income

—

—

24,532

—

24,532

—

24,532

(87
)
24,445

Net income attributable to redeemable securities holder

—

—

402

—

402

—

402

—

402

Stock option expense

—

1,492

—

—

1,492

—

1,492

—

1,492

Restricted stock units – time
-

based

1

721

—

—

722

—

722

—

722

Restricted stock units –
performance-based

5

1,477

—

—

1,482

—

1,482

—

1,482

Director –
non-cash
compensation

—

196

—

—

196

—

196

—

196

Warrant expense

—

242

—

—

242

—

242

—

242

Exercise of stock options

1

877

—

—

878

—

878

—

878

Foreign currency adjustments

—

—

—

(4,888
)
(4,888
)
—

(4,888
)
(21
)
(4,909
)
Impact of foreign exchange contracts, net

—

—

—

1,353

1,353

—

1,353

—

1,353

Balance at September 30, 2018
$
1,205
$
922,197
$
397,452
$
  (39,353
) $
1,281,501
$
  (286,733
) $
994,768
$
247
$
995,015

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Table of Contents~~

~~PARTY CITY HOLDCO INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

~~(In thousands)~~

Nine Months Ended
September 30,

2019

2018

Cash flows used in operating activities:

Net (loss) income
$
(264,029
) $
24,445

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization expense

62,380

57,786

Amortization of deferred financing costs and original issuance discounts

3,511

9,834

Provision for doubtful accounts

1,110

726

Deferred income tax (benefit) expense

(26,458
)
1,075

Deferred rent

—

3,623

Change in operating lease liability/asset

(23,361
)
—

Undistributed income in equity method investments

(195
)
(580
)
(Gain) loss on disposal of assets

(59,088
)
23

Store impairment and restructuring charges

19,443

—

Goodwill impairment

259,100

—

Non-employee
equity-based compensation

386

352

Stock option expense

1,150

1,492

Restricted stock unit expense – time-based

1,543

722

Restricted stock unit expense – performance-based

1,036

1,482

Directors –
non-cash
compensation

313

196

Changes in operating assets and liabilities, net of effects of acquired businesses:

Increase in accounts receivable

(23,712
)
(32,802
)
Increase in inventories

(35,628
)
(194,419
)
Increase in prepaid expenses and other current assets

(11,009
)
(13,890
)
(
Decrease
) increase
in accounts payable, accrued expenses and income taxes payable

(88,771
)
53,744

Net cash used in operating activities

(182,279
)
(86,191
)
Cash flows provided by (used in) investing activities:

Cash paid in connection with acquisitions, net of cash acquired

(9,485
)
(63,840
)
Capital expenditures

(45,769
)
(65,491
)
Proceeds from disposal of property and equipment

113,845

22

Net cash provided by (used in) investing activities

58,591

(129,309
)
Cash flows provided by financing activities:

Repayment of loans, notes payable and long-term obligations

(106,133
)
(417,281
)
Proceeds from loans, notes payable and long-term obligations

203,381

636,884

Stock repurchases

(156
)
—

Exercise of stock options

1,145

878

Debt issuance costs

(411
)
(10,343
)

Net cash provided by financing activities

97,826

210,138

Effect of exchange rate changes on cash and cash equivalents

1,220

(772
)

Net decrease in cash and cash equivalents and restricted cash

(24,642
)
(6,134
)
Cash and cash equivalents and restricted cash at beginning of period

59,219

54,408

Cash and cash equivalents and restricted cash at end of period
$
34,577
$
48,274

Supplemental disclosure of cash flow information:

Cash paid during the period for interest
$
97,744
$
77,371

Cash paid during the period for income taxes, net of refunds
$
34,357
$
56,683

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Table of Content~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share)

Note 1 – Description of Business

Party City Holdco Inc. (the “Company” or “Party City Holdco”) is athe leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party ~~goods.~~goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and ~~stationery. The~~stationery throughout the world. As of March 31, 2020 the Company’s retail operations include ~~approximately 900~~854 specialty retail party supply stores (including franchise stores) inthroughout the United States

and ~~through September 30, 2019, Canada,~~

Mexico operating under the ~~name~~names Party City

and Halloween City, and e-commerce

websites, ~~principally operating under~~including through the domain name PartyCity.com and others.

In March 2020, the World Health Organization declared COVID-19 a ~~network~~global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of ~~approximately 250 - 300~~the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as of March 18, 2020. During the temporary ~~Halloween City stores.~~store closures, the Company offered curbside pickup and the Company’s e-commerce site, www.partycity.com, remained fully operational. However, quarantines, stay-at-home orders and related measures had significantly reduced consumer spending as well as customer demand for our products. In addition, these restrictions and other dislocations caused by the outbreak have disrupted, and may continue to ~~the Company’s retail operations, it is also a global designer, manufacturer~~disrupt, our planning, branding and ~~distributor~~administrative functions, as well as that of ~~decorated party supplies, with products found in over 40,000 retail outlets, including independent party supply stores, mass merchants, grocery retailers,~~

~~e-commerce~~

~~merchandisers~~our suppliers, transporters and ~~dollar stores. The Company’s products are available in over 100 countries with the United Kingdom, Canada, Germany, Mexico and Australia among the largest end markets outside of the United States.~~

customers. Party City Holdco is a holding company with no operating assets or operations. The Company owns 100% of PC Nextco Holdings, LLC (“PC Nextco”), which owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”). PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”), which owns most of the Company’s operating ~~subsidiaries.~~

subsidiaries.

Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its majority-owned and controlled entities. All intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements.

The majority of our retail operations define a fiscal year (“Fiscal Year”) as the

52-week

period or

53-week

period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim

13-week

periods following the end of the previous Fiscal Year, except in the case of a

53-week

Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the differences between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.

Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, ~~2019.~~2020. Our business is subject to substantial seasonal variations as our retail segment has historically realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other

year-end

holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material ~~costs.~~

costs and the uncertainty surrounding the impact of the COVID-19 pandemic.

Recently Issued and Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-13,

~~“Fair~~ “Fair Value Measurement (Topic 820) -– Disclosure Framework -– Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance improves and clarifies the fair value measurement disclosure requirements of ASC 820. The new disclosure requirements include

the disclosure of

the changes in unrealized gains or losses included in other comprehensive (loss)

income for recurring Level 3 fair value measurements held at the end of the reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance iswas effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including in an interim period for which financial statements have not been issued or made available for issuance. The Company has evaluated the impact of the adoption of this2019. This ASU ~~and determined that it will have~~had no significant impact on ~~its~~the Company’s condensed consolidated financial statements.

In June 2018, the FASB issued ASU

2018-07,

~~“Compensation –~~ “Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”. The ASU simplifies the accounting for

non-employee

share-based payments. The Company adopted the update during the first quarter of

~~2019~~

. 2019. The pronouncement requires companies to record the impact of adoption, if any, as a cumulative-effect adjustment to retained earnings as of the adoption date. Therefore, on January

2019,

, the Company decreased retained earnings by $

~~503~~

.$503. Additionally, the Company increased additional

paid-in

capital by $

~~662~~

$662 and recorded a $

~~159~~

$159 deferred income tax asset.

In August 2017, the FASB issued ASU

2017-12,

~~“Derivatives~~ “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The pronouncement amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. The Company adopted the update during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

~~Table of Contents~~

In January 2017 the FASB issued ASU No. 2017-04, ~~“Intangibles –~~ “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company adopted ASU No. 2017-04 during the first quarter of ~~2019.~~

2019 and such adoption had no impact on the Company’s consolidated financial statements.

June 2016,

, the FASB issued ASU

2016-13,

~~“Financial~~ “Financial Instruments – Credit Losses”. The ASU changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ~~pronouncement~~ASU requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company has adopted this guidance effective ~~for~~January 1, 2020, prospectively, with respect to its receivables, and the ~~Company~~adoption and application of this standard did not have a material impact to the consolidated financial statements during the first ~~quarter of~~

~~2020~~

. quarter.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. Judgment is ~~still evaluating~~required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the ~~ASU~~COVID-19 pandemic on ~~its consolidated financial statements.~~

expected losses. At March 31, 2020 and December 31, 2019, the allowance for doubtful accounts was $5,342 and $4,786, respectively.

In February 2016, the FASB issued ASU

2016-02,

~~“Leases”~~ “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by companies’ leases. The Company’s lease portfolio is primarily comprised of store leases, manufacturing and distribution facility leases, warehouse leases and office leases. Most of the leases are operating leases. The Company’s finance leases are not material to its consolidated financial statements.

The Company adopted the new lease standard during the first quarter of 2019 and, to the extent required by the pronouncement, recognized a right of use asset and liability for its operating lease arrangements with terms of greater than twelve months. ~~See the Company’s September 30, 2019 consolidated balance sheet for the impact of such adoption.~~

The pronouncement provided companies with a transition option under which they could opt to continue to apply legacy lease guidance in comparative periods. The Company elected such option. The Company’s December 31, 2018 consolidated balance sheet includes a $74,464 deferred rent liability in other long-term liabilities and a $7,170 deferred rent liability in accrued expenses. In the Company’s September 30, 2019 consolidated balance sheet, such accounts reduce the operating lease asset. Additionally, in the Company’s December 31, 2018 consolidated balance sheet, other intangible assets, net, includes a $3,904 intangible asset related to favorable leases and prepaid expenses and other current assets includes a $2,552 asset related to capitalized broker costs. In the Company’s September 30, 2019 consolidated balance sheet, such assets are included in the operating lease asset.

The pronouncement had no impact on the Company’s consolidated statement of operations and comprehensive loss and it did not impact the Company’s compliance with its debt covenants. Additionally, the standard requires companies to make certain ~~disclosures. See Note 1~~annual disclosures, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 3 – Store Impairment and Restructuring Charges

Each year, the Company typically closes approximately ten Party City stores as part of its typical network rationalization process and in response to ongoing consumer, market and economic changes that naturally arise in the business. ~~During the nine months ended September 30, 2019, the~~The Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”) ~~and, after~~. After careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of ~~approximately 55~~ stores, which are primarily located in close proximity to other Party City stores. In 2019, 55 stores were identified for closure, out of which 35 stores were closed in 2019 and 20 stores were closed in January 2020. In addition, 21 stores were identified in 2020 for closure at a future date. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company evaluated the recoverability of long lived assets at the open stores and recorded an impairment charge associated with the operating lease asset and property, plant and equipment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19. In conjunction with the store optimization program and store impairment, during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recorded the following charges:

	Three Months Ended March 31,
	2020		2019
Inventory reserves	$	11,696	$	17,629
Operating lease asset impairment		14,212		13,209
Property, plant and equipment impairment		2,065		4,139
Labor and other costs incurred closing stores		1,451		—
Severance		—		661
Total	$	29,424	$	35,638

Three Months Ended
September 30,
2019

Nine Months Ended
September 30,
2019

Inventory reserves
$
—
$
21,285

Operating lease asset impairment

—

14,149

Property, plant and equipment impairment

—

4,680

Labor and other costs incurred closing stores

2,574

6,327

Severance

—

661

Total
$
2,574
$
47,102

~~Such amounts~~

Amounts disclosed above represent the Company’s best estimate of the total charges that are expected to be ~~recorded for such items.~~recorded. As the Company closes the stores, it records charges for common area maintenance, insurance and taxes to be paid subsequent to such closures in accordance with the stores’ lease agreements. However, such amounts are immaterial. Additionally, the Company incurs costs while moving inventory, cleaning the stores and returning them to their original condition. Such costs are also immaterial.

The fair values of the operating lease assets and property, plant and equipment were determined based on estimated future discounted cash flows for such assets using market participant assumptions, including data on the ability to

sub-lease

the stores.

The charge for inventory reserves ~~represents~~is related to inventory that is disposed of following the closures of the stores and inventory that is sold below cost prior to such closures. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive loss. The other charges were recorded in Store impairment and restructuring charges in the Company’s statement of operations and comprehensive loss.

~~Table of Contents~~

The Company cannot guarantee that it will be able to achieve the anticipated benefits from the store optimization program. If the Company is unable to achieve such benefits, its results of operations and financial condition could be affected.

Note 4 – Goodwill and Intangibles Impairment

The Company reviews goodwill and other intangibles that have indefinite lives for impairment ~~~~annually as of October 1 or when events or changes in circumstances indicate the carrying value of t

~~ese~~these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

During the three months ended ~~September 30, 2019,~~March 31, 2020, the Company identified anintangible assets’ impairment ~~indicator~~indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of ~~September 30, 2019.~~March 31, 2020. The interim impairment tests were performed using ~~a combination of a market approach and~~ an income approach. ~~As a result of a sustained decline in the Company’s market capitalization, the~~The Company recognized

non-cash

pre-tax

goodwill impairment charges at ~~September 30, 2019~~

March 31, 2020 of $

~~224,100~~

$253,110 and ~~$35,000~~$148,326 against the goodwill associated with its retail and wholesale reporting units, respectively.

~~, respectively~~

There was 0 goodwill impairment charge for the ~~nine~~three months ended ~~September 30, 2018.~~

March 31, 2019.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment charge of $131,287 and $3,925 on its Party City and Halloween City tradenames, respectively. During 2019, there was 0 impairment on the Party City trade name and the Company recorded a Halloween City trade name impairment charge of $6,575.

Note 5 – Sale/Leaseback Transaction

In June 2019, the Company sold its main distribution center in Chester, New York, its metallic balloons manufacturing facility in Eden Prairie, Minnesota and its injection molded plastics manufacturing facility in Los Lunas, New Mexico. Simultaneously, the Company entered into twenty-year leases for each of the facilities. The aggregate sale price was $128,000 and, during the ~~nine months~~year ended ~~September 30,~~December 31, 2019, the Company recorded a $58,381 gain on the sale, net of transaction costs, in the Company’s condensed consolidated statement of operations and comprehensive loss.

Under the terms of the lease agreements, the Company ~~will pay~~pays total rent of $8,320 during the first year and the annual rent will increase by 2% thereafter.

The Chester and Eden Prairie leases are being accounted for as operating leases and the sale of such properties ~~is included~~resulted in the gain above.

However, for the Los Lunas property, the present value of the lease payments is greater than substantially all of the fair value of the assets. Therefore, the lease is a finance lease and sale accounting treatment is prohibited. As such, the Company is accounting for the ~~$12,080 of~~ proceeds as a financing ~~lease and has~~lease. As of March 31, 2020, $11,944 is recorded ~~such amount in long-term obligations in its September 30, 2019 condensed consolidated balance sheet.~~

as a part of a Finance lease.

In conjunction with the sale/leaseback transaction, the Company amended its Term Loan Credit Agreement. The amendment required the Company to use half of the proceeds from the transaction, net of costs, to paydown part of the outstanding balance under such debt agreement. Additionally, the amendment required the Company to pay an immaterial “consent fee” to the lenders. As the Term Loan Credit Agreement is a loan syndication, the Company assessed, on a

creditor-by-creditor

basis, whether the amendment should be accounted for as an extinguishment or a modification. The Company concluded that, for each creditor, the amendment should be accounted for as a modification. Therefore, no capitalized deferred financing costs or original issuance discounts were written off in conjunction with the amendment.

During June 2019, the Company used proceeds from the sale (net of costs) of $125,864 to paydown outstanding ~~debt.~~

Term Loan debt of $62,770 with the balance used to paydown the ABL Facility. See Note 16 – Current and Long-Term Obligations.

Note 6 – Disposition of Assets ~~and Liabilities Held for Sale~~

On October 1, 2019, the Company sold its Canadian-based Party City stores to a Canadian-based retailer for ~~$174,500 Canadian dollars~~$131,711 and ~~enter~~entered into a

10-year

supply agreement under which the acquirer agreed to purchase product from the Company for such Party City stores, as well as the ~~acquirer’~~

acquirer’s other stores. The Company ~~used~~expects to use $85 million of the net proceeds to paydown ~~debt. For~~principal on the ~~three months ended September 30, 2019~~Term Loan, see Note 16 – Current and 2018 the Canadian-based Party City stores had pre-tax (loss) income of $(140) and $1,507. For the nine months ended September 30, 2019 and 2018, the Canadian-based Party City stores had pre-tax income of $2,631 and $4,843, respectively.

As of September 30, 2019, the Company reported the assets of its Canadian-based Party City stores as assets held for sale in its condensed consolidated balance sheet. Assets held for sale as of September 30, 2019 include the following:

At September 30,
2019

Inventories, net
$
31,302

Property, plant and equipment, net

14,779

Operating lease asset

40,470

Goodwill

51,370

Trade names

33,044

Other assets, net

1,224

Total, net
$
172,189

~~In addition to the assets held for sale, the Company reported the related operating lease liabilities of $48,618 as liabilities held for sale.~~

Long-Term Obligations.

Note

– Inventories

Inventories consisted of the following:

	March 31, 2020		December 31, 2019
Finished goods	$	583,662	$	606,036
Raw materials		30,795		34,259
Work in process		15,418		18,124
	$	629,875	$	658,419

September 30,
2019

December 31,
2018

Finished goods
$
709,830
$
706,327

Raw materials

34,045

33,423

Work in process

16,304

16,288

$
760,179
$
756,038

~~Table of Contents~~

Inventories are valued at the lower of cost or net realizable value. The Company principally determines the cost of inventory using the weighted average method.

The Company estimates retail inventory shrinkage for the period between physical inventory dates on a

store-by-store

basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

Note

– Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“the CARES Act”) was signed into law. The CARES Act is a $2 trillion legislative package intended to provide economic relief to companies impacted by the COVID-19 pandemic, and it enacted a number of Internal Revenue Code modifications which are of particular benefit to the Company, including: 5-year net operating loss carryback, temporary relaxation of the limitations on interest deductions, qualified improvement property eligible for bonus depreciation, employee retention tax credits and deferral of payment of payroll tax.

