Item 8. Financial Statements and Supplementary Data
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021, 2020, and 2019
1. |
Summary of Significant Accounting Policies |
Tivity Health, Inc. (the “Company”) was founded and incorporated in Delaware in 1981. We are a leading provider of healthy life-changing solutions, including SilverSneakers®, Prime® Fitness, and WholeHealth LivingTM. We help adults improve their health and support them on life’s journey by providing access to in-person and virtual physical activity, social engagement, and mental enrichment programs. We deliver resources that enable members to live healthier, happier, more connected lives. Our solutions support health plans and employers nationwide as they seek to reduce costs and improve health outcomes.
Effective as of December 9, 2020, we completed the sale of Nutrisystem. Results of operations for Nutrisystem have been classified as discontinued operations for all periods presented in the consolidated financial statements.
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). In our opinion, the accompanying consolidated financial statements of Tivity Health, Inc. and its wholly owned subsidiaries (collectively, “Tivity Health,” the “Company,” or such terms as “we,” “us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. We have reclassified certain items in prior periods to conform to current classifications.
a. |
Principles of Consolidation – See discussion above regarding Nutrisystem. We have eliminated all intercompany profits, transactions, and balances. |
b. |
Cash and Cash Equivalents - Cash and cash equivalents primarily include cash on deposit. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable. |
c. |
Accounts Receivable, net - Accounts receivable includes billed and unbilled amounts. Billed receivables represent fees that are contractually due for services performed or products sold, net of allowances for doubtful accounts (reflected as selling, general and administrative expenses). Allowances for doubtful accounts were $0 at December 31, 2021 and 2020. Historically, we have experienced minimal instances of customer non-payment and therefore consider our accounts receivable to be collectible; however, we provide reserves, when appropriate, for doubtful accounts on a specific identification basis. Unbilled receivables were $16.2 million and $5.7 million at December 31, 2021 and 2020, respectively, and primarily represent fees recognized for monthly member utilization of fitness facilities under our SilverSneakers fitness solution, billed one month in arrears. |
d. |
Investment in equity securities – At December 31, 2021, investment in equity securities consists of 11,079,331 shares of common stock of Sharecare, Inc. As required under Accounting Standard Codification (“ASC”) 321, beginning in July 2021, we carry the investment at fair value and recognize any changes in fair value in net income as unrealized gains or losses. See Note 12 for further information on investment in equity securities. |
e. |
Property and Equipment - Property and equipment is carried at cost and includes expenditures that increase value or extend useful lives. We recognize depreciation using the straight-line method over useful lives of three to seven years for computer software and hardware and four to seven years for furniture and office equipment, and three to five years for equipment. Leasehold improvements are depreciated over the shorter of the estimated life of the asset or the life of the lease, which ranges from two to fifteen years. Depreciation expense, including depreciation of assets recorded under finance leases, for the years ended December 31, 2021, 2020, and 2019 was $11.3 million, $9.9 million, and $7.1 million, respectively. |
f. |
Leases – We recognize right-of-use assets and lease liabilities for leases with contractual terms longer than twelve months, and we categorize such leases as either operating or finance. Finance leases are generally those leases that allow us to substantially utilize or pay for the entire asset over its estimated life. All other leases are categorized as operating leases. Our leases generally have remaining lease terms of seven to 33 months, some of which include options to extend the lease for additional periods. Such extension options were not considered in the value of the asset or liability since it is not probable that we will exercise the options to extend. If applicable, allocations among lease and non-lease components would be achieved using relative fair values. |
46
Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the leases. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
Costs associated with right-of-use assets are recognized on a straight-line basis within operating expenses over the term of the lease. Finance lease assets are amortized within operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term. See Note 9 for further information on leases.
|
g. |
Intangible Assets - Intangible assets subject to amortization include acquired technology and distributor and provider networks, which we amortized on a straight-line basis over estimated useful lives ranging from three to ten years. All intangible assets related to continuing operations and subject to amortization were fully amortized at December 31, 2021 and 2020. |
Intangible assets related to continuing operations and not subject to amortization at December 31, 2021 and 2020 consist of a trade name of $29.0 million.
