| REORGANIZATION AND CHAPTER 11 PROCEEDINGS | Reorganization and Chapter 11 Proceedings On the Petition Date, the Chapter 11 Cases were filed. The Debtors filed certain motions and applications intended to limit the disruption of the Chapter 11 Cases on its operations. Since the commencement of the Chapter 11 Cases, the Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Chapter 11 Accounting The Company has applied ASC 852 in preparing our Consolidated Financial Statements. ASC 852 requires the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the Company's reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the unaudited Consolidated Statements of Operations. In addition, prepetition obligations that are unsecured or undersecured that may be impacted by the Chapter 11 Cases have been classified on the unaudited Consolidated Balance Sheet at June 30, 2020 as liabilities subject to compromise. These liabilities are reported at the amounts the Company currently anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. Under the Bankruptcy Code, the Debtors may assume, assume and assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach subject, in the case of the rejection of unexpired leases of real property, to certain caps on damages. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtor’s estate for such damages. Generally, the assumption or assumption and assignment of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance thereunder. Accordingly, any description of an executory contract or unexpired lease with the Debtor in this quarterly report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Leases Due to the adverse impacts of COVID-19, the Company withheld rent and other occupancy payments beginning in April 2020 for certain of its retail locations as management negotiated with landlords for rent concessions. The Company had unpaid rent and other occupancy payments of approximately $47 million as of June 30, 2020. In the event that withholding these rent payments would constitute an event of default per the lease agreement, management intends to negotiate resolution with the landlord. If such negotiations are not successful, the lease liabilities associated with those leases could become immediately due and payable. We also intend to reject certain lease arrangements throughout the Chapter 11 Cases. On July 20, 2020, the Bankruptcy Court authorized the Debtors to reject certain unexpired U.S and Canada company-owned and franchise leases, 551 of which were rejected with an effective termination date in June 2020. As a result, for each rejected lease, we have extinguished the related right-of-use asset and lease liability, and recorded the expected allowed claim amount in liabilities subject to compromise ("LSTC") as of June 30, 2020, the effects of which were not material. As of June 30, 2020, the Company identified a trigger event as it relates to the impairment of certain right-of-use assets. See further discussion in Note 6. "Property, Plant and Equipment, Net." For any leases not rejected by the Bankruptcy Court as of August 10, 2020, we have continued to account for these leases under ASC 842, amortizing the right-of-use assets and evaluating for impairment and/or revisions to the assets' useful lives. We anticipate rejecting additional leases in the course of bankruptcy. As of the Petition Date, we have classified all lease liabilities within LSTC. Automatic Stay Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code. Deconsolidation of GNC Canada GNC Canada filed parallel proceedings in the Canadian Court. Any significant business decision which would impact our Canadian business requires the approval of both the U.S. and Canadian Courts as they have equal and plenary authority. As joint control by the U.S. and Canadian Courts does not constitute continued common control by the parent, the Company has deconsolidated GNC Canada effective as of the Canadian Petition Date consistent with ASC 810, Consolidation . Additionally, as the Company does not have significant influence over GNC Canada while in bankruptcy, GNC will record and account for its investment in GNC Canada using the cost method under ASC 321, Investments - equity securities , as of the date of deconsolidation. The operating results of GNC Canada are reflected in our Consolidated Statements of Operations through the date of deconsolidation. We recorded a $5.0 million loss within Reorganization items, net related to the deconsolidation of GNC Canada during the three and six months ended June 30, 2020. The loss reflects the re-measurement of our net investment in GNC Canada to its estimated fair value of $13.6 million. Included in the loss was the