The effective income tax rate for the ~~nine~~three months ended ~~September 30, 2019, 7.6%,~~March 31, 2020 of 15.7% is

~~lower~~

~~than~~ different from the statutory rate of 21.0% primarily due

to the non-deductible portions of goodwill impairment ~~charges. (See~~charges (see Note 4 – Goodwill and Intangibles Impairment above for further discussion), state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Note

– Changes in Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss consisted of the following:

	Three Months Ended March 31, 2020
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2019	$	(37,434	)	$	1,700		$	(35,734	)
Other comprehensive (loss) income before reclassifications, net of tax		(12,201	)		11			(12,190	)
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(23	)		(23	)
Net current-period other comprehensive loss		(12,201	)		(12	)		(12,213	)
Balance at March 31, 2020	$	(49,635	)	$	1,688		$	(47,947	)

	Three Months Ended March 31, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2018	$	(50,056	)	$	855		$	(49,201	)
Other comprehensive income before reclassifications		4,156			62			4,218
Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(575	)		(575	)
Net current-period other comprehensive income		4,156			(513	)		3,643
Balance at March 31, 2019	$	(45,900	)	$	342		$	(45,558	)

Three Months Ended September 30, 2019

Foreign
Currency
Adjustments

Impact of
Foreign
Exchange
Contracts,
Net of Taxes

Total,
Net of Taxes

Balance at June 30, 2019
$
(45,344
) $
  128
$
  (45,216
)
Other comprehensive (loss) income before reclassifications, net of tax

(6,920
)
166

(6,754
)
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax

—

(73
)
(73
)

Net current-period other comprehensive (loss) income

(6,920
)
93

(6,827
)

Balance at September 30, 2019
$
(52,264
) $
221
$
  (52,043
)

Three Months Ended September 30, 2018

Foreign
Currency
Adjustments

Impact of
Foreign
Exchange
Contracts,
Net of Taxes

Total,
Net of Taxes

Balance at June 30, 2018
$
(40,917
) $
1,120
$
(39,797
)
Other comprehensive income before reclassifications

419

217

636

Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax

—

(192
)
(192
)

Net current-period other comprehensive income

419

25

444

Balance at September 30, 2018
$
(40,498
) $
1,145
$
(39,353
)

~~Table of Contents~~

Nine Months Ended September 30, 2019

Foreign
Currency
Adjustments

Impact of
Foreign
Exchange
Contracts,
Net of Taxes

Total,
Net of Taxes

Balance at December 31, 2018
$
  (50,056
) $
855
$
  (49,201
)
Other comprehensive (loss) income before reclassifications, net of tax

(2,208
)
226

(1,982
)
Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax

—

(860
)
(860
)

Net current-period other comprehensive loss

(2,208
)
(634
)
(2,842
)

Balance at September 30, 2019
$
  (52,264
) $
221
$
  (52,043
)

Nine Months Ended September 30, 2018

Foreign
Currency
Adjustments

Impact of
Foreign
Exchange
Contracts,
Net of Taxes

Total,
Net of Taxes

Balance at December 31, 2017
$
  (35,610
) $
(208
) $
  (35,818
)
Other comprehensive (loss) income before reclassifications, net of income tax

(4,888
)
1,188

(3,700
)
Loss reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax

—

165

165

Net current-period other comprehensive (loss) income

(4,888
)
1,353

(3,535
)

Balance at September 30, 2018
$
  (40,498
) $
1,145
$
  (39,353
)

Note

– Capital Stock

At ~~September 30, 2019,~~March 31, 2020, the Company’s ~~auth~~

~~rized~~authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value preferred stock.

Note 1

11 – Segment Information

Industry Segments

The Company has ~~two~~2 identifiable business segments. The Wholesale segment designs, manufactures, sources and distributes decorated party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United States, ~~and, through September 30, 2019, Canada,~~ principally under the names Party City and Halloween City, and it operates

e-commerce

websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City. The Company’s industry segment data for the three

~~and nine~~

months ended ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~ was as follows:

	Wholesale			Retail			Consolidated
Three Months Ended March 31, 2020
Revenues:
Net sales	$	214,798		$	301,394		$	516,192
Royalties and franchise fees		—			1,582			1,582
Total revenues		214,798			302,976			517,774
Eliminations		(103,731	)		—			(103,731	)
Net revenues	$	111,067		$	302,976		$	414,043
Loss from operations	$	(163,548	)	$	(447,822	)	$	(611,370	)
Interest expense, net								25,120
Other expense, net								5,676
Loss before income tax benefits							$	(642,166	)

	Wholesale			Retail			Consolidated
Three Months Ended March 31, 2019
Revenues:
Net sales	$	290,301		$	378,153		$	668,454
Royalties and franchise fees		—			2,014			2,014
Total revenues		290,301			380,167			670,468
Eliminations		(157,352	)		—			(157,352	)
Net revenues	$	132,949		$	380,167		$	513,116
Income (loss) from operations	$	2,223		$	(12,520	)	$	(10,297	)
Interest expense, net								29,257
Other expense, net								1,254
Loss before income taxes							$	(40,808	)

~~Table of Contents~~

Wholesale

Retail

Consolidated

Three Months Ended September 30, 2019

Revenues:

Net sales
$
383,425
$
369,467
$
752,892

Royalties and franchise fees

—

1,886

1,886

Total revenues

383,425

371,353

754,778

Eliminations

(214,547
)
—

(214,547
)

Net revenues
$
168,878
$
371,353
$
540,231

L
oss from operations
$
(32,424
) $
(245,102
) $
(277,526
)

Interest expense, net

29,424

Other expense, net

2,047

Loss before income tax benefits
$
(308,997
)

Wholesale

Retail

Consolidated

Three Months Ended September 30, 2018

Revenues:

Net sales
$
424,569
$
375,680
$
800,249

Royalties and franchise fees

—

2,206

2,206

Total revenues

424,569

377,886

802,455

Eliminations

(249,409
)
—

(249,409
)

Net revenues
$
175,160
$
377,886
$
553,046

Income from operations
$
15,501
$
16,237
$
31,738

Interest expense, net

27,705

Other expense, net

5,696

Loss before income taxes
$
(1,663
)

~~The Company’s industry segment data for the nine months ended September 30, 2019 and September 30, 2018 was as follows:~~

Wholesale

Retail

Consolidated

Nine Months Ended September 30, 2019

Revenues:

Net sales
$
962,793
$
1,170,777
$
2,133,570

Royalties and franchise fees

—

6,089

6,089

Total revenues

962,793

1,176,866

2,139,659

Eliminations

(522,421
)
—

(522,421
)

Net revenues
$
440,372
$
1,176,866
$
1,617,238

Income
(loss)
from operations
$
30,096
$
(220,434
) $
(190,338
)

Interest expense, net

88,857

Other expense, net

6,643

Loss before income tax benefits
$
(285,838
)

Wholesale

Retail

Consolidated

Nine Months Ended September 30, 2018

Revenues:

Net sales
$
988,129
$
1,150,609
$
2,138,738

Royalties and franchise fees

—

7,832

7,832

Total revenues

988,129

1,158,441

2,146,570

Eliminations

(524,689
)
—

(524,689
)

Net revenues
$
463,440
$
1,158,441
$
1,621,881

Income from operations
$
31,997
$
87,448
$
119,445

Interest expense, net

76,481

Other expense, net

9,076

Income before income taxes
$
33,888

~~Table of Contents~~

During June 2019, the Company’s Wholesale segment sold its main distribution center in Chester, New York, its metallic balloons manufacturing facility in Eden Prairie, Minnesota and its injection molded plastics manufacturing facility in Los Lunas, New Mexico. The aggregate sale price was $128,000 and, during the nine months ended September 30, 2019, the Company’s Wholesale segment recorded a $58,381 gain on the sale in the Company’s condensed consolidated statement of operations and comprehensive

(

~~loss~~

)

~~income~~

~~. See Note 5 for further detail.~~

~~During the three and nine months ended September 30,~~

In 2019, the Company ~~executed~~initiated a store optimization program under which the Company ~~plans to close~~identified approximately 55 Party City stores ~~during the course of 2019.~~to be closed. In addition, 21 stores were identified in 2020 for closure at a future date. In conjunction with the program, ~~during the three months and nine months ended September 30, 2019,~~ the Company’s Retail segment recorded $29,424 and $35,638 of store impairment and restructuring charges in the first quarter of ~~$2,574~~2020 and ~~$47,102,~~2019, respectively. See Note 3 – Store Impairment and Restructuring Charges for further detail.

~~During the nine months ended September 30, 2019, the Company adopted ASU~~

~~2016-02,~~

~~“Leases”. See Notes 2 and 1~~

for further discussion. As of September 30, 2019, the operating lease asset for the Company’s Retail segment was $684,004 and the operating lease asset for the Company’s Wholesale segment was $143,813.

During the three months ended ~~September 30, 2019,~~March 31, 2020, the Company identified anintangible assets’ impairment ~~indicator~~indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of ~~September 30, 2019.~~March 31, 2020. As a result, ~~of a sustained decline in the Company’s market capitalization,~~ the Company recognized

non-cash

pre-tax

goodwill and trade name impairment ~~charges~~

~~of $~~

~~224,100~~

~~and $35,000 against the goodwill associated with its retail and wholesale reporting units.~~charges. See Note 4 – Goodwill and Intangibles Impairment for further detail.

Note 1

12 – Commitments and Contingencies

The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.

Note 1

13 – Derivative Financial Instruments

The Company is directly and indirectly affected by changes in certain market conditions. These changes in market conditions may adversely impact the Company’s financial performance and are referred to as market risks. The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed through the use of derivative financial instruments are interest rate risk and foreign currency exchange rate risk.

Interest Rate Risk Management

As part of the Company’s risk management strategy, the Company periodically uses interest rate swap agreements to hedge the variability of cash flows on floating rate debt obligations. Accordingly, interest rate swap agreements are reflected in the consolidated balance sheets at fair value and the related gains and losses on these contracts are deferred in equity and recognized in interest expense over the same period in which the related interest payments being hedged are recognized in income. The Company did not utilize interest rate swap agreements during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~the nine months ended September 30, 2018.~~

2019.

Foreign Exchange Risk Management

A portion of the Company’s cash flows are derived from transactions denominated in foreign currencies. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, including the British Pound Sterling, the Canadian Dollar, the Euro, the Malaysian Ringgit, the Australian Dollar, and the Mexican Peso, the Company enters into foreign exchange contracts with major international financial institutions. These forward contracts, which typically mature within one year, are designed to hedge anticipated foreign currency transactions, primarily inventory purchases and sales. For contracts that qualify for hedge accounting, the terms of the foreign exchange contracts are such that cash flows from the contracts should be highly effective in offsetting the expected cash flows from the underlying forecasted transactions.

The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. At ~~September~~

~~2019~~

March 31, 2020 and December

31,

~~2018~~

, 2019, the Company had foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges are

~~100~~

% 100% effective, there is no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings by

June ~~2020~~

~~Table of Contents~~

2020.

The following table displays the fair values of the Company’s derivatives at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

Derivative Assets

Derivative Liabilities

March 31, 2020

December 31, 2019

March 31, 2020

December 31, 2019

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Foreign Exchange Contracts

(a) PP

—

(b) AE

—

(b) AE

—

Derivative Assets

Derivative Liabilities

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Balance
Sheet
Line

Fair
Value

Derivative Instrument

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

Foreign Exchange Contracts

(a) PP
$

151

(a) PP
$
115

(b) AE
$
22

(b) AE
$
—

(a)	PP = Prepaid expenses and other current assets

(b)	AE = Accrued expenses

The following table displays the notional amounts of the Company’s derivatives at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

Derivative Instrument

March 31,

2020

December 31,

2019

Foreign Exchange Contracts

1,800

300

Derivative Instrument

September 30,
2019

December 31,
2018

Foreign Exchange Contracts
$
3,650
$
10,942

Note 1

14 – Fair Value Measurements

The provisions of ASC Topic 820, “Fair Value Measurement”, define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

~~Level 1 — Quoted prices in active markets for identical~~

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

During 2017, the Company acquired a 28% ownership interest in Punchbowl, Inc. (“Punchbowl”), a provider of digital greeting cards and digital invitations. At such time, the Company provided Punchbowl’s other investors with the ability to “put” their interest in Punchbowl to the Company at a future date. Additionally, at such time, the Company received the ability to “call” the interest of the other investors. During the ~~nine~~twelve months ended ~~September 30,~~December 31, 2019, the option was terminated and the Company wrote off its asset related to the call option and reversed its liability related to the put ~~option and recorded a net charge of $1,890 in other expenses, net.~~option. Prior to such time, the Company had been adjusting the put liability to fair value on a recurring basis. The liability represented a Level 3 fair value measurement as it was based on unobservable inputs.

In November 2019, the Company sold its ownership interest in Punchbowl, and recorded a net charge of $2,169 in other expenses, net for the option termination and the sale of its ownership interest.

During 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The interest ~~has~~had been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as ~~in the future,~~ Ampology ~~has~~had the right to cause the Company to purchase the interest. ~~On a recurring basis, the~~The liability iswas adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage).On March 23, 2020, the Company agreed to purchase all of Ampology’s interest in Kazzam. Refer to Note 19 – Kazzam, LLC for further detail. As of both ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019 the original value was greater and, therefore, the liabilities are not ~~included in the table below.~~

~~Table of Contents~~

~~The following table shows assets and liabilities as of September 30, 2019 that are measured at fair value on a recurring basis:~~

Level 1

Level 2

Level 3

Total as of
September 30,
2019

Derivative assets
$
  —
$
151
$
  —
$
151

Derivative liabilities

—

22

—

22

~~The following table shows assets and liabilities as of December 31, 2018 that are measured at fair value on a recurring basis:~~

Level 1

Level 2

Level 3

Total as of
December 31,
2018

Derivative assets
$
  —
$
115
$
  —
$
115

Derivative liabilities

—

—

—

—

Punchbowl put liability

—

—

316

316

disclosed.

The majority of the Company’s

non-financial

instruments, which include goodwill, intangible assets, lease assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a

non-financial

instrument is required to be evaluated for impairment. If the Company determines that the

non-financial

instrument is impaired, the Company would be required to write down the

non-financial

instrument to its fair value. During the nine months ended September 30, 2019, the Company initiated a store optimization program under which it plans to close approximately 55 Party City stores during the course of 2019. In conjunction with the program, during the nine months ended September 30, 2019, the Company recorded impairment charges for its property, plant and equipment and operating lease assets. See Note 3 – Store Impairment and Restructuring Charges and Note 4 – Goodwill and Intangibles Impairment for further detail.

During the three months ended September 30, 2019, the Company identified an impairment indicator associated with its market capitalization and performed interim impairment tests on the goodwill at its

~~retail and~~

wholesale reporting units as of September 30, 2019. The interim impairment tests arrived at the fair values of the reporting units using a combination of a market approach and an income approach. As a result of a sustained decline in the Company’s market capitalization, the Company recognized

~~non-cash~~

~~pre-tax~~

~~goodwill impairment charges at September 30, 2019~~

~~of $224,100~~

~~and~~

~~$35,000 against the goodwill associated with its retail and wholesale reporting units. See Note 4 for further detail.~~

The carrying amounts for cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximated fair value at ~~September 30, 2019~~March 31, 2020 because of the short-term maturities of the instruments and/or their variable rates of interest.

The carrying amounts and fair values of borrowings under the Term Loan Credit Agreement and the Company’s senior notes as of ~~September 30, 2019~~March 31, 2020 are as follows:

	March 31, 2020
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	715,940	$	349,178
6.125% Senior Notes – due 2023		347,221		80,500
6.625% Senior Notes – due 2026		495,104		55,000

September 30, 2019

Carrying
Amount

Fair
Value

Term Loan Credit Agreement
$
720,743
$
722,488

6.125% Senior Notes – due 2023

346,809

356,125

6.625% Senior Notes – due 2026

494,717

493,125

The fair values of the Term Loan Credit Agreement and the ~~senior notes~~Senior Notes represent Level 2 fair value measurements as the debt instruments trade in inactive markets. The carrying amounts for other long-term debt approximated fair value at September 30, 2019 based on the discounted future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturity.

Note 1

15 – Earnings Per Share

Basic earnings per share are computed by dividing net income attributable to common shareholders of Party City Holdco Inc. by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated based on the weighted average number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units, as if they vested.

~~Table of Contents~~

~~A reconciliation between basic~~

Basic and diluted ~~income (loss)~~loss per share is as follows:

	Three Months Ended
	March 31, 2020			March 31, 2019
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	$	(30,218	)
Weighted average shares - Basic		93,395,609			93,174,553
Effect of dilutive securities:
Warrants		—			—
Restricted stock units		—			—
Stock options		—			—
Weighted average shares - Diluted		93,395,609			93,174,553
Net loss per share attributable to common shareholders of Party City Holdco Inc. - Basic	$	(5.80	)	$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc. - Diluted	$	(5.80	)	$	(0.32	)

Three Months
Ended
September 30,
2019

Three Months
Ended
September 30,
2018

Nine Months
Ended
September 30,
2019

Nine Months
Ended
September 30,
2018

Net (loss) income attributable to common shareholders of Party City Holdco Inc.
$
(281,533
) $
(2,420
) $
(263,677
) $
24,934

Weighted average shares - Basic

93,346,448

96,494,565

93,271,392

96,449,011

Effect of dilutive securities:

Warrants

—

—

—

—

Restricted stock units

—

—

—

9,004

Stock options

—

—

—

1,226,275

Weighted average shares - Diluted

93,346,448

96,494,565

93,271,392

97,684,290

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Basic
$
(3.02
) $
(0.03
) $
(2.83
) $
0.26

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Diluted
$
(3.02
) $
(0.03
) $
(2.83
) $
0.26

During the three months ended ~~September 30, 2019 and September 30, 2018, 3,544,501~~March 31, 2020, 3,450,209 stock options, 1,000,000 warrants and ~~4,157,559~~413,968 restricted stock ~~options, respectively,~~ units were excluded from the calculation of ~~diluted earnings~~net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. ~~Additionally, during~~During the three months ended ~~September 30,~~March 31, 2019, ~~and September 30, 2018,~~ 3,613,408 stock options, 596,000 warrants ~~were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Further, during the three months ended September 30, 2019~~ and ~~September 30, 2018, 416,260 restricted stock units and 191,033 restricted stock units, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive.~~

During the nine months ended September 30, 2019 and September 30, 2018, 3,544,501 stock options and 2,354,244 stock options, respectively, were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Additionally, during the nine months ended September 30, 2019 and September 30, 2018, 596,000 warrants were excluded from the calculation of diluted earnings per share as they were anti-dilutive. Further, during the nine months ended September 30, 2019, 416,260142,130 restricted stock units were excluded from the calculation of ~~diluted earnings~~net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. ~~During the nine months ended September 30, 2018, all restricted stock units were dilutive.~~

Note 1

16 – Current and Long-Term Obligations

Long-term obligations at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consisted of the following:

	March 31, 2020			December 31, 2019
Term Loan Credit Agreement	$	716,195		$	718,596
6.125% Senior Notes – due 2023		347,221			347,015
6.625% Senior Notes – due 2026		495,104			494,910
Finance lease obligations		14,922			14,990
Total long-term obligations		1,573,442			1,575,511
Less: current portion		(98,588	)		(71,524	)
Long-term obligations, excluding current portion	$	1,474,854		$	1,503,987

September 30,
2019

December 31,
2018

Term Loan Credit Agreement
$
720,743
$
791,135

6.125% Senior Notes – due 2023

346,809

346,191

6.625% Senior Notes – due 2026

494,717

494,138

Finance lease obligations

15,327

3,815

Total long-term obligations

1,577,596

1,635,279

Less: current portion

(13,498
)
(13,316
)

Long-term obligations, excluding current portion
$
1,564,098
$
1,621,963

As disclosed in Note 6 – Disposition of Assets, the Company expects to use $85 million of the net proceeds from the sale of its Canadian-based stores to paydown the Term Loan.