In accordance with ASC 350, we review indefinite-lived intangible assets for impairment on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. We estimate the fair value of our indefinite-lived tradename using the relief-from-royalty method, which requires us to estimate significant assumptions such as the long-term growth rates of future revenues associated with the tradename, the royalty rate for such revenue, the terminal growth rate of revenue, the tax rate, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradename. See Note 6 for further information on intangible assets.
h. |
Goodwill - We recognize goodwill for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses that we acquire. |
In accordance with ASC 350, we review goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. Following the sale of our Nutrition business in December 2020, we have a single reporting unit.
As part of the annual impairment test, we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If we elect not to perform a qualitative assessment or we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative review. During the quantitative review, if the estimated fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the estimated fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value. See Note 6 for further information on goodwill.
i. |
Accounts Payable - Accounts payable consists of short-term trade obligations and includes cash overdrafts attributable to disbursements not yet cleared by the bank. |
j. |
Accrued Liabilities – Accrued liabilities primarily include amounts owed for estimated member visits to fitness network locations (which actual visit data is typically received approximately one month in arrears). Estimated amounts accrued for member visits at December 31, 2021 and 2020 were $19.3 million and $10.5 million, respectively. |
k. |
Income Taxes - We file a consolidated federal income tax return that includes all of our wholly owned subsidiaries. U.S. GAAP generally requires that we record deferred income taxes for the tax effect of differences between the book and tax bases of our assets and liabilities. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial |
47
|
statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. |
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income.
l. |
Revenue Recognition - See Note 4 for a further discussion of revenue recognition. |
m. |
Marketing Expense – Marketing expense includes media, advertising production, marketing, and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense from continuing operations was $4.0 million, $7.2 million, and $7.1 million in 2021, 2020, and 2019, respectively. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. All other advertising costs are charged to expense as incurred or, in the case of production costs, the first time the advertising takes place. At December 31, 2021 and 2020, $1.8 million and $0 million, respectively, of costs have been prepaid for future advertisements and promotions. |
n. |
Earnings (Loss) Per Share – We calculate basic earnings (loss) per share using weighted average common shares outstanding during the period. We calculate diluted earnings (loss) per share using weighted average common shares outstanding during the period plus the effect of all dilutive potential common shares outstanding during the period unless the impact would be anti-dilutive. During 2019 and 2020, we used the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock awards outstanding under our equity incentive plan were participating shares with nonforfeitable rights to dividends. Under the two-class method, we computed earnings per share of common stock by dividing the sum of distributed earnings to common stockholders (not applicable as we do not pay dividends) and undistributed earnings allocated to common stockholders by the weighted average number of outstanding shares of common stock for the period. In applying the two-class method, we allocated undistributed earnings to both shares of common stock and participating securities based on the number of weighted average shares outstanding during the period. During periods of net loss, no effect was given to the participating securities because they did not share in the losses of the Company. There were no participating securities during 2021; as such, we did not calculate EPS using the two-class method during 2021. See Note 15 for a reconciliation of basic and diluted earnings (loss) per share. |
o. |
Share-Based Compensation – We recognize all share-based payments to employees in the consolidated statements of operations over the required vesting period based on estimated fair values at the date of grant. See Note 7 for a further discussion of share-based compensation. |
p. |
Derivative Instruments and Hedging Activities – We generally use derivative instruments to add stability to interest expense and to manage our exposure to interest rate movements. We account for derivatives in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 815, which establishes accounting and reporting standards requiring that certain derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative’s fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. For derivatives that are designated and qualify as effective cash flow hedges, the unrealized gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as interest expense when the hedged transaction affects earnings. If a derivative instrument ceases to be a highly effective hedge, we will discontinue hedge accounting prospectively for the affected derivative instrument. The application of the authoritative guidance could impact the volatility of earnings. See Note 14 for further information on derivative instruments and hedging activities. |
q. |
Management Estimates – In preparing our consolidated financial statements in conformity with U.S. GAAP, management must make estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (2) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
48
2. |
Discontinued Operations |
Effective as of December 9, 2020, we completed the sale of Nutrisystem, Inc. (“Nutrisystem”) to KNS Acquisition Corp. (“Kainos”) for an aggregate purchase price, after giving effect to customary indebtedness and cash adjustments, of approximately $558.9 million, which amount was subject to a customary working capital adjustment post-closing. Such working capital adjustment was finalized in the second quarter of 2021 and resulted in additional proceeds of $2.7 million. Additionally, we incurred $11.2 million of transaction costs in 2020 directly related to the disposition of Nutrisystem, resulting in net proceeds, after post-closing adjustment, of $550.4 million.