reclassification of $5.6 million of cumulative foreign currency translation adjustments related to GNC Canada from Accumulated other comprehensive loss. Subsequent to the deconsolidation, transactions with GNC Canada are no longer eliminated in consolidation and are considered related party transactions. Transactions between GNC and GNC Canada were not material during the 6 days ended June 30, 2020. Prepetition professional fees Expenses, gains and losses that are realized or incurred before the Petition Date and in relation to the Chapter 11 Cases are recorded under selling, general and administrative charges on our Consolidated Statements of Operations. Prepetition professional fees related to the Chapter 11 Cases were $34.2 million for the three and six months ended June 30, 2020. Debtor-In-Possession (“DIP”) Financing Debtor-in-Possession Credit Agreements In connection with the Chapter 11 Cases, on June 24, 2020, GNC Corporation and General Nutrition Centers, Inc. (collectively, the “Borrower”) entered into the following DIP financing arrangements (collectively, the "DIP Credit Agreements"): 1. The Borrower entered into a Debtor-in-Possession Term Loan Credit Agreement (the “DIP Term Loan Credit Agreement”), with GLAS Trust Company, LLC, as administrative agent and collateral agent, and the lenders party thereto (collectively, the “TL DIP Lenders”), to obtain a senior secured super-priority DIP term loan (the “DIP Term Loan Facility”), consisting of: (i) $100 million of new cash (the “New Money DIP”), which term loan shall accumulate interest based on an adjusted LIBOR rate plus an applicable margin of 13.00%, with a 1.00% LIBOR floor, and (ii) $100 million in aggregate principal of the prepetition Tranche B-2 Term Loans which were converted into a separate tranche of DIP Facility loans (the “Rollup Term Loans”) on July 21, 2020. As of June 30, 2020, the prepetition Tranche B-2 Term Loans were classified in LSTC. 2. The Borrower entered into a Debtor-in-Possession Amended and Restated ABL Credit Agreement (the “DIP FILO Credit Agreement”), with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto (collectively, the “FILO DIP Lenders”), to obtain a senior secured super-priority DIP FILO facility (the “DIP Rollover Facility”). The DIP Rollover Facility consists of the refinancing of all $275 million of the Debtors’ prepetition FILO term loan under its ABL Credit Agreement, dated as of February 28, 2018 (as amended, the “ABL Credit Agreement”). The DIP Rollover Facility is subject to interest based on an adjusted LIBOR rate plus an applicable margin of 9.00%, with a 1.00% LIBOR floor. DIP Term Loan Facility Amounts borrowed against the DIP Term Loan Facility as of June 30, 2020 were $30.0 million, of which $15.7 million was held in escrow in accordance with terms of the DIP Term Loan Credit Agreement. The amounts in escrow were recorded as restricted cash within the Consolidated Balance Sheets. The TL DIP Lenders shall provide an additional $70 million in new money term loans in addition to the $30 million in new money term loans provided pursuant to the Interim DIP Order and $100 million in amounts outstanding pursuant to the Debtors’ prepetition term loan facility would be “rolled-up” into amounts outstanding under the DIP Term Loan Facility, which term loan shall accumulate interest based on an adjusted LIBOR rate plus an applicable margin of 13.00%, with a 1.00% LIBOR floor. The TL DIP Lenders are entitled to receive cash interest payments on the New Money DIP and Rollup Term Loans through the pendency of the Chapter 11 Cases. The associated fees and expenses under the New Money DIP include (i) a 6.00% backstop premium, (ii) a 4.00% upfront fee and (iii) a 3.00% exit fee. Borrowings under the DIP Term Loan Facility are secured by (i) a super priority lien on the collateral under the existing term loan (the “Term Loan Facility”) under the Amended and Restated Term Loan Agreement, dated as of February 28, 2018 (the "Term Loan Agreement"), as well as the unencumbered collateral of the Debtors, and (ii) a second priority lien on the existing collateral under the existing ABL Facility, junior to the lien in favor of the lenders thereunder. The DIP Term Loan Credit Agreement has various customary covenants, as well as covenants mandating compliance by the Debtors with a 13-week budget, variance testing and reporting requirements, among others. The scheduled maturity of the DIP Term Loan Facility will be the earlier of six months from June 24, 2020 or the date of consummation of the Plan approved in the RSA, after which consummation (i) the outstanding New Money DIP amounts under the DIP Term Loan Facility would convert into the Exit FLFO Facility (as defined below), and (ii) the Rollup Term Loans would convert into the Exit FLSO Facility (as defined below), in each case upon the consummation of the Plan and the conclusion of the Chapter 11 Cases. DIP Rollover Facility The DIP FILO Credit Agreement amends and restates the ABL Credit Agreement and provided Borrower with approximately $30 million of additional liquidity by (i) removing certain cash dominion blockers effective upon Borrower’s paydown of the revolving credit facility under the ABL Credit Agreement (which paydown Borrower completed immediately upon receipt of interim approval of the DIP Facilities from the Bankruptcy Court), (ii) and adding $17.5 million to the borrowing base. The scheduled maturity of the DIP Rollover Facility will be the earlier of six months from June 24, 2020 or the date of consummation of the Plan approved in the RSA, after which consummation the outstanding amounts under the DIP Rollover Facility would convert into a new FILO exit facility (the “FILO Exit Facility”) to the DIP FILO Credit Agreement upon the consummation of the Plan. The FILO Exit Facility contemplates a four-year maturity with an initial interest rate of LIBOR plus 9.00% with a 1% LIBOR floor, with the ability to step down to LIBOR plus 7.00% with a 1.00% LIBOR floor if certain conditions are satisfied, with mandatory prepayments required in certain circumstances. Other terms are customary and/or consistent with the DIP Rollover Facility or the ABL Credit Agreement. The DIP Rollover Facility is subject to any additional fees, or to budget reporting covenants beyond those required under the Term Loan DIP Credit Agreement. DIP Backstop Commitment Letter On June 23, 2020, prior to commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries received a DIP Backstop Commitment Letter (the “Commitment Letter”) from the TL DIP Lenders for financing of (i) the New Money DIP and (ii) the Rollup Term Loans. If the Plan is consummated, the Commitment Letter contemplates that the New Money DIP will convert on a dollar-for-dollar basis into a first-lien-first-out term loan exit facility (the “Exit FLFO Facility”). The Exit FLFO Facility is contemplated to have a 4-year maturity and an interest rate of LIBOR plus an applicable margin of 10.00%, with a 1.00% LIBOR floor, with the borrowings thereunder secured by the same liens as the borrowings under the DIP Term Loan Facility. The Rollup Term Loans, together with an additional $50 million converted from the amounts outstanding under the Term Loan Facility, will convert on a dollar-for-dollar basis into a first-lien-second-out term loan exit facility (the “Exit FLSO Facility”). The Exit FLSO Facility is contemplated to have a 4.25-year term and an interest rate of, at the option of the borrower, LIBOR plus 9.00% cash interest (with a 1.00% LIBOR floor) plus an additional 3.00% interest paid-in-kind or LIBOR plus 11.50% cash interest (with a 1.00% LIBOR floor), with the borrowings thereunder secured by the same liens as the borrowings under the DIP Term Loan Facility, but with second-out payment priority. Restructuring Support Agreement On June 23, 2020, the Debtors entered into the RSA with creditors holding, in the aggregate, approximately (a) 92% of the aggregate outstanding principal amount of the Company’s Tranche B-2 Term Loan (the TL DIP Lenders), and (b) 87% of the aggregate outstanding principal amount of the Company’s ABL FILO Term Loan (the FILO DIP Lenders, and collectively with the TL Creditors, the “Consenting Creditors”). The RSA incorporates the economic terms agreed to by the parties for the Plan. The RSA also contemplates that a significant majority of the Consenting Creditors have agreed that the Company will pursue on a parallel path basis a going concern sale of the business of the Debtors pursuant to Section 363 of the Bankruptcy Code the highest and best sale offer pursuant to this sale process, the “Sale Transaction”). As further discussed in Note 16. "Subsequent Events," on August 7, 2020, the Company reached an agreement for a stalking horse bid with Harbin Pharmaceutical Group Holding Co., Ltd ("Harbin Buyer") ("the Bid") and the Debtors will seek the Bankruptcy Court’s approval of the Bid and any related bid protections. Any such Sale Transaction would be executed through an auction process supervised by the Bankruptcy Court at which higher and better bids may be presented. The DIP financing will provide the Debtors with at least $130 million in liquidity during the Chapter 11 Cases. If the Plan is consummated in exchange for providing the liquidity offered by the DIP Credit Agreements and in consideration for converting $100 million of prepetition Tranche B-2 Term Loans