Prior to April 2019, the Company had a $540,000 asset-based revolving credit facility (with a seasonal ~~~~increase to $640,000 during a certain period of each calendar year) ~~(“ABL~~(the “ABL Facility”), which matures during August 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000.

During April 2019, the Company amended the ABL Facility. Such amendment removed the seasonal component and made the ~~facility~~ABL Facility a $640,000 facility ~~on a year-round basis.~~

~~Table~~with no seasonal modification component.

In the first quarter of ~~Contents~~

~~During June 2019, in conjunction with a sale/leaseback transaction,~~2020 the Company ~~amended its Term Loan Credit Agreement and financed its Los Lunas, New Mexico facility. See~~drew down $253.0 million under the ABL Facility. At March 31, 2020, $150 million was invested in US Treasury funds with maturities of less than three months at March 31, 2020. The Company had approximately $71.3 million of availability under the ABL Facility as of March 31, 2020.

Refer to Note 520 – Subsequent Events forfurther ~~detail. The finance lease obligations above include $~~

~~12,035~~

~~related to~~disclosure about the ~~Los Lunas, New Mexico facility.~~

Company’s debt.

Note 1

17 – Revenue from Contracts with Customers

The following table summarizes revenue from contracts with customers for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~September 30, 2018:~~2019:

	Three Months Ended March 31,
	2020		2019
Retail Net Sales:
North American Party City Stores	$	259,878	$	346,140
Global E-commerce		29,753		31,808
Other		11,763		205
Total Retail Net Sales	$	301,394	$	378,153
Royalties and Franchise Fees		1,582		2,014
Total Retail Revenue	$	302,976	$	380,167
Wholesale Net Sales:
Domestic	$	58,754	$	73,821
International		52,313		59,128
Total Wholesale Net Sales	$	111,067	$	132,949
Total Consolidated Revenue	$	414,043	$	513,116

Three Months
Ended
September 30,
2019

Three Months
Ended
September 30,
2018

Nine Months
Ended
September 30,
2019

Nine Months
Ended
September 30,
2018

Retail Net Sales:

North American Party City Stores
$
326,810
$
336,355
$
1,060,258
$
1,043,422

Global
E-commerce

36,823

34,221

103,995

102,083

Other

5,834

5,104

6,524

5,104

Total Retail Net Sales
$
369,467
$
375,680
$
1,170,777
$
1,150,609

Royalties and Franchise Fees

1,886

2,206

6,089

7,832

Total Retail Revenue
$
371,353
$
377,886
$
1,176,866
$
1,158,441

Wholesale Net Sales:

Domestic
$
82,670
$
88,287
$
231,257
$
247,243

International

86,208

86,873

209,115

216,197

��
Total Wholesale Net Sales
$
168,878
$
175,160
$
440,372
$
463,440

Total Consolidated Revenue
$
540,231
$
553,046
$
1,617,238
$
1,621,881

Note 1

18 – Cash, Cash Equivalents and Restricted Cash

The Company’s ~~September 30, 2019 consol~~

~~dated~~March 31, 2020 consolidated balance sheet included ~~$34,572~~$194,433 of cash and cash equivalents (with maturities of less than three months) and $5$144 of restricted cash and the Company’s December 31, ~~2018~~2019 consolidated balance sheet included ~~$58,909~~$34,917 of cash and cash equivalents and ~~$310~~$259 of restricted cash.

The Company’s September 30, 2018 consolidated balance sheet included $48,097 of cash and cash equivalents and $177 of restricted cash and the Company’s December 31, 2017 consolidated balance sheet included $54,291 of cash and cash equivalents and $117 of restricted cash.

Restricted cash is recorded in Prepaid expenses and other current assets.

Note 1

19 – ~~Leases~~

~~In February 2016, the FASB issued ASU~~

~~2016-02,~~

~~“Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by the companies’ leases. The update was effective for the Company during~~Kazzam, LLC

During the first quarter of ~~2019.~~

~~The FASB has provided companies with~~2017, the Company and Ampology, a ~~transition option under which they can opt~~subsidiary of Trivergence, reached an agreement to ~~continue to apply the legacy guidance, including its disclosure requirements, in the comparative periods presented in the year during which they adopt the~~form a new ~~lease standard. Entities that elect the option only make annual disclosures~~legal entity, Kazzam, LLC (“Kazzam”), for the ~~comparative periods as legacy guidance does not require interim disclosures. The Company has elected this transition option~~

~~Practical Expedients/Policy Elections~~

~~Under the new standard, companies may elect the following practical expedients, which must be elected as a package~~purpose of designing, developing and ~~applied consistently to all leases:~~

~~1. An entity need not reassess whether any expired or existing contracts are or contain leases.~~

~~2. An entity need not reassess the lease classification~~launching an online exchange platform for ~~any expired or existing leases.~~

~~3. An entity need not reassess initial direct costs for any existing leases.~~

~~The Company elected this package of practical expedients.~~

~~Table of Contents~~

~~Under the new standard, an entity may also elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s~~

~~right-of-use~~

~~assets. The Company did not elect this practical expedient.~~

Additionally, under the new standard, lessees can make an accounting policy election (by class of underlying asset to which the right of use relates) to apply accounting similar to legacy accounting to leases that meet the new standard’s definition of a “short-term lease” (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). The Company has made this election for all classes of underlying assets.

Further, the new standard provides a practical expedient that permits lessees to make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated

~~non-lease~~

~~components as a single lease component. The Company has elected this expedient for all asset classes, with the exception of its real estate.~~

~~Lease Population~~

The Company’s lease portfolio is primarily comprised of real estate leases for its permanent Party City stores. The Company also leases manufacturing facilities, distribution facilities, warehouse space and office space. Additionally,party-related services.

At December 31, 2019, though the Company ~~enters~~owned 26% of Kazzam’s equity, Kazzam was a variable interest entity and the Company consolidated Kazzam into ~~short leases (generally less than four months) in order to operate its temporary stores.~~the Company’s financial statements. Further, the Company ~~enters into leases of equipment, copiers, printers and automobiles.~~

~~Substantially~~was funding all of Kazzam’s start-up activities via a loan to Kazzam and recorded its operating results in “development stage expenses” in the Company’s ~~leases are operating leases.~~

~~The Company’s finance leases are immaterial. The~~

~~right-of-use~~

~~asset for~~consolidated statement of operations and comprehensive (loss) income. Ampology’s ownership interest in Kazzam had been recorded in redeemable securities in the ~~Company’s finance leases is included in Property, plant and equipment, net on~~mezzanine of the Company’s consolidated balance sheet.

In January 2020, the Company and Ampology terminated certain services agreements and warrants that Ampology had in the Company stock. The ~~liabilities~~parties concurrently entered into an interim transition agreement for which expenses are recorded as development stage expenses.

On March 23, 2020, the ~~Company’s finance leases are included~~Company agreed to purchase Ampology’s interest in ~~Current portion of long-term obligations~~Kazzam in exchange for a three-year royalty on net service revenue and ~~Long-term obligations, excluding current portion, on the Company’s consolidated balance sheet.~~

~~The Company’s~~

~~sub-leases~~

~~are also immaterial.~~

~~Variable Lease Payments~~

~~A limited number~~a warrant to purchase up to 1,000,000 shares of the Company’s ~~store leases require rent~~common stock. The acquisition of Ampology’s interest in Kazzam is an equity transaction and the difference between the fair value of the consideration transferred and the carrying value of Ampology’s interest in Kazzam is recorded within the consolidated statement of stockholders’ equity.

Note 20 – Subsequent Events

Transaction Support Agreement with Certain Existing Noteholders

On May 28, 2020, the Company and an ad hoc committee of holders (the “Consenting Noteholders”) of approximately 52% of the aggregate principal amount of the 6.125% Senior Notes due 2023 (the “2023 Notes”) and the 6.625% Senior Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “Existing Notes”), each issued by Party City Holdings Inc. (“Holdings”), entered into an agreement (together with all exhibits, annexes and schedules thereto and as subsequently amended on June 9, 2020, the “Transaction Support Agreement”), whereby the Consenting Noteholders agreed to support a set of transactions to be ~~paid based on sales levels. The Company’s cost for such leases is immaterial. Variable lease consideration is not included in lease payments until the contingency is resolved.~~

~~Additionally, for most store leases,~~commenced by the Company ~~pays variable taxes and insurance.~~

~~Renewal Options~~

~~Many~~(collectively, the “Transactions”).

Under the Transaction Support Agreement, each of the ~~Company’s store leases,~~Company and ~~certain~~the Consenting Noteholders have undertaken customary commitments to one another. The Company has agreed, among other things, to solicit approval of the ~~Company’s~~Transactions by the holders of the Existing Notes through the Exchange Offer (as defined below) and to negotiate in good faith the definitive documents that will govern the Transactions. The Consenting Noteholders have agreed, among other ~~leases, contain renewal options. However,~~things, to timely vote, exchange, and tender their Existing Notes in connection with the ~~renewal periods~~Transactions, to use commercially reasonable efforts to support approval and implementation of the Transactions, and to negotiate in good faith the definitive documents that will govern the Transactions.

The Transactions consist of the Exchange Offer, the Consent Solicitation (as defined below), the Rights Offering (as defined below) and the Private Placement (as defined below).

As of June 12, 2020, the Consenting Noteholders held a total of approximately 54% of the aggregate principal amount of the Existing Notes.

Exchange Offer

Under the Transaction Support Agreement, the Company will conduct an exchange offer (the “Exchange Offer”) in respect of the Existing Notes in which the Company will offer to exchange any and all Existing Notes, including accrued and unpaid interest on account of such notes to, but not including, the settlement date (the “Settlement Date”) of the Exchange Offer, (in each case assuming all Existing Notes are ~~generally~~validly tendered and not ~~included~~validly withdrawn in the Exchange Offer) for:

~~right-of-use~~

•

shares of common stock of Party City Holdco Inc., par value $0.01 per share, representing 19.90% of such common stock outstanding on the Settlement Date prior to the settlement of the Exchange Offer (the “Shares”);

•

$100.0 million aggregate principal amount of 10.00% Senior Secured Notes due 2026 (the “Second Lien Issuer Exchange Notes”) to be issued by a newly formed limited liability company, a direct wholly owned subsidiary of Holdings, and Anagram International, Inc. (together, the “Issuer”). The Second Lien Issuer Exchange Notes will be secured by second-priority liens on all assets of the Issuer and its subsidiaries guaranteeing such notes and all of the Issuer’s capital stock, subject to certain agreed upon exceptions; and

•

$185.0 million aggregate principal amount of variable rate Senior Secured Notes due 2025 (the “First Lien Party City Exchange Notes”) to be issued by Holdings and secured by first-priority liens on all assets of Holdings and its subsidiaries that currently secure the Company’s existing senior credit facilities.

Consent Solicitation

The Company will seek, and ~~lease liabilities for such leases as exercise~~holders of Existing Notes who tender pursuant to the Exchange Offer will be required to deliver, consents to certain amendments (the “Proposed Amendments”) to each of the ~~options~~indentures governing the Existing Notes (together, the “Existing Indentures”). The Proposed Amendments will:

•

allow for the issuance of the New Money First Lien Issuer Notes (as defined below), the Second Lien Issuer Exchange Notes and the First Lien Party City Exchange Notes;

•

allow for the issuance of the Shares;

•

eliminate substantially all of the restrictive covenants and certain events of default and related provisions contained in the Existing Indentures;

•

waive any related cross-defaults under the Existing Indentures;

•

release any guarantees provided by guarantors (or groups of guarantors) under the Existing Indentures that do not constitute Significant Subsidiaries (as defined in the Existing Indentures);

•

prohibit the designation of any future guarantors under the Existing Indentures; and

•

waive any requirement to use excess proceeds from any previous asset sales to make an offer to repurchase the Existing Notes under the provisions of the asset sales covenant in the Existing Indentures.

Rights Offering

Simultaneously with the launch of the Exchange Offer and the Consent Solicitation, the Company will initiate a rights offering (the “Rights Offering”) whereby holders of the Existing Notes eligible to participate in the Exchange Offer (“Eligible Holders”) who validly tender (and do not validly withdraw) their Existing Notes for exchange in the Exchange Offer will be provided the right (a “Right”) to purchase a pro rata portion of $41.5 million of 15.00% Senior Secured Notes due 2025 (the “New Money First Lien Issuer Notes”) to be issued by the Issuer and secured by first-priority liens on all assets of the Issuer and its subsidiaries guaranteeing such notes and all of the Issuer’s capital stock, subject to certain agreed upon exceptions.

Certain of the Consenting Noteholders (as designated from time to time, the “Backstop Parties”) have agreed in the Transaction Support Agreement to, and will, enter into a backstop and private placement agreement (the “Backstop and Private Placement Agreement”) with the Company prior to launch of the Transactions, to purchase up to $41.5 million of New Money First Lien Issuer Notes. The Backstop and Private Placement Agreement will include a $41.5 million commitment by the Backstop Parties to purchase the amount of New Money First Lien Issuer Notes that may be issued in the Rights Offering, representing the aggregate amount the Backstop Parties may purchase in the Rights Offering plus an additional amount of New Money First Lien Issuer Notes that are otherwise available to be purchased in the Rights Offering but for which applicable Rights have not been exercised by other Eligible Holders.

As consideration for entering into the Backstop and Private Placement Agreement and providing their respective commitments, the Company has agreed to pay to each of the Backstop Parties (i) its pro rata portion of an aggregate premium of $5.275 million in the form of New Money First Lien Issuer Notes plus (ii) its pro rata portion of an aggregate premium of $5.0 million in the form of First Lien Party City Exchange Notes.

Private Placement

On May 28, 2020, the Company and Barings LLC (including certain funds or advisory accounts managed, advised or sub-advised by it, “Barings”) entered into a private placement commitment agreement (the “Private Placement Commitment Agreement”). The Private Placement Commitment Agreement includes a commitment by Barings to purchase $40.0 million of New Money First Lien Issuer Notes in a private transaction (the “Private Placement”) exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the terms of the Transaction Support Agreement, the Backstop and Private Placement Agreement will also contain commitments by certain parties, including Barings, to purchase $58.5 million of New Money First Lien Issuer Notesin the Private Placement. As consideration for entering into the Backstop and Private Placement Agreement (and, with respect to Barings, the Private Placement Commitment Agreement) and providing commitments in the aggregate amount of

$58.5 million, the Company will pay to each party participating in the Private Placement an agreed portion of an aggregate premium of $4.725 million in the form of New Money First Lien Issuer Notes.

As of June 12, 2020, the Company has secured commitments in an aggregate amount of $58.5 million of New Money First Lien Issuer Notes in connection with the Private Placement.

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.

On April 9, 2020, the Company received written notice (the “Notice”) from the New York Stock Exchange (the “NYSE”) that the Company is ~~not reasonably certain.~~

~~Discount Rates~~

no longer in compliance with the NYSE continued listing standards set forth in Section 802.01C of the NYSE’s Listed Company Manual, which requires listed companies to maintain an average closing share price of at least $1.00 over a consecutive 30 trading-day period.

Under NYSE continued listing standards, the Company has a period of six months following the receipt of the Notice to regain compliance with the minimum share price requirement. However, on April 20, 2020, the NYSE made a rule filing with the Securities and Exchange Commission for relief on the $1.00 share closing price standard, which became effective on April 21, 2020. The relief provides issuers additional time to cure noncompliance with the $1.00 share closing price standard. As a result, the Company’s new noncompliance cure expiration date is December 18, 2020. In order to regain compliance, on the last trading day of any calendar month during the cure period, the Company’s common stock, $0.01 par value per share (the “Common Stock”), must have (i) a closing price of at least $1.00 per share and (ii) an average closing price of at least $1.00 per share over the 30-trading day period ending on the last trading day of such month. If the Company is unable to ~~determine~~regain compliance, the ~~discount rates that are implicit in its operating leases. Therefore, for~~NYSE will initiate procedures to suspend and delist the Common Stock.

The Notice has no immediate impact on the listing of the Company’s Common Stock, which will continue to be listed and traded on the NYSE during the cure period, subject to the Company’s compliance with the other listing requirements of the NYSE. The Common Stock will continue to trade under the symbol “PRTY” but will have an added designation of “.BC” to indicate the status of the Common Stock as “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such ~~leases,~~time as the Company ~~is utilizing its incremental borrowing rate.~~

~~For leases that existed as of January 1, 2019, the Company determined the applicable incremental borrowing rates for such leases based on the remaining lease terms for the leases as of such date.~~

~~Quantitative Disclosures~~

~~During the three months and nine months ended September 30, 2019,~~regains compliance.

The Notice does not affect the Company’s ~~operating lease cost was $56,366 and $153,813, respectively. Such amount excludes impairment charges recorded in conjunction~~business operations or its reporting obligations with the ~~Company’s store optimization program (see Note 3).~~

~~The Company’s variable lease cost during the three~~Securities and ~~nine months ended September 30, 2019 was $6,530~~Exchange Commission, and ~~$23,716, respectively.~~

~~Table~~it does not conflict with or cause an event of ~~Contents~~

~~During the three and nine months ended September 30, 2019, cash paid for amounts included in the measurement~~default under any of ~~operating lease liabilities was $49,947 and $165,398, respectively.~~

~~During the three and nine months ended September 30, 2019,~~

~~right-of-use~~

~~assets obtained in exchange for new operating lease liabilities were $30,257 and $187,124, respectively.~~

~~As of September 30, 2019, the weighted-average remaining lease term for operating leases was~~

~~eight years~~

~~and the weighted-average discount rate for operating leases was 6.8%.~~

~~As of September 30, 2019, the future cash flows for~~ the Company’s ~~operating leases were:~~material debt or other agreements.