In accordance with ASC Topic 205, “Presentation of Financial Statements”, the Nutrition business met the criteria for discontinued operations, as it was a component of the Company and the sale represented a strategic shift in the Company’s operations and financial results. Accordingly, the results of operations of the Nutrition business have been classified as discontinued operations for 2019, 2020, and 2021.
The following table presents financial results of the Nutrition business included in “loss from discontinued operations" for the years ended December 31, 2021, 2020 and 2019.
|
|
Year Ended December 31 |
|
(In thousands) |
|
2021 |
|
|
2020 (1) |
|
|
2019 (2) |
|
Revenues |
|
$ |
— |
|
|
$ |
617,191 |
|
|
$ |
498,091 |
|
Cost of revenues |
|
|
— |
|
|
|
291,097 |
|
|
|
232,240 |
|
Marketing expenses |
|
|
— |
|
|
|
196,952 |
|
|
|
140,286 |
|
Selling, general and administrative expenses (3) |
|
|
3,210 |
|
|
|
59,093 |
|
|
|
56,840 |
|
Depreciation and amortization |
|
|
— |
|
|
|
35,957 |
|
|
|
43,638 |
|
Impairment loss |
|
|
— |
|
|
|
199,500 |
|
|
|
377,100 |
|
Restructuring and related charges |
|
|
— |
|
|
|
472 |
|
|
|
5,143 |
|
Interest expense (4) |
|
|
— |
|
|
|
36,798 |
|
|
|
34,763 |
|
Pretax loss from discontinued operations |
|
|
(3,210 |
) |
|
|
(202,678 |
) |
|
|
(391,919 |
) |
Loss on de-designation of cash flow hedges (5) |
|
|
— |
|
|
|
(14,336 |
) |
|
|
— |
|
Write-off of deferred loan costs and debt discount (4) |
|
|
— |
|
|
|
(8,946 |
) |
|
|
— |
|
Loss on sale of Nutrition business (6) |
|
|
(96 |
) |
|
|
(101,391 |
) |
|
|
— |
|
Total pretax loss from discontinued operations |
|
$ |
(3,306 |
) |
|
$ |
(327,351 |
) |
|
$ |
(391,919 |
) |
Income tax benefit |
|
|
(844 |
) |
|
|
(46,851 |
) |
|
|
(59,881 |
) |
Loss from discontinued operations, net of income tax benefit |
|
$ |
(2,462 |
) |
|
$ |
(280,500 |
) |
|
$ |
(332,038 |
) |
|
(1) |
Results include the period from January 1, 2020 through December 8, 2020. |
|
(2) |
Results include the period from March 8, 2019 (the date of acquisition) through December 31, 2019. |
|
(3) |
For the year ended December 31, 2021, expenses from discontinued operations primarily relate to legal and other professional fees. |
|
(4) |
The term loans under our Prior Credit Agreement (as defined in Note 10) were originated with the purchase of Nutrisystem on March 8, 2019. Following the disposition of Nutrisystem, we repaid $519.0 million of principal on the Term Loans under the terms of the Prior Credit Agreement. In conjunction with the partial debt prepayment, we wrote off a portion of the related deferred loan costs and original issue discount. We allocated interest expense to discontinued operations based on the interest expense incurred from March 8, 2019 through December 8, 2020 related to $519.0 million of term loan debt, using our historical interest rates. |
|
(5) |
Represents loss recognized in the fourth quarter of 2020 in connection with the de-designation of cash flow hedging on interest rate swaps (see Note 14). |
|
(6) |
For the year ended December 31, 2020, the loss on sale of business consists of impairment losses of $90.2 million related to Nutrisystem goodwill (see Note 13), which includes post-closing adjustments related to final |
49
|
|
settlement, and $11.2 million of transaction costs directly related to the disposition of Nutrisystem. During the year ended December 31, 2021, an additional loss of $0.1 million was recognized upon final settlement of the post-closing working capital adjustment. |
The depreciation, amortization and significant operating and investing non-cash items of the discontinued operations were as follows:
|
|
Year Ended December 31 |
|
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
Impairment of goodwill and intangible assets |
|
$ |
— |
|
|
$ |
199,500 |
|
|
$ |
377,100 |
|
Loss on sale of business |