into the Exit FLSO Facility (as defined and described above), the holders of the prepetition Tranche B-2 Term Loans will also own 100% of the common stock in the reorganized Debtors (the “New Common Shares”), subject to dilution by a management incentive plan providing for 10% of the New Common Shares to be awarded to management and employees as well as a proposed equity distribution to general unsecured creditors. If the Plan is approved and the class of unsecured creditors votes to accept the approved Plan, they will have a choice to receive 3-year warrants for 5% of the pro forma equity of the reorganized Debtors or elect to receive their pro rata share of $250,000 in cash. Pursuant to the RSA, each of the Debtors and Consenting Creditors has made certain customary commitments to each other. The Debtors have agreed to, among other things, use commercially reasonable efforts to implement the restructuring contemplated by the RSA; implement the Plan in a timely manner if the Sale Transaction is not consummated; respond to diligence and status update requests from certain of the Consenting Creditors’ representatives; and satisfy certain other covenants. The Consenting Creditors have committed to support and vote for the Plan and have agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support. Certain of the Consenting Creditors have also agreed to provide debtor-in-possession financing pursuant to the DIP Credit Agreements. The RSA contains milestones for the progress of the Chapter 11 Cases (the “Milestones”), which include the dates by which the Debtors are required to, among other things, obtain certain orders of the Bankruptcy Court and consummate the Debtors’ emergence from bankruptcy. Among other dates set forth in the RSA, the agreement contemplates that the Bankruptcy Court shall have entered the Interim DIP order no later than three business days after the Petition Date, the Final DIP Order no later than 35 days after the Petition Date and the Disclosure Statement Order no later than 45 days after the Petition Date and that the Company shall have emerged from bankruptcy no later than 141 days after the Petition Date, subject in each case to an extension or waiver of such dates by the requisite Consenting Creditors under the terms of the RSA. As of August 10, 2020, GNC has achieved or extended all Milestones required up to the report release date of August 10, 2020. The transactions contemplated by the RSA are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated. Plan of Reorganization On July 15, 2020, the Debtors filed a joint plan of reorganization (the “Plan of Reorganization”) and a related disclosure statement (as amended, the “Disclosure Statement”) with the Bankruptcy Court. On August 7, 2020, the Debtors filed an amended Plan of Reorganization. On August 19, 2020, the Bankruptcy Court will hold a hearing to consider approval of the Disclosure Statement. Reorganization Items, net The accounting standards require that the Consolidated Financial Statements, for the periods incurred after the Petition Date as a direct result of the Chapter 11 Cases, distinguish transactions and events that are directly associated with the Chapter 11 Cases from the ongoing operations of the business. Accordingly, certain expenses (including professional fees), realized gains and losses, and provisions for losses that are realized or incurred during the Chapter 11 Cases are recorded in reorganization items, net in the Consolidated Statements of Operations. Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Bankruptcy and are consisted of the following for the three and six months ended June 30, 2020: Three months ended June 30, 2020 Six months ended June 30, 2020 (in thousands) Debtor-in-possession financing costs $ 7,300 $ 7,300 Professional fees 2,043 2,043 Prepetition debt issuance costs and debt discount 1,039 1,039 Loss on deconsolidation of GNC Canada 5,047 5,047 Total reorganization items, net $ 15,429 $ 15,429 Six months ended June 30, 2020 2019 Cash paid during the period for: Reorganization items, net $ 7,532 $ — Claims and Claims Resolution Process To the best of our knowledge, after making reasonable efforts, we have notified all of our known current or potential creditors that the Debtors have filed the Chapter 11 Cases. On July 21, 2020 each of the Debtors filed their respective Schedules of Assets and Liabilities (the “Schedules”) and Statements of Financial Affairs (the “Statements”) (collectively, the “Schedules and Statements”) with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the Debtors, the unexpired leases of the Debtors, including executory contracts to which each of the Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or modification as our Chapter 11 Cases proceed. The Schedules and Statements may be subject to further amendment or modification after filing. Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wish to assert prepetition claims against us and whose claim (i) is not listed in the Schedules and Statements or (ii) is listed in the Schedules and Statements as disputed, contingent, or unliquidated, must file a proof of claim with the Bankruptcy Court prior to the bar date set by the court. The general bar date for creditors to file claims or contest claim amounts is scheduled for August 28, 2020 and the governmental bar date is scheduled for December 21, 2020 (collectively, the "Bar Dates"). As of August 7, 2020, approximately 763 claims totaling $62.7 million have been filed with the Bankruptcy Court against the Debtors by approximately 633 claimants. We expect additional claims to be filed prior to the Bar Dates. In addition, creditors who have already filed claims may amend or modify their claims in ways we cannot reasonably predict. The amounts of these additional claims and/or amendments or modifications to claims already filed may be material. We anticipate the claims filed against the Debtors in the Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the Chapter 11 Cases. As part of the process, we will work to resolve differences in amounts scheduled by the Debtors and the amounts claimed by creditors, including through the filing of objections with the Bankruptcy Court where necessary. Accordingly, the ultimate number and amount of claims that will be allowed against the Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated. See Note 12. "Mezzanine Equity," for further details discussing classification of mezzanine equity. Liabilities Subject to Compromise The accompanying unaudited Consolidated Balance Sheet as of June 30, 2020 includes amounts classified as liabilities subject to compromise, which represent unsecured or undersecured prepetition liabilities. These amounts include the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust estimates as necessary. Liabilities subject to compromise consisted of the following: June 30, 2020 (in thousands) Accounts payable $ 61,128 Accrued interest 3,744 Lease liabilities 329,790 Other liabilities 188,971 Tranche B-2 Term Loan 410,834 Notes 159,097 Total Liabilities subject to compromise $ 1,153,564 The principal balance on the Tranche B-2 Term Loan and Notes of $410.8 million and $159.1 million, respectively, has been reclassified from long-term debt to LSTC as of June 30, 2020. See also Note 8. "Debt / Interest Expense" for further details. Effective as of the Petition Date, we ceased recording interest expense on outstanding prepetition debt subject to compromise. Contractual interest expense represents amounts due under the contractual terms of outstanding prepetition debt classified as LSTC. For the quarter ended June 30, 2020, contractual interest expense of $0.8 million related to LSTC has not been recorded in the Consolidated Financial Statements. Accrued interest on the prepetition debt subject to compromise was also reclassified from accrued liabilities to LSTC as of June 30, 2020. We have not made any interest payments on our prepetition debt subject to compromise since the commencement of the Chapter 11 Cases. Employee Retention Program On July 20, 2020, the Bankruptcy Court approved the Debtors' Key Employee Retention Program ("KERP"). The KERP is designed to enhance retention of key employees and provides a maximum award pool of approximately $3.1 million. Debtor Financial Statements Debtors Condensed Combined Financial Statements The Company has seventeen wholly-owned entities that are considered non-debtors ( “ Non-Debtors ” ). • Nutra Insurance Company • GNC Korea Limited • GNC Hong Kong Limited • GNC (Shanghai) Trading Co., Ltd. • GNC China JV Holdco Limited • GNC (Shanghai) Food Technology Limited • GNC South Africa (Pty) Ltd. • GNC Jersey One Limited • GNC Jersey Two Unlimited • THSD Unlimited Company • GNC Live Well Ireland • GNC Colombia SAS • GNC Newco Parent, LLC • Nutra Manufacturing, LLC • GNC Supply Purchaser, LLC • GNC Intermediate IP Holdings, LLC • GNC Intellectual Property Holdings, LLC With the exception of cash and cash equivalents, brand name and equity method investments in the amounts of $5.1 million, $24.8 million and $42.1 million, respectively, the balance sheet, results of operations and cash flow activity of the Non-Debtors is not material to the consolidated financial statements of GNC as of and for the period ended June 30, 2020. See Note 9. "Equity Method Investments" for more information on the Company's equity method investments. |