Three months ended December 31, 2019
$
35,386

2020

197,177

2021

182,950

2022

163,685

2023

135,792

Thereafter

480,287

Total Undiscounted Cash Flows
$
1,195,277

Less: Interest

(307,417
)

Total Operating Lease Liability

887,860

Less: Current Portion of Operating Lease Liability

(140,781
)

Long-Term Portion of Operating Lease Liability
$
747,079

~~Note~~

~~– Subsequent Event~~

~~On November 4, 2019, the Company acquired the stock of a European-based online retailer for total consideration of approximately $9,000.~~

~~Table of Contents~~

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

References throughout this document to the “Company” include Party City Holdco Inc. and its subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its subsidiaries and not to any other person.

Business Overview

Our Company

We are the leading ~~decorated~~ party goods ~~omni-channel retailer,~~company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. ~~With approximately 900 locations (inclusive~~The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of ~~franchised~~March 31, 2020, the Company’s retail operations include 854 specialty retail party supply stores (including franchise stores)~~, we have~~ throughout the ~~only~~

~~coast-to-coast~~

~~network of party superstores in~~United States and Mexico operating under the ~~U.S.~~names Party City and ~~through September 30, 2019, Canada,~~Halloween City, and such stores make it easy and fun to enhance special occasions with a differentiated shopping experience and an unrivaled assortment of innovative and exciting merchandise offered at a compelling value. We also operate multiple

e-commerce

~~sites, principally under~~ websites, including through the domain name ~~PartyCity.com. Further, we open a network of approximately 250 - 300 temporary Halloween City stores.~~

PartyCity.com and others.

In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers,

e-commerce

merchandisers and dollar stores. Our products are available in over 100 countries with the United Kingdom (“U.K.”), Canada, Germany, Mexico and Australia among the largest end markets for our products outside of the United States.

How We Assess the Performance of Our Company

In assessing the performance of our company, we consider a variety of performance and financial measures for our two operating segments, Retail and Wholesale. These key measures include revenues and gross profit, comparable retail same-store sales and operating expenses. We also review other metrics such as adjusted net income (loss), adjusted net income (loss) per common share – diluted and adjusted EBITDA. For a discussion of our use of these measures and a reconciliation of adjusted net income (loss) and adjusted EBITDA to net income (loss), please refer to “Financial Measures - Adjusted EBITDA,” “Financial Measures - Adjusted Net Income (Loss)” and “Financial Measures - Adjusted Net Income (Loss) Per Common Share – Diluted” below.

Segments

We have two reporting segments: Retail and Wholesale.

Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and Costumes USA brand names through Party City, Halloween City and PartyCity.com. During ~~2018, 79%~~2019, 80% of the product that was sold by our retail segment was supplied by our wholesale segment and ~~23%~~24% of the product that was sold by our retail segment was self-manufactured.

Our wholesale revenues are generated from the sale of decorated party goods for all occasions, including paper and plastic tableware, accessories and novelties, costumes, metallic and latex balloons and stationery. Our products are sold at wholesale to party goods superstores (including our franchise stores), other party goods retailers, mass merchants, independent card and gift stores, dollar stores and

e-commerce

merchandisers.

Intercompany sales between the Wholesale and the Retail segment are eliminated, and the wholesale profits on intercompany sales are deferred and realized at the time the merchandise is sold to the retail consumer. For segment reporting purposes, certain general and administrative expenses and art and development costs are allocated based on total revenues.

Financial Measures

Revenues.

Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retail

e-commerce

sales are recognized when the consumer receives the product as control transfers upon delivery. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail sales are reported net of taxes collected.

Under the terms of our agreements with our franchisees, we provide both: 1) brand value (via significant advertising spend) and 2) support with respect to planograms, in exchange for a royalty fee that ranges from 4% to 6% of the franchisees’ sales. The Company records the royalty fees at the time that the franchisees’ sales are recorded.

For most of our wholesale sales, control transfers upon the shipment of the product as: 1) legal title transfers on such date and 2) we have a present right to payment at such time. Wholesale sales returns are not significant as we generally only accept the return of goods that were shipped to the customer in error or that were damaged when received by the customer. Additionally, due to our extensive history operating as a leading party goods wholesaler, we have sufficient history with which to estimate future sales returns and we use the expected value method to estimate such activity.

~~Table of Contents~~

Intercompany sales from our wholesale operations to our retail stores are eliminated in our consolidated total revenues.

Comparable Retail Same-Store Sales.

The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail

e-commerce

sales.

Cost of Sales.

Cost of sales at wholesale reflects the production costs (i.e., raw materials, labor and overhead) of manufactured goods and the direct cost of purchased goods, inventory shrinkage, inventory adjustments, inbound freight to our manufacturing and distribution facilities, distribution costs, including rent at distribution facilities, and outbound freight to get goods to our wholesale customers. At retail, cost of sales reflects the direct cost of goods purchased from third parties and the production or purchase costs of goods acquired from our wholesale segment. Retail cost of sales also includes inventory shrinkage, inventory adjustments, inbound freight, occupancy costs related to store operations (such as rent and common area maintenance, utilities and depreciation on assets) and all logistics costs associated with our retail

e-commerce

business.

Our cost of sales increases in higher volume periods as the direct costs of manufactured and purchased goods, inventory shrinkage and freight are generally tied to net sales. However, other costs are largely fixed or vary based on other factors and do not necessarily increase as sales volume increases. Changes in the mix of our products may also impact our overall cost of sales. The direct costs of manufactured and purchased goods are influenced by raw material costs (principally paper, petroleum-based resins and cotton), domestic and international labor costs in the countries where our goods are purchased or manufactured and logistics costs associated with transporting our goods. We monitor our inventory levels on an

on-going

basis in order to identify slow-moving goods.

Cost of sales related to sales from our wholesale segment to our retail segment are eliminated in our consolidated financial statements.

Wholesale Selling Expenses.

Wholesale selling expenses include the costs associated with our wholesale sales and marketing efforts, including merchandising and customer service. Costs include the salaries and benefits of the related work force, including sales-based bonuses and commissions. Other costs include catalogues, showroom expenses, travel and other operating costs. Certain selling expenses, such as sales-based bonuses and commissions, vary in proportion to sales, while other costs vary based on other factors, such as our marketing efforts, or are largely fixed and do not necessarily increase as sales volumes increase.

Retail Operating Expenses.

Retail operating expenses include all of the costs associated with retail store operations, excluding occupancy-related costs included in cost of sales. Costs include store payroll and benefits, advertising, supplies and credit card costs. Retail expenses are largely variable but do not necessarily vary in proportion to net sales.

Franchise Expenses.

Franchise expenses include the costs associated with operating our franchise network, including salaries and benefits of the administrative work force and other administrative costs. These expenses generally do not vary proportionally with royalties and franchise fees.

General and Administrative Expenses.

General and administrative expenses include all operating costs not included elsewhere in the statement of operations and comprehensive (loss) income. These expenses include payroll and other expenses related to operations at our corporate offices, including occupancy costs, related depreciation and amortization, legal and professional fees and data-processing costs. These expenses generally do not vary proportionally with net sales.

Art and Development Costs.

Art and development costs include the costs associated with art production, creative development and product management. Costs include the salaries and benefits of the related work force. These expenses generally do not vary proportionally with net sales.

Development Stage Expenses.

Development stage expenses represent

start-up

activities related to Kazzam, LLC (“Kazzam”).

~~Table of Contents~~

Adjusted EBITDA.

We define EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core operating performance. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because the credit facilities use Adjusted EBITDA to measure compliance with certain covenants.

Adjusted Net Income (Loss).

Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization,

non-cash

purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.

Adjusted Net Income (Loss) Per Common Share – Diluted.

Adjusted net income (loss) per common share – diluted represents adjusted net income (loss) divided by the Company’s diluted weighted average common shares outstanding. We present the metric because we believe it assists investors in comparing our per share performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.

~~Table of Contents~~

Results of Operations

Impact of the COVID-19 Pandemic

This led to a temporary furlough of approximately 90% of store employees and 70% of wholesale, manufacturing and corporate employees for whom the Company provides health benefits. In addition, there were non-payroll expense reductions including advertising and other store operating expenses, as well as professional and consulting fees, and cancellation of orders and negotiated receipt delays to manage inventory levels.

As of June 5, 2020, approximately 85% of our corporate retail stores have opened with store employees returning from furlough. But our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. The disruption to the global economy and to our business, along with the decline in our stock price, negatively impacted the recoverability value of certain assets, including intangibles, and goodwill.

Three Months Ended ~~September 30, 2019~~March 31, 2020 Compared To Three Months Ended ~~September 30, 2018~~

March 31, 2019

The following table sets forth the Company’s operating results and operating results as a percentage of total revenues for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

	Three Months Ended March 31,
	2020						2019
	(Dollars in thousands)
Revenues:
Net sales	$	412,461		99.6		%	$	511,102		99.6		%
Royalties and franchise fees		1,582		0.4				2,014		0.4
Total revenues		414,043		100.0				513,116		100.0
Expenses:
Cost of sales		296,757		71.7				339,042		66.1
Wholesale selling expenses		15,458		3.7				17,961		3.5
Retail operating expenses		88,166		21.3				95,018		18.5
Franchise expenses		3,309		0.8				3,303		0.6
General and administrative expenses		59,996		14.5				41,925		8.2
Art and development costs		5,322		1.3				5,929		1.2
Development stage expenses		2,029		0.5				2,226		0.4
Store impairment and restructuring charges		17,728		4.3				18,009		3.5
Goodwill and intangibles impairment		536,648		129.6				—		—
Total expenses		1,025,413		247.7				523,413		102.0
Loss from operations		(611,370	)	(147.7	)			(10,297	)	(2.0	)
Interest expense, net		25,120		6.1				29,257		5.7
Other expense, net		5,676		1.4				1,254		0.2
Loss before income taxes		(642,166	)	(155.1	)			(40,808	)	(8.0	)
Income tax benefit		(100,498	)	(24.3	)			(10,519	)	(2.1	)
Net loss		(541,668	)	(130.8	)			(30,289	)	(5.9	)
Less: Net loss attributable to noncontrolling interests		(155	)	—				(71	)	—
Net loss attributable to common shareholders of Party City Holdco Inc.	$	(541,513	)	(130.8	)	%	$	(30,218	)	(5.9	)	%
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	(5.80	)				$	(0.32	)
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	(5.80	)				$	(0.32	)

Three Months Ended September 30,

2019

2018

(Dollars in thousands)

Revenues:

Net sales
$
538,345

99.7
% $
550,840

99.6
%
Royalties and franchise fees

1,886

0.3

2,206

0.4

Total revenues

540,231

100.0

553,046

100.0

Cost of sales

373,413

69.1

349,641

63.2

Wholesale selling expenses

16,084

3.0

17,538

3.2

Retail operating expenses

111,595

20.7

103,833

18.8

Franchise expenses

3,274

0.6

862

0.2

General and administrative expenses

43,062

8.0

42,239

7.6

Art and development costs

5,927

1.1

5,573

1.0

Development stage expenses

2,728

0.5

1,622

0.3

Store impairment and restructuring charges

2,574

0.5

—

—

Goodwill impairment

259,100

48.0

—

—

Total expenses

817,757

151.4

521,308

94.3

(Loss) income from operations

(277,526
)
(51.4
)
31,738

5.7

Interest expense, net

29,424

5.4

27,705

5.0

Other expense, net

2,047

0.4

5,696

1.0

Loss before income taxes

(308,997
)
(57.2
)
(1,663
)
(0.3
)
Income tax (benefit) expense

(27,252
)
(5.0
)
777

0.1

Net loss

(281,745
)
(52.2
)
(2,440
)
(0.4
)
Add: Net loss attributable to redeemable securities holder

—

—

(8
)
(0.0
)
Less: Net loss attributable to noncontrolling interests

(212
)
(0.0
)
(28
)
(0.0
)

Net loss attributable to common shareholders of Party City Holdco Inc.
$
(281,533
)
(52.1
)% $
(2,420
)
(0.4
)%

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic
$
(3.02
) $
(0.03
)
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted
$
(3.02
) $
(0.03
)

~~Table of Contents~~

Revenues

Total revenues for the ~~third~~first quarter of ~~2019~~2020 were ~~$540.2~~$414.0 million and were ~~$12.8~~$99.1 million, or ~~2.3%~~19.3%, lower than the ~~third~~first quarter of ~~2018.~~2019. The following table sets forth the Company’s total revenues for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

	Three Months Ended March 31,
	2020							2019
	Dollars in Thousands			Percentage of Total Revenues				Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	214,798			51.9		%	$	290,301			56.6		%
Eliminations		(103,731	)		(25.1	)			(157,352	)		(30.7	)
Net wholesale		111,067			26.8				132,949			25.9
Retail		301,394			72.8				378,153			73.7
Total net sales		412,461			99.6				511,102			99.6
Royalties and franchise fees		1,582			0.4				2,014			0.4
Total revenues	$	414,043			100.0		%	$	513,116			100.0		%

Three Months Ended September 30,

2019

2018

Dollars in
Thousands

Percentage of
Total Revenues

Dollars in
Thousands

Percentage of
Total Revenues

Net Sales:

Wholesale
$
383,425

71.0
% $
424,569

76.8
%
Eliminations

(214,547
)
(39.7
)%
(249,409
)
(45.1
)%

Net wholesale

168,878

31.3
%
175,160

31.7
%
Retail

369,467

68.4
%
375,680

67.9
%

Total net sales

538,345

99.7
%
550,840

99.6
%
Royalties and franchise fees

1,886

0.3
%
2,206

0.4
%

Total revenues
$
540,231

100.0
% $
553,046

100.0
%

Retail

Retail net sales during the ~~third~~first quarter of ~~2019~~2020 were ~~$369.5~~$301.4 million and were ~~$6.2~~$76.8 million, or ~~1.7%~~20.3%, lower than during the ~~third~~first quarter of ~~2018.~~2019. Retail net sales at our North American Party City stores totaled ~~$326.8~~$259.9 million and were ~~$9.5~~$86.3 million, or ~~2.8%,~~24.9% lower than in the ~~third~~first quarter of ~~2018~~2019 principally due to the ~~continued impact~~temporary closure of all Party City stores in response to the ~~ongoing helium shortage~~COVID-19 pandemic starting on March 18, 2020, the sale of 65 Canadian Party City stores in October 2019, and the closure of 3455 stores in conjunction with our 2019 store optimization program. These negative factors affecting sales were partially offset by the acquisition of six franchise and independent stores and the opening of ~~nine~~one new ~~stores~~store during the twelve months ended ~~September 30, 2019, as well as the acquisition of 37 franchise stores throughout the third quarter of 2018.~~March 31, 2020. Global retail

e-commerce

sales totaled ~~$36.8~~$40.9 million during the ~~third~~first quarter of ~~2019~~2020 and were ~~$2.6~~$9.1 million, or ~~7.6%,~~28.6% higher than during the corresponding quarter of ~~2018. Sales at our temporary Halloween City stores totaled $4.8 million and were $0.3 million or 5.7% lower than in the third quarter of 2018.~~2019. Sales at other store formats totaled ~~$1.0~~$0.6 million during the ~~third~~first quarter of ~~2019.~~

2020.

Same-store sales for the Party City brand (including North American retail

e-commerce

sales) decreased by ~~2.6%~~17.1% during the ~~third~~first quarter of ~~2019,~~2020, principally due to the impact of the ~~ongoing helium shortage on balloon sales.~~

temporary closure of all Party City stores in response to the COVID-19 pandemic.

Our North American retail

e-commerce

sales, which include our Amazon marketplace sales, ~~increased~~decreased by ~~11.6%~~17.1% compared to the ~~third~~first quarter of ~~2018~~2019 and, when adjusting for the impact of our “buy online,

pick-up

in store” program which includes our curbside pickup launched on March 25, 2020 (such sales are included in our store sales), ~~increased~~decreased by ~~14.8%~~6.9%.

Excluding the impact of

e-commerce,

same-store sales decreased by ~~3.9%~~18.2%.

Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.

Wholesale

Wholesale net sales during the ~~third~~first quarter of ~~2019~~2020 totaled ~~$168.9~~$111.1 million and were ~~$6.3~~$21.8 million, or ~~3.6%~~16.5%, lower than the ~~third~~first quarter of ~~2018.~~2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled ~~$65.9~~$43.7 million and were ~~$4.5~~$10.6 million, or ~~6.4%~~19.6%, lower than during ~~2018. The acquisition of six~~2019 principally due to lower distributor demand and closed franchise and independent stores during the twelve months ended September 30, 2019, together with the acquisition of 37 franchise stores late in the third quarter of 2018, negatively impacted sales as post-acquisition sales to such stores (approximately $2.5 million during the third quarter of 2018) are now eliminated as intercompany sales. Adjusted for the acquisitions, sales to domestic party goods ~~retailers and distributors decreased by approximately $2.0 million, or 2.9%, versus~~stores as a result of the ~~third quarter of 2018.~~COVID-19 pandemic. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled ~~$16.8~~$15.1 million during the ~~third~~first quarter of ~~2019~~2020 and were ~~$1.1~~$4.4 million, or ~~6.2%~~22.8%, lower than during the corresponding quarter of ~~2018~~2019 principally due to the ~~ongoing helium shortage.~~COVID-19 pandemic. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled ~~$86.2~~$52.3 million and were ~~$0.7~~$6.8 million, or ~~0.8%~~11.5%, lower than in ~~2018.~~2019. Foreign currency translation negatively impacted sales by approximately ~~$4.1 million and more than offset $3.4 million of sales growth on a constant currency basis.~~

$1.1 million.