|
|
— |
|
|
|
90,163 |
|
|
|
— |
|
Depreciation and amortization |
|
|
— |
|
|
|
35,957 |
|
|
|
43,638 |
|
Loss on de-designation of cash flow hedges |
|
|
— |
|
|
|
14,336 |
|
|
|
— |
|
Write-off of deferred loan costs and debt discount (1) |
|
|
— |
|
|
|
8,946 |
|
|
|
— |
|
Capital expenditures on discontinued operations |
|
|
— |
|
|
|
6,794 |
|
|
|
10,168 |
|
Share-based compensation on discontinued operations |
|
|
— |
|
|
|
4,351 |
|
|
|
13,230 |
|
Deferred income taxes |
|
|
(844 |
) |
|
|
(54,561 |
) |
|
|
(68,488 |
) |
|
(1) |
Reflected on the consolidated statement of cash flows in the line items “Amortization and write-off of deferred loan costs” and “Amortization and write-off of debt discount”. |
3. |
Recent Relevant Accounting Standards |
In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes" (“ASU 2018-16”), which adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide lead time for entities to prepare for changes to interest rate risk hedging strategies. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. As of December 31, 2021, the benchmark interest rate in our existing interest rate swap agreements is LIBOR. The adoption of this standard did not have an impact on our financial position, results of operations, or cash flows.
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform: Scope”, which refines the scope of ASC 848 and clarifies the application of its guidance. ASC 848 contains temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, such as a transition away from the use of LIBOR. ASC 848 was effective for the Company as of January 1, 2020. The provisions of ASC 848 are available through December 31, 2022, at which time the reference rate replacement activity is expected to have been completed. The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic level for all transactions other than derivatives, which may be applied at a hedging relationship level. The accounting relief provided by ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. Modifications that are unrelated to reference rate reform will scope out a given contract. ASC 848 allows for different elections to be made at different points in time, and the timing of those elections will be documented as applicable. For the avoidance of doubt, we intend to reassess the elections of optional expedients and exceptions included within ASC 848 related to our hedging activities and will document the election of these items on a quarterly basis. In March 2020, we elected the expedient that allows us to assume that our hedged interest payments are probable of occurring regardless of any expected modification in their terms related to reference rate reform. In addition, we have the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848. In June 2020, we elected to (i) continue the method of assessing effectiveness as documented in the original hedge documentation and (ii) apply the expedient wherein the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. We will also apply the aforementioned elections to any future designated cash flow hedging relationship.
50
4. Revenue Recognition
We account for revenue from contracts with customers in accordance with ASC Topic 606. The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.
We earn revenue from continuing operations primarily from three programs: SilverSneakers senior fitness, Prime Fitness, and WholeHealth Living. We provide the SilverSneakers senior fitness program to members of Medicare Advantage, Medicare Supplement, and group retiree plans through our contracts with such plans. We offer Prime Fitness, a fitness facility access program, through contracts with commercial health plans, employers, and other sponsoring organizations that allow their members to individually purchase the program. We sell our WholeHealth Living program primarily to health plans.