Intercompany sales to our retail affiliates totaled ~~$214.5~~$103.7 million during the ~~third~~first quarter of ~~2019~~2020 and were ~~$34.9~~$53.6 million lower than during the corresponding quarter of ~~2018.~~2019. Intercompany sales represented ~~56.0%~~48.3% of total wholesale sales during the ~~third~~first quarter of ~~2019~~2020 and were ~~2.7%~~34.1% lower than during the ~~third~~first quarter of ~~2018,~~2019, principally reflecting the impact of ~~our~~the Party City store ~~optimization program, strong seasonal~~

~~in-stock~~

~~positions at our retail stores from~~closures related to the ~~prior year and a reduction in sales of metallic balloons to our retail operations.~~COVID-19 pandemic. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

~~Table of Contents~~

Royalties and franchise fees

Royalties and franchise fees for the ~~third~~first quarter of ~~2019~~2020 totaled ~~$1.9~~$1.6 million and were ~~$0.3~~$0.4 million lower than during the ~~third~~first quarter of ~~2018 principally~~2019 primarily due to lower sales as a result of store closures resulting from the ~~acquisition of franchise stores.~~

COVID-19 pandemic.

Gross Profit

The following table sets forth the Company’s gross profit for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~September 30, 2018.~~2019.

	Three Months Ended March 31,
	2020					2019
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	94,361		31.3	%	$	136,018		36.0	%
Wholesale		21,343		19.2			36,042		27.1
Total	$	115,704		28.1	%	$	172,060		33.7	%

Three Months Ended September 30,

2019

2018

Dollars in
Thousands

Percentage of
Net Sales

Dollars in
Thousands

Percentage of
Net Sales

Retail
$
128,692

34.8
% $
151,860

40.4
%
Wholesale

36,240

21.5

49,339

28.2

Total
$
164,932

30.6
% $
201,199

36.5
%

The gross profit margin on net sales at retail during the ~~third~~first quarter of ~~2019~~2020 was ~~34.8%~~31.3% or ~~560~~470 basis points lower than during the corresponding quarter of ~~2018.~~2019. The decrease was ~~partially~~mainly due to sales deleverage from the temporary closure of all the Company’s retail stores announced on March 18, 2020 in response to the COVID-19 pandemic. In addition, the increased costs of helium, and unfavorable product mix due to lower sales of higher margin products contributed to the margin decline. The declines in margin were partially offset by margin increases due to favorable share of shelf gains and lower year over year markdowns in conjunction with the Company’s “store optimization program” (see “operating expenses” below for further discussion) and the impact of aggressive promotional programs during the quarter. Additionally, the decrease was partially due to a flow through of higher freight and distribution costs for product acquired from the Company’s wholesale operations during the second half of 2018 as the China tariffs caused

~~non-recurring~~

~~logistical challenges.~~. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of ~~25.4%~~29.0% during the ~~third~~first quarter of ~~2019~~2020 was ~~comparable~~1.4% higher as compared to the ~~third~~first quarter of ~~2018.~~2019. Our wholesale share of shelf at our Party City stores and our North American retail

e-commerce

operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was ~~78.3%~~81.3% during the quarter or ~~1.1%~~3.2% higher than during the ~~third~~first quarter of ~~2018.~~

2019.

The gross profit margin on net sales at wholesale during the ~~third~~first quarters of 2020 and 2019 was 19.2% and ~~2018 was 21.5% and 28.2%~~27.1%, respectively. The ~~decreased wholesale gross profit margin~~decrease was principally due to ~~a significant reduction in high-margin sales of metallic balloons and sales to franchisees (due to the store acquisitions discussed above) and, to a lesser extent,~~ the deleveraging of distribution and manufacturing ~~costs.~~

costs from lower sales to closed franchise and independent party stores due to the COVID-19 pandemic as well as increased rent associated with the sale leaseback transaction.

Operating expenses

Wholesale selling expenses were ~~$16.1~~$15.5 million during the ~~third~~first quarter of ~~2019~~2020 and were ~~$1.5~~$2.5 million lower than during the corresponding quarter of ~~2018,~~2019principally due ~~partially~~ to ~~the~~lower travel, commissions, marketing, and impact of foreign ~~currency translation.~~exchange. Wholesale selling expenses were ~~9.5%~~13.9% and ~~10.0%~~13.5% of net wholesale sales during the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively.

Retail operating expenses during the ~~third~~first quarter of ~~2019~~2020 were ~~$111.6~~$88.2 million and were ~~$7.8~~$6.8 million ~~higher~~lower than the corresponding quarter of ~~2018.~~2019. The ~~increase~~decrease was ~~principally~~mainly due to ~~increases~~the sale of the 65 Canada Retail stores, 55 closed US stores in ~~advertising~~conjunction with the store optimization program, and ~~e-commerce expenses as well as~~lower credit card fees and marketing due to the COVID-19 pandemic partially offset by higher ~~average store count, including temporary Halloween stores, during~~costs associated with the ~~third quarter~~acquisition of Livario and Webdots in December of 2019. Retail operating expenses were ~~30.2%~~29.3% and ~~27.6%~~25.1% of retail sales during the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively.

Franchise expenses during each of the ~~third quarters of 2019 and 2018 were $3.2 million and $0.9 million, respectively. Franchise expenses during the third~~first quarter of ~~2018 reflects a~~

~~non-recurring~~

~~adjustment that lowered franchise intangible asset amortization expense.~~

2020 and 2019 were $3.3 million.

General and administrative expenses during the ~~third quarter~~first quarters of ~~2019~~2020 totaled ~~$43.1~~$60.0 million and were ~~$0.8~~$18.1 million, or ~~1.9%~~43.1%, higher than in the ~~third~~first quarter of ~~2018~~2019 principally due to ~~increases in~~increased legal and settlement costs, new executive leadership compensation, and ~~other impacts of inflation, partially offset by the impact of foreign currency translation.~~higher professional fees. General and administrative expenses as a percentage of total revenues were ~~8.0%~~14.5% and ~~7.6%~~8.2% during the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively.

Art and development costs were ~~$5.9~~$5.3 million and ~~$5.6~~$5.9 million during the ~~third~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively.

~~Table of Contents~~

Development stage expenses represent

~~start-up~~

costs related to ~~Kazzam (see the 2018 Form~~

~~10-K~~

~~for further detail).~~

Kazzam.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”)~~. Each year, the Company typically closes approximately 10 Party City stores as part of its typical network rationalization process~~ and, ~~in response to ongoing consumer, market and economic changes that naturally arise in the business. During the first nine months of 2019,~~ after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 5521 stores which are primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In ~~conjunction with the store optimization program, during the third quarter of 2019,~~addition, the Company ~~recorded $2.6 million~~estimated lease impairment for open stores where sales were affected due to the outbreak of, ~~labor~~ and ~~other costs related~~local, state and federal governmental responses to, ~~closing the stores.~~

COVID-19.

Goodwill and intangibles impairment charges for the three months ended ~~September 30, 2019~~March 31, 2020 were ~~$259.1~~$536.6 million. The

non-cash

pre-tax

goodwill impairment charges were the result of a sustained decline in the Company’s market ~~capitalization.~~capitalization and significantly reduced customer demand for its products due to COVID-19. There were no goodwill impairment charges for the three months ended ~~September 30, 2018.~~March 31, 2019. See Note 4 ~~to the condensed consolidated financial statements~~– Goodwill and Intangibles Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion.

Interest expense, net

Interest expense, net, totaled ~~$29.4~~$25.1 million during the ~~third~~first quarter of ~~2019,~~2020, compared to ~~$27.7~~$29.3 million during the ~~third~~first quarter of ~~2018.~~2019. The ~~variance~~decrease in interest principally ~~relates to~~reflects lower average debt following a debt repayment in the ~~impact~~fourth quarter of ~~the Company’s August 2018 refinancing (see the Company’s 2018 Form~~2019.

~~10-K~~

~~for discussion of such refinancing) and higher average borrowings and rates under our Term Loan and ABL credit facilities.~~

Other expense, net

For the ~~third~~first quarters of ~~2019~~2020 and ~~2018,~~2019, other expense, net, totaled ~~$2.0~~$5.7 million and ~~$5.7~~$1.3 million, respectively. ~~During~~The change is due to currency loss during the ~~third~~first quarter of ~~2018, other expense included costs associated with the August 2018 refinancing of our debt portfolio.~~

2020.

Income tax ~~(benefit) expense~~

benefit

The effective income tax rate for the three months ended ~~September 30, 2019, 8.8%~~March 31, 2020, 15.7%, is ~~lower than~~different from the statutory rate primarily due the non-deductible portions of the goodwill impairment charges noted ~~above.~~

~~Table of Contents~~

~~Nine Months Ended September 30, 2019 Compared To Nine Months Ended September 30, 2018~~

~~The following table sets forth the Company’s operating results~~above, state taxes, and ~~operating results as~~ a ~~percentage of total revenues for the nine months ended September 30, 2019 and 2018.~~

Nine Months Ended September 30,

2019

2018

(Dollars in thousands)

Revenues:

Net sales
$
  1,611,149

99.6
% $
1,614,049

99.5
%
Royalties and franchise fees

6,089

0.4

7,832

0.5

Total revenues

1,617,238

100.0

1,621,881

100.0

Cost of sales

1,065,511

65.9

996,084

61.4

Wholesale selling expenses

50,929

3.1

53,581

3.3

Retail operating expenses

302,756

18.7

285,019

17.6

Franchise expenses

9,813

0.6

8,624

0.5

General and administrative expenses

126,497

7.8

136,230

8.4

Art and development costs

17,568

1.1

17,278

1.1

Development stage expenses

7,966

0.5

5,620

0.3

Gain on sale/leaseback transaction

(58,381
)
(3.6
)
—

—

Store impairment and restructuring charges

25,817

1.6

—

—

Goodwill impairment

259,100

16.0

—

—

Total expenses
1,807,576

111.8

1,502,436

92.6

(Loss) income from operations

(190,338
)
(11.8
)
119,445

7.4

Interest expense, net

88,857

5.5

76,481

4.7

Other expense, net

6,643

0.4

9,076

0.6

(Loss) income before income taxes

(285,838
)
(17.7
)
33,888

2.1

Income tax (benefit) expense

(21,809
)
(1.4
)
9,443

0.6

Net (loss) income

(264,029
)
(16.3
)
24,445

1.5

Add: Net income attributable to redeemable securities holder

—

—

402

0.0

Less: Net loss attributable to noncontrolling interests

(352
)
(0.0
)
(87
)
0.0

Net (loss) income attributable to common shareholders of Party City Holdco Inc.
$
(263,677
)
16.3
% $
24,934

1.5
%

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Basic
$
(2.83
) $
0.26

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Diluted
$
(2.83
) $
0.26

~~Revenues~~

Total revenues for the first nine months of 2019 were $1,617.2 million and were $4.6 million lower than the first nine months of 2018. The following table sets forth the Company’s total revenues for the nine months ended September 30, 2019 and 2018.

Nine Months Ended September 30,

2019

2018

Dollars in
Thousands

Percentage of
Total Revenues

Dollars in
Thousands

Percentage of
Total Revenues

Net Sales:

Wholesale
$
962,793

61.4
% $
988,129

60.9
%
Eliminations

(522,421
)
(34.2
)%
(524,689
)
(32.3
)%

Net wholesale

440,372

27.2
%
463,440

28.6
%
Retail

1,170,777

72.4
%
1,150,609

70.9
%

Total net sales

1,611,149

99.6
%
1,614,049

99.5
%
Royalties and franchise fees

6,089

0.4
%
7,832

0.5
%

Total revenues
$
1,617,238

100.0
% $
1,621,881

100.0
%

~~Table of Contents~~

~~Retail~~

~~Retail net sales during the first nine months of 2019 were $1,170.8 million and increased $20.2 million or 1.8% compared~~rate benefit related to the first nine months of 2018. Retail net sales at our North American Party City stores totaled $1,060.3 million and were $16.9 million, or 1.6%, higher than 2018, principally due to the acquisition of six franchise and independent stores and the opening of nine new stores during the twelve months ended September 30, 2019, as well as the acquisition of 37 franchise stores late in the third quarter of 2018. These positive factors were partially offset by the closure of 34 stores in the second and third quarters, in conjunction with our 2019 store optimization program and the continued impact of the ongoing helium shortage. Global retail

~~e-commerce~~

sales totaled $104.0 million during the first nine months of 2019 and were $1.9 million, or 1.9%, higher than during the corresponding period of 2018. Sales at our temporary Halloween City stores totaled $4.8 million and were $0.3 million or 5.7% lower than during the first nine months of 2018. Sales at other store formats totaled $1.7 million during the first nine months of 2019.

~~Same-store sales for the Party City brand (including North American retail~~

~~e-commerce~~

~~sales) decreased by 2.0% during the first nine months of 2019, principally due to impact of the ongoing helium shortage on balloon sales.~~

~~Our North American retail~~

~~e-commerce~~

~~sales, which include our Amazon marketplace sales, increased by $2.7 million or 3.2% compared to the first nine months of 2018 and, when adjusting for the impact of our “buy online,~~

~~pick-up~~

~~in store” program (such sales are included in our store sales), increased by 16.0%.~~

~~Excluding the impact of~~

~~e-commerce,~~

~~same-store sales decreased by 2.4%.~~

~~Same-store sales percentages were not affected by foreign currency as such percentages are calculated in local currency.~~

~~Wholesale~~

Wholesale net sales during the first nine months of 2019 totaled $440.4 million and were $23.1 million, or 5.0% lower than during the first nine months of 2018. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $176.5 million and were $9.3 million, or 5.0% lower than during 2018. The decrease was partially due to our acquisition of six franchise and independent stores during the twelve months ended September 30, 2019, together with the acquisition of 37 franchise stores throughout the third quarter of 2018; as post-acquisition sales to such stores (approximately $13.7 million during the first nine months of 2018) are now eliminated as intercompany sales. Adjusted for the acquisitions, sales to domestic party goods retailers and distributors increased by approximately $4.4 million or 2.3%. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $54.7 million during the first nine months of 2019 and were $6.7 million, or 10.9%, lower than during the corresponding period of 2018 principally due to the ongoing helium shortage. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $209.1 million and were $7.1 million, or 3.3%, lower than in 2018. Foreign currency translation negatively impacted sales by approximately $10.0 million and more than offset $2.9 million in sales growth on a constant currency basis.

Intercompany sales to our retail affiliates totaled $522.4 million during the nine months ended September 30, 2019 and were $2.3 million lower than during the corresponding period of 2018. Intercompany sales represented 55.6% of total wholesale sales during the first nine months of 2019, compared to 53.1% during the comparable period of 2018. The increase in percentage was principally due to the impact of franchise/independent store acquisitions, partially offset by the impact of strong season

~~in-stock~~

positions from the prior year and a reduction in sales of metallic balloons to our retail operations. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

~~Royalties and franchise fees~~

Royalties and franchise fees for the nine months ended September 30, 2019 totaled $6.1 million and were $1.7 million lower than during the comparable period of 2018 principally due to the acquisition of franchise stores.

~~Table of Contents~~

~~Gross Profit~~

~~The following table sets forth the Company’s gross profit for the nine months ended September 30, 2019 and September 30, 2018.~~

Nine Months Ended September 30,

2019

2018

Dollars in
Thousands

Percentage of
Net Sales

Dollars in
Thousands

Percentage of
Net Sales

Retail
$
436,761

37.3
% $
482,609

41.9
%
Wholesale

108,877

24.7

135,356

29.2

Total
$
545,638

33.9
% $
617,965

38.3
%

The gross profit margin on net sales at retail during the first nine months of 2019 was 37.3%. Such percentage was 460 basis points lower than during the corresponding period of 2018. The decrease was principally due to markdowns in conjunction with the Company’s “store optimization program” and provisions against inventory recorded in conjunction with such program (see “operating expenses” below for further discussion) and the impact of an aggressive coupon program during the third quarter of 2019. Additionally, the decrease was partially due to a flow through of higher freight and distribution costs for product acquired from the Company’s wholesale operations during the second half of 2018 as the China tariffs caused

~~non-recurring~~

logistical challenges. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) was 26.7% during the period, or 10 basis points higher than during the during the first nine months of 2018. Our wholesale share of shelf at our Party City stores and our North American retail

~~e-commerce~~

operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 78.0% during the period, or 20 basis points higher than the nine months ended September 30, 2018.

The gross profit on net sales at wholesale during the first nine months of 2019 and 2018 was 24.7% and 29.2%, respectively. The decrease was principally due to the decrease in high-margin sales of metallic balloons and lower sales to franchisees (due to the store acquisitions discussed above).

~~Operating expenses~~

Wholesale selling expenses were $50.9 million during the first nine months of 2019 and were $2.7 million or 4.9% lower than during the corresponding period of 2018, due partially to the impact of foreign currency translation. Wholesale selling expenses were 11.6% of net wholesale sales during each of the first nine months of 2019 and 2018.

Retail operating expenses during the first nine months of 2019 were $302.8 million and were $17.7 million, or 6.2%, higher than the corresponding period of 2018. The increase was principally due to higher average store count during the first nine months of 2019 as well as an increase in advertising, e-commerce and information technology related expenses compared to the corresponding period in 2018. Retail operating expenses were 25.9% and 24.8% of retail sales during the first nine months of 2019 and 2018, respectively.

~~Franchise expenses during the first nine months of 2019 and 2018 were $9.8 million and $8.6 million, respectively. Franchise expenses for 2018 reflect a third quarter~~

~~non-recurring~~

~~adjustment that lowered franchise intangible asset amortization expense.~~

General and administrative expenses during the first nine months of 2019 totaled $126.5 million and were $9.7 million, or 7.1%, lower than in the first nine months of 2018. The decrease for the first nine months of 2019 was principally due to

~~non-recurring~~

~~consulting costs and~~

~~non-recurring~~

~~executive severance charges incurred during 2018. General and administrative expenses as a percentage of total revenues were 7.8% and 8.4% during the first nine months of 2019 and 2018, respectively.~~

~~Art and development costs were $17.6 million and $17.3 million during the first nine months of 2019 and 2018, respectively.~~

~~Development stage expenses represent~~

~~start-up~~

~~costs related to Kazzam (see the 2018 Form~~

~~10-K~~

~~for further detail).~~

During September 2019, the Company reported a $58.4 million gain from the sale and leaseback of its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The aggregate sale price for the three properties was $128.0 million. Simultaneous with the sale, the Company entered into twenty-year leases for each of the facilities.

~~Table of Contents~~

During the nine months ended September 30, 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). Each year, the Company typically closes approximately 10 Party City stores as part of its typical network rationalization process and in response to ongoing consumer, market and economic changes that naturally arise in the business. During the first nine months of, 2019, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 55 stores which are primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In conjunction with the store optimization program, during the first nine months of 2019, the Company recorded a $14.1 million impairment charge for its operating lease asset, a $4.7 million impairment charge for property, plant and equipment, $6.3 million of labor and other costs related to closing the stores and $0.7 million of severance.

~~Goodwill impairment charges for the nine months ended September 30, 2019 were $259.1 million. The~~

~~non-cash~~

~~pre-tax~~

~~goodwill impairment charges were the result~~carryback of a ~~sustained decline in~~net operating loss to years when the Company’s market capitalization. There was no goodwill impairment for the nine months ended September 30, 2018. See Note 4 to the condensed consolidated financial statements for further discussion.

~~Interest expense, net~~

Interest expense, net, totaled $88.9 million during the first nine months of 2019, compared to $76.5 million during the comparable period of 2018. The variance principally relates to the impact of the Company’s August 2018 refinancing (see the Company’s 2018 Form

~~10-K~~

~~for discussion of such refinancing) and the impact of borrowings and average rates under our Term Loan and ABL credit facilities.~~

~~Other expense, net~~

For the first nine months of 2019 and 2018, other expense, net, totaled $6.6 million and $9.1 million, respectively. During the first nine months of 2018, other expense included costs associated with the August 2018 refinancing of our debt portfolio.

~~Income tax expense~~

~~The effective~~statutory income tax rate ~~for the nine months ended September 30, 2019, 7.6%, is lower than the statutory rate primarily due to the non-deductible portions of the goodwill impairment charges noted above.~~

was 35.0%.

Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Common Share – Diluted

The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization,

non-cash

purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual or

non-recurring

items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share - diluted are helpful benchmarks to evaluate its operating performance.

Adjusted EBITDA, adjusted net income, and adjusted net income per common share - diluted have limitations as analytical tools. Some of these limitations are:

•

they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;

•

they do not reflect changes in, or cash requirements for, the Company’s working capital needs;

~~they do not reflect the Company’s cash expenditures or future requirements for capital expenditures or contractual commitments;~~

•

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s indebtedness;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

•

non-cash compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;

•

they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and

•

other companies in the Company’s industry may calculate adjusted EBITDA, adjusted net income and adjusted net income per common share differently than the Company does, limiting its usefulness as a comparative measure.

~~Table of Contents~~

~~they do not reflect changes in, or cash requirements for, the Company’s working capital needs;~~

~~adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s indebtedness;~~

~~although depreciation and amortization are~~

~~non-cash~~

~~charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;~~

~~non-cash~~

compensation is and will remain a key element of the Company’s overall long-term incentive compensation package, although the Company excludes it as an expense when evaluating its core operating performance for a particular period;

~~they do not reflect the impact of certain cash charges resulting from matters the Company considers not to be indicative of its ongoing operations; and~~

Because of these limitations, adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA, adjusted net income and adjusted net income per common share – diluted only on a supplemental basis. The reconciliations from net income (loss) to adjusted EBITDA and income (loss) before income taxes to adjusted net income (loss) for the periods presented are as follows:

	Three Months Ended March 31,
	2020			2019
(Dollars in thousands)
Net loss	$	(541,668	)	$	(30,289	)
Interest expense, net		25,120			29,257
Income taxes		(100,498	)		(10,519	)
Depreciation and amortization		17,752			21,341
EBITDA		(599,294	)		9,790
Non-cash purchase accounting adjustments		—			1,001
Store impairment and restructuring charges (a)		27,761			35,638
Other restructuring, retention and severance (b)		3,047			1,388
Goodwill and intangibles impairment (c)		536,648			—
Deferred rent (d)		(1,384	)		(1,150	)
Closed store expense (e)		1,235			591
Foreign currency losses/(gains), net		4,255			(293	)
Stock option expense (f)		354			370
Non-employee equity-based compensation (g)		1,033			129
Undistributed income in equity method investments		(144	)		(198	)
Corporate development expenses (h)		2,969			2,845
Restricted stock units – time-based (i)		621			392
Non-recurring legal settlements/costs		6,321			732
COVID - 19 (l)		26,180			—
Other		2,272			247
Adjusted EBITDA	$	11,874		$	51,482

Three Months Ended
September 30, 2019

Three Months Ended
September 30, 2018

Nine Months Ended
September 30, 2019

Nine Months Ended
September 30, 2018

(Dollars in thousands)

Net (loss) income
$
(281,745
) $
  (2,440
) $
(264,029
) $
24,445

Interest expense, net

29,424

27,705

88,857

76,481

Income taxes

(27,252
)
777

(21,809
)
9,443

Depreciation and amortization

19,155

16,974

62,380

57,786

EBITDA

(260,418
)
43,016

(134,601
)
168,155

Non-cash
purchase accounting adjustments

—

2,154

2,757

2,696

Store impairment and restructuring charges (a)

8,694

—

54,960

—

Other restructuring, retention and severance (b)

(73
)
951

5,248

3,105

Goodwill impairment (c)

259,100

—

259,100

—

Deferred rent (d)

446

2,468

(1,042
)
3,623

Closed store expense (e)

2,326

825

3,424

3,430

Foreign currency losses/(gains), net

646

(314
)
486

128

Stock option expense (f)

409

550

1,150

1,492

Non-employee
equity-based compensation (g)

128

(13
)
386

352

Undistributed (loss) income in equity method investments

7

(279
)
(195
)
(580
)
Corporate development expenses (h)

4,588

3,057

11,782

8,409

Non-recurring
consulting charges (i)

—

624

—

12,243

Refinancing charges (j)

—

5,091

—

6,237

Restricted stock units – time-based (k)

610

470

1,543

722

Restricted stock units – performance-based (l)

560

889

1,036

1,482

Non-recurring
legal settlements/costs

194

—

1,795

—

Gain on sale/leaseback transaction (m)

—

—

(58,381
)
—

Other

(75
)
(44
)
217

(295
)

Adjusted EBITDA
$
17,142
$
  59,445
$
149,666
$
211,199

				March 31, 2020 EBITDA Adjustments
	March 31, 2020 GAAP Basis (as reported)			Goodwill and intangibles impairment (c)			Store impairment and restructuring charges (a)			Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)			Deferred Rent (d)		Other restructuring, retention and severance (b)			Closed store expense (e)			COVID- 19 (l)			Foreign currency losses			Other			March 31, 2020 Non-GAAP basis
Revenues:
Net sales	$	412,461																																		$	412,461
Royalties and franchise fees		1,582																																			1,582
Total revenues		414,043																																			414,043
Cost of sales		296,757						(10,033	)																			(12,804	)					(429	)		273,491
Wholesale selling expenses		15,458									(736	)																(114	)								14,608
Retail operating expenses		88,166																		1,336					(1,166	)		(10,178	)								78,158
Franchise expenses		3,309																										(329	)								2,980
General and administrative expenses		59,996									(100	)		(6,321	)		(975	)		48		(3,047	)		(69	)		(2,755	)								46,777
Art and development costs		5,322																																			5,322
Development stage expenses		2,029									(2,029	)																									—
Store impairment and restructuring charges		17,728						(17,728	)																												—
Goodwill and intangibles impairment		536,648			(536,648	)																															—
Total expenses		1,025,413			(536,648	)		(27,761	)		(2,865	)		(6,321	)		(975	)		1,384		(3,047	)		(1,235	)		(26,180	)		—			(429	)		421,336
Loss from operations		(611,370	)																																		(7,293	)
Interest expense, net		25,120																																			25,120
Other expense, net		5,676									(104	)					(1,033	)													(4,255	)		(1,699	)		(1,415	)
Loss before income taxes		(642,166	)																																		(30,998	)
Interest expense, net		25,120																																			25,120
Depreciation and amortization		17,752																																			17,752
EBITDA		(599,294	)																																		11,874
Adjustments to EBITDA		611,168			(536,648	)		(27,761	)		(2,969	)		(6,321	)		(2,008	)		1,384		(3,047	)		(1,235	)		(26,180	)		(4,255	)		(2,128	)		—
Adjusted EBITDA	$	11,874		$	(536,648	)	$	(27,761	)	$	(2,969	)	$	(6,321	)	$	(2,008	)	$	1,384	$	(3,047	)	$	(1,235	)	$	(26,180	)	$	(4,255	)	$	(2,128	)	$	11,874

				March 31, 2019 EBITDA Adjustments
	March 31, 2019 GAAP Basis (as reported)			Store impairment and restructuring charges (a)			Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)			Deferred Rent (d)		Other restructuring, retention and severance (b)			Closed store expense (e)			Non-Cash Purchase Accounting Adjustments			Foreign currency gains		Other			March 31, 2019 Non-GAAP basis
Revenues:
Net sales	$	511,102																														$	511,102
Royalties and franchise fees		2,014																															2,014
Total revenues		513,116																															513,116
Cost of sales		339,042			(17,629	)											1,150																322,563
Wholesale selling expenses		17,961																															17,961
Retail operating expenses		95,018																	(31	)		(479	)										94,508
Franchise expenses		3,303																															3,303
General and administrative expenses		41,925									(732	)		(891	)				(1,357	)		(112	)										38,833
Art and development costs		5,929																															5,929
Development stage expenses		2,226						(2,226	)																								—
Store impairment and restructuring charges		18,009			(18,009	)																											—
Goodwill and intangibles impairment		—																															—
Total expenses		523,413			(35,638	)		(2,226	)		(732	)		(891	)		1,150		(1,388	)		(591	)		—			—		—			483,097
Loss from operations		(10,297	)																														30,019
Interest expense, net		29,257																															29,257
Other expense, net		1,254						(619	)																(1,001	)		293		(49	)		(122	)
Loss before income taxes		(40,808	)																														884
Interest expense, net		29,257																															29,257
Depreciation and amortization		21,341																															21,341
EBITDA		9,790																															51,482
Adjustments to EBITDA		41,692			(35,638	)		(2,845	)		(732	)		(891	)		1,150		(1,388	)		(591	)		(1,001	)		293		(49	)		—
Adjusted EBITDA	$	51,482		$	(35,638	)	$	(2,845	)	$	(732	)	$	(891	)	$	1,150	$	(1,388	)	$	(591	)	$	(1,001	)	$	293	$	(49	)	$	51,482

	Three Months Ended March 31,
	2020			2019
(Dollars in thousands, except per share amounts)
Loss before income taxes	$	(642,166	)	$	(40,808	)
Intangible asset amortization		2,866			3,429
Non-cash purchase accounting adjustments		—			1,317
Amortization of deferred financing costs and original issuance discounts (j)		1,202			1,143
Store impairment and restructuring charges (a)		27,973			35,638
Other restructuring charges (b)		922			—
Goodwill and intangibles impairment (c)		536,648			—
Non-employee equity-based compensation (g)		1,033			129
Non-recurring legal settlements/costs		6,321			—
Stock option expense (f)		354			370
COVID - 19 (l)		26,180			—
Adjusted (loss) income before income taxes		(38,667	)		1,218
Adjusted income tax (benefit) expense (k)		(12,284	)		115
Adjusted net (loss) income	$	(26,383	)	$	1,103
Adjusted net (loss) income per common share – diluted	$	(0.28	)	$	0.01
Weighted-average number of common shares-diluted		93,395,609			93,879,979

~~Table of Contents~~

Three Months
Ended
September 30,
2019

Three Months
Ended
September 30,
2018

Nine Months
Ended
September 30,
2019

Nine Months
Ended
September 30,
2018

(Dollars in thousands, except per share amounts)

(Loss) income before income taxes
$
(308,997
) $
(1,663
) $
(285,838
) $
33,888

Intangible asset amortization

3,553

591

10,528

7,959

Non-cash
purchase accounting adjustments

424

1,659

4,200

2,622

Amortization of deferred financing costs and original issuance discounts (j)

1,222

6,268

3,511

9,834

Store impairment and restructuring charges (a)

8,694

—

54,960

—

Other restructuring charges (b)

(263
)
809

2,822

809

Goodwill impairment (c)

259,100

—

259,100

—

Non-employee
equity-based compensation (g)

128

(13
)
386

352

Refinancing charges (j)

—

—

36

—

Non-recurring
consulting charges (i)

—

624

—

12,243

Stock option expense (f)

409

550

1,150

1,492

Gain on sale/leaseback transaction (m)

—

—

(58,381
)
—

Restricted stock units - performance-based (l)

560

889

1,036

1,482

Adjusted (loss) income before income taxes

(35,170
)
9,714

(6,490
)
70,681

Adjusted income tax (benefit) expense (n)

(9,459
)
2,364

(2,117
)
17,213

Adjusted net (loss) income
$
(25,711
) $
7,350
$
(4,373
) $
53,468

Adjusted net (loss) income per common share – diluted
$
(0.28
) $
0.08
$
(0.05
) $
0.55

Weighted-average number of common shares-diluted

93,346,448

97,714,252

93,271,392

97,684,290

(a)

During the ~~nine~~three months ended ~~September 30,~~March 31, 2019, the Company initiated a store optimization program under which it ~~plans to close~~closed approximately 55 Party City stores during the course of ~~2019.~~2019 and 21 Party City stores during the first quarter of 2020. In conjunction with the program, during the first ~~nine~~three months of ~~2019,~~2020, the Company recorded the following charges: inventory reserves: ~~$21,285,~~$11,696, operating lease asset impairment: ~~$14,149,~~$8,162, plant and equipment impairment: $2,065 and labor and other costs related to closing the stores: ~~$6,327,~~$1,451.In addition the Company recorded $6,051 of operating lease asset impairment related to its active stores, driven partially by stores that were closed due to COVID-19. During the first three months of 2019, the Company recorded the following charges related to the store optimization program: inventory reserves: $17,629, operating lease asset impairment: $13,209, property, plant and equipment impairment: ~~$4,680~~$4,139 and severance: $661. The charge for inventory reserves was recorded in cost of sales in the Company’s statement of operations and comprehensive (loss) income. The other charges were recorded in store impairment and restructuring charges in the Company’s statement of operations and comprehensive (loss) income. See Note 3 – Store Impairment and Restructuring Charges in Item 1 for further discussion. Additionally, during the process of liquidating the inventory in such stores, the Company lost margin of ~~$7,858.~~$980.

(b)	Amounts expensed during ~~2019~~the first quarter 2020 principally relate to ~~executive~~ severance ~~and~~due to the ~~write-off~~ ~~of inventory for a section of the Company’s Party City stores that is being restructured.~~ organizational changes.

(c)	As a result of a sustained decline in market capitalization, the Company recognized a non-cash pre-tax goodwill and intangibles impairment charge at ~~September 30, 2019~~March 31, 2020 of ~~$259,100.~~$536,648.

(d)

The “deferred rent” adjustment reflects the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items. During the first quarter of 2019, the Company adopted ASC 842. Under the standard, the difference between accounting for rent and landlord incentives in accordance with GAAP and the Company’s actual cash outlay for such items is now incorporated in the Company’s operating lease asset.

(e)	Charges incurred related to closing and relocating stores in the ordinary course of business.

(f)	Represents non-cash charges related to stock options.

(g)	~~Principally represents shares~~ The acquisition of Ampology’s interest in Kazzam, ~~awarded to Ampology as compensation for Ampology’s services.~~LLC in an equity transaction. See ~~the 2018 Form~~ ~~10-K~~ Note 19 – Kazzam, LLC in Item 1 for further discussion.

(h)	Primarily represents ~~start-up~~ costs for Kazzam (see ~~the 2018 Form~~ ~~10-K~~ Note 19 – Kazzam, LLC in Item 1 for further discussion) and third-party costs related to acquisitions (principally legal and diligence expenses).

(i)	~~Non-recurring~~ ~~consulting~~ Non-cash charges ~~related to the Company’s retail operations.~~for restricted stock units that vest based on service conditions.

(j)

During February 2018, the Company amended ~~its credit facilities.~~the Term Loan Credit Agreement. In conjunction with the ~~amendments,~~amendment, the Company

wrote-off

capitalized deferred financing costs, original issue discounts and call premiums. The amounts are included ~~in “Refinancing charges” in the adjusted EBITDA table above and~~ in “Amortization of deferred financing costs and original issuance discounts” in the adjusted net income table above. ~~Further, in conjunction with the amendment, the Company expensed investment banking and legal fees. These amounts are included in “Refinancing charges” in the tables above.~~

~~Table of Contents~~

(k)	~~Non-cash~~ ~~charges for restricted stock units that vest based on service conditions.~~

~~(l)~~

~~Non-cash~~

~~charges for restricted stock units that vest based on performance conditions.~~

~~(m)~~

During June 2019, the Company reported a $58,381 gain from the sale and leaseback of its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The aggregate sale price for the three properties was $128,000. Simultaneous with the sale, the Company entered into twenty-year leases for each of the facilities.

~~(n)~~

Represents income tax expense/benefit after excluding the specific tax impacts for each of the

pre-tax

adjustments. The tax impacts for each of the adjustments were determined by applying to the

pre-tax

adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.

(l)	Represents COVID-19 expenses for employees on temporary furlough for whom the Company provides health benefits; non-payroll expenses including advertising, occupancy and other store expenses.

Liquidity

The Company’s indebtedness principally consists of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) $350 million of 6.125% ~~senior notes~~Senior Notes (the “2023 Notes”) and (iii) $500 million of 6.625% ~~senior notes.~~Senior Notes (the “2026 Notes”). Additionally, the Company has a $640 million asset-based revolving credit facility (“ABL Facility”) that it draws down on as necessary (see the consolidated statement of cash flows in Item 1).

As disclosed in Note 6 – Disposition of Assets in Item 1, the Company expects to use $85 million of the net proceeds from the sale of its Canadian-based stores to paydown the Term Loan.

During the temporary store closures as a result of COVID-19, quarantines, stay-at-home orders and related measures had significantly reduced consumer spending as well as customer demand for our products. The Company reduced cash outflow through reduction of employee and non-employee expenses, cancellation of orders and negotiated receipt delays to manage inventory levels.

We expect that cash generated from operating activities and availability under our credit agreements will be our principal sources of liquidity. Based on our current level of operations, we believe that these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot provide assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility and the Term Loan Credit Agreement in amounts sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.

As a result and as disclosed in Note 20 – Subsequent Events, on May 28, 2020, the Company entered into an exchange offer transaction support agreement with an ad hoc committee of holders of at least 52% of the aggregate principal amount of the 2023 and 2026 Notes whereby the Consenting Noteholders have agreed to support a set of transactions to be commenced by the Company.The contemplated transactions are expected to deleverage the Company’s balance sheet by approximately $450 million and the Company intends to raise $100.0 million in new capital to increase its financial strength and support PCHI’s global operations and ongoing transformation initiatives.

Cash Flow

Net cash used in operating activities totaled ~~$182.3~~$74.0 million and ~~$86.2~~$100.9 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The variance principally reflects ~~the net loss~~decrease in accounts receivable due to decreased sales as well as reduced payments from operations for the nine months ended September 30, 2019 compared to the net income for the nine month ended September 30, 2018. Net cash flows used in operating activities before changes in operating assets and liabilities were $23.2 million during the first nine months of 2019, compared to positive cash flows of $101.2 million during the corresponding period of 2018.lower inventory levels. Changes in operating assets and liabilities during the first ~~nine~~three months of ~~2019~~2020 and ~~2018~~2019 resulted in the use of cash of ~~$159.1~~$52.0 million and ~~$187.4~~$83.3 million, respectively.

Net cash ~~provided by~~used in investing activities totaled ~~$58.6~~$10.7 million during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~$129.3~~$12.9 million used in investing activities during the ~~nine~~three months ended September 30, 2018. During September 2019, the Company sold and leased back its main distribution center in Chester, New York and its metallic balloons manufacturing facility in Eden Prairie, Minnesota. The net sale price for the properties is included in “Proceeds from disposal of property and equipment” in the Company’s condensed consolidated statement of cash flows. See Note 5 to the Company’s consolidated financial statements for further detail.March 31, 2019. Capital expenditures during the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$45.8~~$10.7 million and ~~$65.5~~$12.4 million, respectively. Retail capital expenditures totaled ~~$25.8~~$5.0 million during ~~2019.~~2020. Wholesale capital expenditures during ~~2019~~2020 totaled ~~$20.0~~$6.0 million.

Net cash provided by financing activities was ~~$97.8~~$249.0 million during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~$210.1~~$91.7 million during the ~~first nine~~three months ~~of 2018.~~ended March 31, 2019. The variance was principally due to ~~less of~~ a ~~need to borrow~~$150.0 million draw down under the ABL Facility, which were invested in US Treasury funds ~~during 2019 due to proceeds from the sale of certain properties (see above).~~

at March 31, 2020.

As of ~~September 30, 2019,~~March 31, 2020, the Company had approximately ~~$152~~$71.3 million of availability under the ABL ~~Facility, after considering borrowing base restrictions.~~

Facility.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements included herein.

We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly

re-evaluated

and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.

~~Table~~

Long-Lived and Intangible Assets (including Goodwill)

We review the recoverability of ~~Contents~~

~~Goodwill~~

our long-lived assets, including finite-lived intangible assets, whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. For purposes of recognizing and measuring impairment, we evaluate long-lived assets/asset groups, other than goodwill, based upon the lowest level of independent cash flows ascertainable to evaluate impairment. If an impairment indicator exists, we compare the undiscounted future cash flows of the asset/asset group to the carrying value of the asset/asset group. If the sum of the undiscounted future cash flows is less than the carrying value of the asset/asset group, we would calculate discounted future cash flows based on market participant assumptions. If the sum of discounted cash flows is less than the carrying value of the asset/asset group, we would recognize an impairment loss. The impairment related to long-lived assets is measured as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). When fair values are not readily available, we estimate fair values using discounted expected future cash flows. Such estimates of fair value require significant judgment, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.

In the evaluation of the fair value and future benefits of finite long-lived assets attached to retail stores, we perform our cash flow analysis generally on a store-by-store basis. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or strategies change, the conclusion regarding impairment may differ from the current estimates.

Goodwill is reviewed for potential impairment on an annual basis or more frequently if circumstances indicate a possible impairment. For purposes of testing goodwill for impairment, reporting units are determined by identifying individual ~~components~~operating segments within our organization which constitute a business for which discrete financial information is available and is reviewed by management. Components within a segment are aggregated to the extent that they have similar economic characteristics. Based on this evaluation, we have determined that our operating segments, wholesale and retail, represent our reporting units for the purposes of our goodwill impairment test.

If it is concluded that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we estimate the fair value of the reporting unit using a combination of a market approach and an income approach. If such carrying value exceeds the fair value, an impairment loss will be recognized in an amount equal to such excess. The fair value of a reporting unit refers to the amount at which the unit as a whole could be sold in a current transaction between willing parties. The determination of such fair value is subjective, and actual fair value could differ due to changes in the expectations of cash flows or other assumptions, including discount rates.

During the ~~third~~first quarter of ~~2019,~~2020, the Company identified an impairment ~~indicator~~indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed an interim impairment ~~test~~tests on the goodwill at its retail and wholesale reporting units. As a result, the Company recorded a ~~$259.1~~$536.6 million goodwill impairment charge. See ~~footnote~~Note 4 ~~to the condensed consolidated financial statements~~– Goodwill and Intangibles Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record additional impairment charges for the goodwill of such reporting units.

Contractual Obligations

Other than as described above under ~~“Liquidity and Capital Resources”~~“Liquidity”, there were no material changes to our future minimum contractual obligations as of December 31, ~~2018~~2019 as previously disclosed in our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~

2019.

Off Balance Sheet Arrangements

We had no

off-balance

sheet arrangements during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and the year ended December 31, ~~2018.~~

2019.

Seasonality

Wholesale Operations

Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines, customer base and increased promotional activities, the impact of seasonality on the quarterly results of our wholesale operations has been limited. However, due to Halloween, the inventory balances of our wholesale operations are slightly higher during the third quarter than during the remainder of the year. Additionally, Halloween products sold to retailers and other distributors result in slightly higher accounts receivable balances during the quarter.

Retail Operations

Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to our Halloween sales in October and, to a lesser extent,

year-end

holiday sales.

Cautionary Note Regarding Forward-Looking Statements

From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form

10-K

filed with the SEC on ~~February 28, 2019.~~March 12, 2020 and in the “Risk Factors” section of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or

~~Table of Contents~~

combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:

•

potential risks and uncertainties relating to the ultimate geographic spread of COVID-19;

•

economic slowdown affecting consumer spending and general economic conditions, including as a result of the COVID-19 pandemic;

~~our ability to compete effectively in a competitive industry;~~

•

the severity of the COVID-19 pandemic;

•

the duration of the COVID-19 pandemic;

•

actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact;

•

the potential negative impacts of COVID-19 on the global economy and foreign sourcing;

•

the impacts of COVID-19 on the Company’s financial condition and business operation;

•

our ability to satisfy the conditions to, and consummate, a series of expected refinancing transactions and, if such transactions are consummated, our ability to realize the expected benefits of such transactions from improving our capital structure and our near term liquidity;

•

our ability to compete effectively in a competitive industry;

•

fluctuations in commodity prices;

•

helium shortages;

•

our ability to appropriately respond to changing merchandise trends and consumer preferences;

•

successful implementation of our business strategy;

•

decreases in our Halloween sales;

•

unexpected or unfavorable consumer responses to our promotional or merchandising programs;

•

failure to comply with existing or future laws relating to our marketing programs, e-commerce initiatives and the use of consumer information;

~~helium shortages;~~

•

disruption to the transportation system or increases in transportation costs;

•

product recalls or product liability;

•

economic slowdown affecting consumer spending and general economic conditions;

•

loss or actions of third-party vendors and loss of the right to use licensed material;

•

disruptions at our manufacturing facilities;

•

failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;

~~our ability to appropriately respond to changing merchandise trends and consumer preferences;~~

•

changes in regulations or enforcement, or our failure to comply with existing or future regulations;

•

our international operations subjecting us to additional risks;

•

potential litigation and claims;

•

risks related to international trade disputes and the U.S. government’s trade policy;

•

lack of available additional capital;

•

our inability to retain or hire key personnel;

•

risks associated with leasing substantial amounts of space;

~~successful implementation of our store growth strategy;~~

•

risks arising from the results of the public referendum held in United Kingdom and its membership in the European Union;

•

failure of existing franchisees to conduct their business in accordance with agreed upon standards;

•

adequacy of our information systems, order fulfillment and distribution facilities;

•

our ability to adequately maintain the security of our electronic and other confidential information;

•

our inability to successfully identify and integrate acquisitions;

•

adequacy of our intellectual property rights;

•

potential negative effect of certain aspects of recent U.S. federal income tax reform;

~~decreases in our Halloween sales;~~

•

risks related to our substantial indebtedness;

•

risks associated with interest rate changes;

•

straining of resources and ability to attract and retain qualified board members due to maintaining and improving our financial controls;

•

decline of our common stock market price due to the large number of outstanding shares of our common stock eligible for sale; and

•

the other factors set forth under “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on March 12, 2020, and in the “Risk Factors” section of this Quarterly Report on Form 10-Q.

~~unexpected or unfavorable consumer responses to our promotional or merchandising programs;~~

~~failure to comply with existing or future laws relating to our marketing programs,~~

~~e-commerce~~

~~initiatives and the use of consumer information;~~

~~disruption to the transportation system or increases in transportation costs;~~

~~product recalls or product liability;~~

~~economic slowdown affecting consumer spending and general economic conditions;~~

~~loss or actions of third-party vendors and loss of the right to use licensed material;~~

~~disruptions at our manufacturing facilities;~~

~~failure by suppliers or third-party manufacturers to follow acceptable labor practices or to comply with other applicable laws and guidelines;~~

~~our international operations subjecting us to additional risks;~~

~~potential litigation and claims;~~

~~lack of available additional capital;~~

~~our inability to retain or hire key personnel;~~

~~risks associated with leasing substantial amounts of space;~~

~~failure of existing franchisees to conduct their business in accordance with agreed upon standards;~~

~~adequacy of our information systems, order fulfillment and distribution facilities;~~

~~our ability to adequately maintain the security of our electronic and other confidential information;~~

~~our inability to successfully identify and integrate acquisitions;~~

~~adequacy of our intellectual property rights;~~

~~risks related to our substantial indebtedness; and~~

~~the other factors set forth under “Risk Factors” in our Annual Report on Form~~

~~10-K,~~

~~filed with the SEC on February 28, 2019.~~

Except as required by law, we undertake no obligation to update publicly any forward-looking statements after the date of this filing to conform these statements to actual results or to changes in our expectations.

You should read this filing with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risks since December 31, ~~2018~~2019 as previously disclosed in our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~

2019.

Item 4. Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and ~~Interim~~ Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules

13a-15(e)

and

15d-15(e)

under the Exchange Act of 1934, as amended (the “Act”)) as of ~~September 30, 2019.~~March 31, 2020. Based upon that evaluation, our Chief Executive Officer and ~~Interim~~ Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There were no changes in our internal control over financial reporting (as defined in Rules

13a-15(f)

and

15d-15(f)

under the Act) during the ~~quarter~~three months ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Table of Contents~~

PART

II-OTHER

INFORMATION

Item 1. Legal Proceedings

Information in response to this Item is incorporated herein by reference from Note ~~11,~~12 – Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form

10-Q.

Item 1A. Risk Factors

~~There~~

"Item 1A, Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities Exchange Commission on March 12, 2020, includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in our Annual Report on Form 10-K. The effects of the events and circumstances described in the following risk factor may have the additional effect of heightening many of the risks noted in our Annual Report on Form 10-K. Otherwise, except as presented below, there have been no material changes to the risk factors disclosed ~~under~~in the ~~heading~~ “Risk Factors” ~~in the Company’s~~section of our Annual Report on Form

10-K

for the year ended ~~December 31, 2018.~~February 1, 2020, as filed with the Securities Exchange Commission on March 27, 2020.

Our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected by the outbreak of COVID-19, a novel coronavirus.

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. In response to COVID-19, to safeguard the health and safety of its team members and customers, the Company temporarily closed all of its corporate retail stores as of March 18, 2020. Although the Company’s e-commerce site, www.partycity.com, remains fully operational and the number of stores offering curbside pickup continues to expand, quarantines, stay-at-home orders and related measures have significantly reduced consumer spending as well as customer demand for our products. In addition, these restrictions and other dislocations caused by the outbreak have disrupted our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers, which will make it more difficult for our business to recover even after we are able to reopen. As a result, our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivables, intangibles, and goodwill. The full extent to which COVID-19 and the measures to contain it will impact our business, operations financial condition and liquidity will depend on the severity and duration of the COVID-19 outbreak and other future developments related to the response to the virus all of which are highly uncertain. As a result, we cannot predict the ultimate impact of COVID-19 on the Company and its operational and financial performance.

We are currently contemplating a series of refinancing transactions. We may not be able to complete such transactions or any other alternative transaction, on favorable terms or at all, and our financial condition could be materially adversely affected.

The Company and certain consenting holders of its outstanding Senior Notes (the "Existing Notes") entered into a transaction support agreement whereby such consenting noteholders have agreed to support a series of transactions expected to be commenced by the Company, including an offer to exchange the Existing Notes for newly issued Senior Secured Notes, solicitation of consents to certain amendments to the indentures governing the Existing Notes and issuance of additional Senior Secured Notes to raise new capital through a rights offering and a private placement. The closing of such transactions is conditioned on the satisfaction or waiver of a number of conditions precedent, including finalizing all definitive documents and achieving certain participation thresholds. Specifically, the transaction support agreement requires the valid tender, without valid withdrawal, of a minimum of 98.00%, or $833 million, of the outstanding aggregate principal amount of the Existing Notes. Among other things, these transactions are conditioned on, and would only be consummated concurrently with, each other and as a result, this series of transactions may not be completed as contemplated or at all. If the Company is unable to complete these transactions or any other alternative transaction, on favorable terms or at all, due to market conditions or otherwise, its financial condition could be materially adversely affected. Nothing contained in this Quarterly Report on Form 10-Q should be construed as an offer to sell, or a solicitation of an offer to purchase, any securities of the Company. See Note 20 – "Subsequent Events" to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.

Item 5. Other Information

On June 9, 2020, the Company and certain consenting holders of the Company’s outstanding 6.125% Senior Notes due 2023 and 6.625% Senior Notes due 2026 (collectively, the “Existing Notes”) entered into an amendment (the “Amendment”) to the Transaction Support Agreement, dated as of May 28, 2020 (the “Original Agreement”), among the Company and an ad hoc committee of holders of at least 52% of the aggregate principal of the Existing Notes. The Original Agreement is described in the Company’s Current Report on Form 8-K, dated May 29, 2020. The full text of the Original Agreement is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

Among other things, the Amendment provides for the following modifications to the Original Agreement:

•

with respect to the contemplated private placement (the “Private Placement”) of 15.00% Senior Secured Notes due 2025 (the “New Money First Lien Issuer Notes”), the Amendment provides for the increase of the aggregate size of commitments by private placement parties (the “Private Placement Parties”) from $50.0 million to $58.5 million;

•

with respect to a contemplated offering of rights (the “Rights Offering”) to purchase a pro rata portion of New Money First Lien Issuer Notes, the Amendment provides for the decrease of the aggregate size of the Rights Offering it decreases the aggregate size of such offering from $50.0 million to $41.5 million;

•

with respect to the consideration payable to the Private Placement Parties in the form of New Money First Lien Issuer Notes, the Amendment modifies it from a pro rata allocation of an aggregate premium of $5.0 million to an agreed allocation of an aggregate premium of $4.725 million; and

•

with respect to the portion of the total consideration payable in the form of New Money First Lien Issuer Notes to certain holders of Existing Notes in exchange for backstopping the Rights Offering, the Amendment increases it from $5.0 million to $5.275 million.

The foregoing is a summary of the material terms of, and is qualified by, the full text of the Amendment, which is attached hereto as Exhibit 10.5 and is incorporated herein by reference. Nothing contained in this Quarterly Report on Form 10-Q should be construed as an offer to sell, or a solicitation of an offer to purchase, any securities of the Company.

Item 6. Exhibits

Exhibit Number			Description
	~~3.1~~
3.1		Certificate of Correction to Party City Holdco Inc.’s Second Amended and Restated Certificate of Incorporation ~~(incorporated by reference to Exhibit 3.1 to Party City Holdco Inc.’s Form 8-K~~filed on June 6, 2019, dated ~~June 7, 2019)~~December 17, 2019 and corrected Second Amended and Restated Certificate of Incorporation

3.2	~~3.2~~		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Party City Holdco Inc.’s Form 8-K dated June 7, 2019)

10.1†*	~~10.1~~	Employment Agreement between Party City Holdings Inc., Party City Holdco Inc. and Michael P. Harrison, dated April 5, 2020

10.2†*		~~Purchase~~Form of Temporary Reduction in Base Salary Agreement between Party City Holdco Inc. and ~~Sale~~(Employees) dated April 25, 2020

10.3		Transaction Support Agreement, dated ~~June~~as of May 28, ~~2019, by~~2020, among Party City Holdings Inc., Party City Holdco Inc., the other credit parties party thereto and ~~between Spirit Realty, L.P. and Amscan Inc., Anagram Eden Prairie Property Holdings LLC, and Amscan NM Land, LLC~~certain consenting noteholders party thereto (incorporated by reference to Exhibit 10.1 to Party City Holdco Inc.’s Form 8-K dated ~~July 3, 2019)~~May 28, 2020)

10.4	~~10.2~~		~~Master Lease~~Private Placement Commitment Agreement, dated ~~June~~as of May 28, ~~2019, by and between Spirit Realty, L.P. and~~2020, among Party City Holdings Inc., Party City Holdco Inc., the other credit parties party thereto and the private placement party named therein (incorporated by reference to Exhibit 10.2 to Party City Holdco Inc.’s Form 8-K dated ~~July 3, 2019)~~May 28, 2020)

10.5*	~~10.3~~		~~Third~~First Amendment to ~~Term Loan Credit~~the Transaction Support Agreement, dated as of June ~~28, 2019, by and~~9, 2020, among Party City Holdings Inc., Party City ~~Corporation, PC Intermediate Holdings,~~Holdco Inc., ~~Deutsche Bank AG New York Branch, as Administrative Agent, and each of~~ the ~~Lenders~~other credit parties party thereto ~~(incorporated by reference to Exhibit 10.3 to Party City Holdco Inc.’s Form 8-K dated June 28, 2019)~~and certain consenting noteholders party thereto

10.6†*	~~10.4~~		~~Fourth Amendment to ABL Credit~~Form of Nonqualified Stock Option Award Agreement ~~dated as of June 28, 2019, by and among Party City Holdings Inc., Party City Corporation, PC Intermediate Holdings, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and each of~~(Employees) under the ~~Lenders party thereto (incorporated by reference to Exhibit 10.4 to Party City Holdco Inc.’s Form 8-K dated June 28, 2019)~~

	10.5 †*		Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan

21.1*	10.6 †*		~~Form~~ List of ~~Restricted Stock Award Agreement under~~Subsidiaries of Party City Holdco ~~Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan~~ Inc.

31.1*	10.7 †*		~~Form of Restricted Stock Unit Award Agreement under Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan~~

	10.8 †*		~~Form of~~ ~~Non-Employee~~ ~~Director Restricted Stock Unit Award Agreement under Party City Holdco Inc. Amended and Restated 2012 Omnibus Equity Incentive Plan~~

	31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/ and Rule 15d-14(a) of the Securities Exchange Act, ~~of 1934,~~ as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002 .

31.2*	31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/ and Rule 15d-14(a) of the Securities Exchange Act, ~~of 1934,~~ as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002 .

32.1*	32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.2*	32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

101.INS*	~~101.INS~~		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*	~~101.SCH~~		Inline XBRL Taxonomy Extension Schema ~~Document.~~ Document

101.CAL*	~~101.CAL~~		Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document.~~ Document

101.DEF*	~~101.DEF~~		Inline XBRL Taxonomy Extension Definition Linkbase ~~Document.~~ Document

101.LAB*	~~101.LAB~~		Inline XBRL Taxonomy Extension Label Linkbase ~~Document.~~ Document

101.PRE*	~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document.~~

			Document
	†
104.1*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

†	Management contract of compensatory plan or arrangement

Filed herewith.

~~Table of Contents~~

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form

10-Q

to be signed on its behalf by the undersigned thereunto duly authorized.


		PARTY CITY HOLDCO INC.

~~By:~~	By:		/s/ ~~Michael A. Correale~~Todd Vogensen
		~~Michael A. Correale~~	Todd Vogensen
		~~Interim~~	Chief Financial Officer (~~on behalf of the Registrant and as~~ Principal Financial Officer)

Date: ~~November~~June 12, ~~2019~~

2020


	September 30, 2019			December 31, 2018
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	34,572		$	58,909
Accounts receivable, net		168,124			146,983
Inventories, net		760,179			756,038
Prepaid expenses and other current assets		75,919			61,905
Assets held for sale		172,189			—

Total current assets		1,210,983			1,023,835
Property, plant and equipment, net		241,413			321,044
Operating lease asset		827,817			—
Goodwill		1,358,137			1,656,950
Trade names		534,611			568,031
Other intangible assets, net		46,258			60,164
Other assets, net		12,578			12,323

Total assets	$	4,231,797		$	3,642,347

LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	461,016		$	302,751
Accounts payable		140,112			208,149
Accrued expenses		166,609			161,228
Liabilities held for sale		48,618
Current portion of operating lease liability		140,781			—
Income taxes payable		—			25,993
Current portion of long-term obligations		13,498			13,316

Total current liabilities		970,634			711,437
Long-term obligations, excluding current portion		1,564,098			1,621,963
Long-term portion of operating lease liability		747,079			—
Deferred income tax liabilities, net		147,904			174,427
Other long-term liabilities		16,305			87,548

Total liabilities		3,446,020			2,595,375
Redeemable securities		3,351			3,351
Commitments and contingencies
Stockholders’ equity:
Common stock (94,448,333 and 93,622,934 shares outstanding and 121,629,237 and 120,788,159 shares issued at September 30, 2019 and December 31, 2018, respectively)		1,211			1,208
Additional paid-in capital		928,749			922,476
Retained earnings		231,597			495,777
Accumulated other comprehensive loss		(52,043	)		(49,201	)

Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury		1,109,514			1,370,260
Less: Common stock held in treasury, at cost (27,180,904 and 27,165,225 shares at September 30, 2019 and December 31, 2018)		(327,086	)		(326,930	)

Total Party City Holdco Inc. stockholders’ equity		782,428			1,043,330
Noncontrolling interests		(2	)		291

Total stockholders’ equity		782,426			1,043,621

Total liabilities, redeemable securities and stockholders’ equity	$	4,231,797		$	3,642,347


	Three Months Ended September 30,
	2019			2018
Revenues:
Net sales	$	538,345		$	550,840
Royalties and franchise fees		1,886			2,206

Total revenues		540,231			553,046
Cost of sales		373,413			349,641
Wholesale selling expenses		16,084			17,538
Retail operating expenses		111,595			103,833
Franchise expenses		3,274			862
General and administrative expenses		43,062			42,239
Art and development costs		5,927			5,573
Development stage expenses		2,728			1,622
Store impairment and restructuring charges		2,574			—
Goodwill impairment		259,100			—

Total expenses		817,757			521,308

(Loss) income from operations		(277,526	)		31,738
Interest expense, net		29,424			27,705
Other expense, net		2,047			5,696

Loss before income taxes		(308,997	)		(1,663	)
Income tax (benefit) expense		(27,252	)		777

Net loss		(281,745	)		(2,440	)
Add: Net loss attributable to redeemable securities holder		—			(8	)
Less: Net loss attributable to noncontrolling interests		(212	)		(28	)

Net loss attributable to common shareholders of Party City Holdco Inc.	$	(281,533	)	$	(2,420	)

Net loss per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(3.02	)	$	(0.03	)
Net loss per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(3.02	)	$	(0.03	)
Weighted-average number of common shares-Basic		93,346,448			96,494,565
Weighted-average number of common shares-Diluted		93,346,448			96,494,565
Dividends declared per share	$	0.00		$	0.00
Comprehensive loss	$	(288,573	)	$	(2,003	)
Add: Comprehensive loss attributable to redeemable securities holder		—			(8	)
Less: Comprehensive loss attributable to noncontrolling interests		(213	)		(35	)

Comprehensive loss attributable to common shareholders of Party City Holdco Inc.	$	(288,360	)	$	(1,976	)


	Nine Months Ended September 30,
	2019			2018
Revenues:
Net sales	$	1,611,149		$	1,614,049
Royalties and franchise fees		6,089			7,832

Total revenues		1,617,238			1,621,881
Cost of sales		1,065,511			996,084
Wholesale selling expenses		50,929			53,581
Retail operating expenses		302,756			285,019
Franchise expenses		9,813			8,624
General and administrative expenses		126,497			136,230
Art and development costs		17,568			17,278
Development stage expenses		7,966			5,620
Gain on sale/leaseback transaction		(58,381	)		—
Store impairment and restructuring charges		25,817			—
Goodwill impairment		259,100			—

Total expense		1,807,576			1,502,436

(Loss) i ncome from operations		(190,338	)		119,445
Interest expense, net		88,857			76,481
Other expense, net		6,643			9,076

(Loss) income before income taxes		(285,838	)		33,888
Income tax (benefit) expense		(21,809	)		9,443

Net (loss) income		(264,029	)		24,445
Add: Net income attributable to redeemable securities holder		—			402
Less: Net loss attributable to noncontrolling interests		(352	)		(87	)

Net (loss) income attributable to common shareholders of Party City Holdco Inc.	$	(263,677	)	$	24,934

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(2.83	)	$	0.26
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(2.83	)	$	0.26
Weighted-average number of common shares-Basic		93,271,392			96,449,011
Weighted-average number of common shares-Diluted		93,271,392			97,684,290
Dividends declared per share	$	0.00		$	0.00
Comprehensive (loss) income	$	(266,883	)	$	20,889
Add: Comprehensive income attributable to redeemable securities holder		—			402
Less: Comprehensive loss attributable to noncontrolling interests		(364	)		(108	)

Comprehensive (loss) income attributable to common shareholders of Party City Holdco Inc.	$	(266,519	)	$	21,399


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at June 30, 2019	$	1,210	$	926,838		$	513,130		$	(45,216	)	$	1,395,962		$	(327,086	)	$	1,068,876		$	211		$	1,069,087
Net loss		—		—			(281,533	)		—			(281,533	)		—			(281,533	)		(212	)		(281,745	)
Stock option expense		—		409			—			—			409			—			409			—			409
Restricted stock units – time- based		—		610			—			—			610			—			610			—			610
Restricted stock units – performance-based		—		560			—			—			560			—			560			—			560
Director – non-cash compensation		—		148			—			—			148			—			148			—			148
Warrant expense		—		128			—			—			128			—			128			—			128
Exercise of stock options		1		56			—			—			57			—			57			—			57
Foreign currency adjustments		—		—			—			(6,920	)		(6,920	)		—			(6,920	)		(1	)		(6,921	)
Impact of foreign exchange contracts, net		—		—			—			93			93			—			93			—			93

Balance at September 30, 2019	$	1,211	$	928,749		$	231,597		$	(52,043	)	$	1,109,514		$	(327,086	)	$	782,428		$	(2	)	$	782,426


	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at June 30, 2018	$	1,199	$	919,845		$	399,872		$	(39,797	)	$	1,281,119		$	(286,733	)	$	994,386		$	282		$	994,668
Net loss		—		—			(2,412	)		—			(2,412	)		—			(2,412	)		(28	)		(2,440	)
Net loss attributable to redeemable securities holder		—		—			(8	)		—			(8	)		—			(8	)		—			(8	)
Stock option expense		—		550			—			—			550			—			550			—			550
Restricted stock units – time-based		1		469			—			—			470			—			470			—			470
Restricted stock units – performance-based		5		884			—			—			889			—			889			—			889
Director – non-cash compensation		—		137			—			—			137			—			137			—			137
Warrant expense		—		(84	)		—			—			(84	)		—			(84	)		—			(84	)
Exercise of stock options		—		396			—			—			396			—			396			—			396
Foreign currency adjustments		—		—			—			419			419			—			419			(7	)		412
Impact of foreign exchange contracts, net		—		—			—			25			25			—			25			—			25

Balance at September 30, 2018	$	1,205	$	922,197		$	397,452		$	(39,353	)	$	1,281,501		$	(286,733	)	$	994,768		$	247		$	995,015


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Inventory reserves	$	—	$	21,285
Operating lease asset impairment		—		14,149
Property, plant and equipment impairment		—		4,680
Labor and other costs incurred closing stores		2,574		6,327
Severance		—		661

Total	$	2,574	$	47,102


	At September 30, 2019
Inventories, net	$	31,302
Property, plant and equipment, net		14,779
Operating lease asset		40,470
Goodwill		51,370
Trade names		33,044
Other assets, net		1,224

Total, net	$	172,189


	Three Months Ended September 30, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at June 30, 2019	$	(45,344	)	$	128		$	(45,216	)
Other comprehensive (loss) income before reclassifications, net of tax		(6,920	)		166			(6,754	)
Gains reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(73	)		(73	)

Net current-period other comprehensive (loss) income		(6,920	)		93			(6,827	)

Balance at September 30, 2019	$	(52,264	)	$	221		$	(52,043	)


	Three Months Ended September 30, 2018
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at June 30, 2018	$	(40,917	)	$	1,120		$	(39,797	)
Other comprehensive income before reclassifications		419			217			636
Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(192	)		(192	)

Net current-period other comprehensive income		419			25			444

Balance at September 30, 2018	$	(40,498	)	$	1,145		$	(39,353	)


	Nine Months Ended September 30, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2018	$	(50,056	)	$	855		$	(49,201	)
Other comprehensive (loss) income before reclassifications, net of tax		(2,208	)		226			(1,982	)
Gain reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(860	)		(860	)

Net current-period other comprehensive loss		(2,208	)		(634	)		(2,842	)

Balance at September 30, 2019	$	(52,264	)	$	221		$	(52,043	)


	Nine Months Ended September 30, 2018
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2017	$	(35,610	)	$	(208	)	$	(35,818	)
Other comprehensive (loss) income before reclassifications, net of income tax		(4,888	)		1,188			(3,700	)
Loss reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax		—			165			165

Net current-period other comprehensive (loss) income		(4,888	)		1,353			(3,535	)

Balance at September 30, 2018	$	(40,498	)	$	1,145		$	(39,353	)


	Level 1		Level 2		Level 3		Total as of September 30, 2019
Derivative assets	$	—	$	151	$	—	$	151
Derivative liabilities		—		22		—		22


	September 30, 2019
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	720,743	$	722,488
6.125% Senior Notes – due 2023		346,809		356,125
6.625% Senior Notes – due 2026		494,717		493,125


	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Net (loss) income attributable to common shareholders of Party City Holdco Inc.	$	(281,533	)	$	(2,420	)	$	(263,677	)	$	24,934
Weighted average shares - Basic		93,346,448			96,494,565			93,271,392			96,449,011
Effect of dilutive securities:
Warrants		—			—			—			—
Restricted stock units		—			—			—			9,004
Stock options		—			—			—			1,226,275

Weighted average shares - Diluted		93,346,448			96,494,565			93,271,392			97,684,290

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Basic	$	(3.02	)	$	(0.03	)	$	(2.83	)	$	0.26

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Diluted	$	(3.02	)	$	(0.03	)	$	(2.83	)	$	0.26


Three months ended December 31, 2019	$	35,386
2020		197,177
2021		182,950
2022		163,685
2023		135,792
Thereafter		480,287

Total Undiscounted Cash Flows	$	1,195,277
Less: Interest		(307,417	)

Total Operating Lease Liability		887,860
Less: Current Portion of Operating Lease Liability		(140,781	)

Long-Term Portion of Operating Lease Liability	$	747,079


	Three Months Ended September 30,
	2019					2018
	(Dollars in thousands)
Revenues:
Net sales	$	538,345		99.7	%	$	550,840		99.6	%
Royalties and franchise fees		1,886		0.3			2,206		0.4

Total revenues		540,231		100.0			553,046		100.0
Cost of sales		373,413		69.1			349,641		63.2
Wholesale selling expenses		16,084		3.0			17,538		3.2
Retail operating expenses		111,595		20.7			103,833		18.8
Franchise expenses		3,274		0.6			862		0.2
General and administrative expenses		43,062		8.0			42,239		7.6
Art and development costs		5,927		1.1			5,573		1.0
Development stage expenses		2,728		0.5			1,622		0.3
Store impairment and restructuring charges		2,574		0.5			—		—
Goodwill impairment		259,100		48.0			—		—

Total expenses		817,757		151.4			521,308		94.3

(Loss) income from operations		(277,526	)	(51.4	)		31,738		5.7
Interest expense, net		29,424		5.4			27,705		5.0
Other expense, net		2,047		0.4			5,696		1.0

Loss before income taxes		(308,997	)	(57.2	)		(1,663	)	(0.3	)
Income tax (benefit) expense		(27,252	)	(5.0	)		777		0.1

Net loss		(281,745	)	(52.2	)		(2,440	)	(0.4	)
Add: Net loss attributable to redeemable securities holder		—		—			(8	)	(0.0	)
Less: Net loss attributable to noncontrolling interests		(212	)	(0.0	)		(28	)	(0.0	)

Net loss attributable to common shareholders of Party City Holdco Inc.	$	(281,533	)	(52.1	)%	$	(2,420	)	(0.4	)%

Net loss per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	(3.02	)			$	(0.03	)
Net loss per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	(3.02	)			$	(0.03	)


	Nine Months Ended September 30,
	2019					2018
	(Dollars in thousands)
Revenues:
Net sales	$	1,611,149		99.6	%	$	1,614,049		99.5	%
Royalties and franchise fees		6,089		0.4			7,832		0.5

Total revenues		1,617,238		100.0			1,621,881		100.0
Cost of sales		1,065,511		65.9			996,084		61.4
Wholesale selling expenses		50,929		3.1			53,581		3.3
Retail operating expenses		302,756		18.7			285,019		17.6
Franchise expenses		9,813		0.6			8,624		0.5
General and administrative expenses		126,497		7.8			136,230		8.4
Art and development costs		17,568		1.1			17,278		1.1
Development stage expenses		7,966		0.5			5,620		0.3
Gain on sale/leaseback transaction		(58,381	)	(3.6	)		—		—
Store impairment and restructuring charges		25,817		1.6			—		—
Goodwill impairment		259,100		16.0			—		—

Total expenses		1,807,576		111.8			1,502,436		92.6

(Loss) income from operations		(190,338	)	(11.8	)		119,445		7.4
Interest expense, net		88,857		5.5			76,481		4.7
Other expense, net		6,643		0.4			9,076		0.6

(Loss) income before income taxes		(285,838	)	(17.7	)		33,888		2.1
Income tax (benefit) expense		(21,809	)	(1.4	)		9,443		0.6

Net (loss) income		(264,029	)	(16.3	)		24,445		1.5
Add: Net income attributable to redeemable securities holder		—		—			402		0.0
Less: Net loss attributable to noncontrolling interests		(352	)	(0.0	)		(87	)	0.0

Net (loss) income attributable to common shareholders of Party City Holdco Inc.	$	(263,677	)	16.3	%	$	24,934		1.5	%

Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Basic	$	(2.83	)			$	0.26
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. – Diluted	$	(2.83	)			$	0.26


	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
(Dollars in thousands)
Net (loss) income	$	(281,745	)	$	(2,440	)	$	(264,029	)	$	24,445
Interest expense, net		29,424			27,705			88,857			76,481
Income taxes		(27,252	)		777			(21,809	)		9,443
Depreciation and amortization		19,155			16,974			62,380			57,786

EBITDA		(260,418	)		43,016			(134,601	)		168,155
Non-cash purchase accounting adjustments		—			2,154			2,757			2,696
Store impairment and restructuring charges (a)		8,694			—			54,960			—
Other restructuring, retention and severance (b)		(73	)		951			5,248			3,105
Goodwill impairment (c)		259,100			—			259,100			—
Deferred rent (d)		446			2,468			(1,042	)		3,623
Closed store expense (e)		2,326			825			3,424			3,430
Foreign currency losses/(gains), net		646			(314	)		486			128
Stock option expense (f)		409			550			1,150			1,492
Non-employee equity-based compensation (g)		128			(13	)		386			352
Undistributed (loss) income in equity method investments		7			(279	)		(195	)		(580	)
Corporate development expenses (h)		4,588			3,057			11,782			8,409
Non-recurring consulting charges (i)		—			624			—			12,243
Refinancing charges (j)		—			5,091			—			6,237
Restricted stock units – time-based (k)		610			470			1,543			722
Restricted stock units – performance-based (l)		560			889			1,036			1,482
Non-recurring legal settlements/costs		194			—			1,795			—
Gain on sale/leaseback transaction (m)		—			—			(58,381	)		—
Other		(75	)		(44	)		217			(295	)

Adjusted EBITDA	$	17,142		$	59,445		$	149,666		$	211,199

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Emerging Growth Company