Except for Prime Fitness, our customer contracts generally have initial terms of approximately three years. Some contracts allow the customer to terminate early and/or determine on an annual basis to which of their members they will offer our programs. For Prime Fitness, our contracts with commercial health plans, employers, and other sponsoring organizations generally have initial terms of approximately three years, while individuals who purchase the Prime Fitness program through these organizations may cancel at any time (on a monthly basis) after an initial period of one to three months. The significant majority of our customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term. Unsatisfied performance obligations at the end of a particular month primarily relate to certain monthly memberships for our Prime Fitness program, which are recorded as deferred revenue on the consolidated balance sheet and recognized as revenue during the immediately subsequent month. There was $0.1 million of revenue recognized during the year ended December 31, 2021 from performance obligations satisfied in a prior period. Deferred revenue was $3.4 million and $4.5 million at December 31, 2021 and 2020, respectively. During 2021, we recognized $4.4 million of revenue that was included in deferred revenue at December 31, 2020 and increased deferred revenue by $3.3 million, excluding amounts recognized as revenue during 2021.
Our fees are variable month to month and are generally billed per member per month (“PMPM”) or billed based on a combination of PMPM and member visits to a network location. We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month. Due to the COVID-19 pandemic, the average monthly total participation levels of our members have fluctuated significantly since March 2020. For the year ended December 31, 2021, total SilverSneakers visits and revenues were higher than the same period in 2020 as the effects of the COVID-19 pandemic lessened compared to the prior year period. As a result, revenues from PMPM fees (which are not derived from visits) represented 47% of SilverSneakers revenue for the year ended December 31, 2021, compared to 54% for the year ended December 31, 2020. We bill for member visits approximately one month in arrears once actual member visits are known. Payments from customers are typically due within 30 days of invoice date. When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period. At December 31, 2021 and 2020, $0.3 million and $0.8 million, respectively, of such costs were capitalized. During the years ended December 31, 2021, 2020, and 2019, amortization expense related to such capitalized costs was $0.7 million, $0.4 million, and $0.1 million, respectively.
Our customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month. The allocated consideration corresponds directly with the value to our customers of our services completed for the month. Under the majority of our contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. ASC 606-10-50-14(b) provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the “right to invoice” practical expedient.
51
Although we evaluate our financial performance and make resource allocation decisions based upon the results of our single operating and reportable segment, we believe the following information depicts how our revenues and cash flows from continuing operations are affected by economic factors.
The following table sets forth revenue from continuing operations disaggregated by program. Revenue from our SilverSneakers program is predominantly contracted with Medicare Advantage and Medicare Supplement plans.
(In thousands) |
|
Year Ended December 31 |
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
SilverSneakers |
|
$ |
362,767 |
|
|
$ |
313,575 |
|
|
$ |
492,778 |
|
Prime Fitness |
|
|
94,254 |
|
|
|
95,015 |
|
|
|
120,949 |
|
WholeHealth Living |
|
|
23,777 |
|
|
|
19,776 |
|
|
|
18,511 |
|
Other (1) |
|
|
454 |
|
|
|
9,348 |
|
|
|
828 |
|
|
|
$ |
481,252 |
|
|
$ |
437,714 |
|
|
$ |
633,066 |
|
|
(1) |
For the year ended December 31, 2020, other revenue in the table above includes $6.8 million from a well-being program with a large employer (which we do not expect to recur at this level) and $2.2 million of revenue from home-delivered meals. |
Sales and usage-based taxes are excluded from revenues.
5. |
Property and Equipment |
Property and equipment at December 31, 2021 and 2020 consisted of the following:
(In thousands) |
|
December 31, 2021 |
|
|
December 31, 2020 |
|
Leasehold improvements |
|
$ |
7,627 |
|
|
$ |
7,963 |
|
Computer equipment and related software |
|
|
57,095 |
|
|
|
45,504 |
|
Furniture and office equipment |
|
|
2,683 |
|
|
|
4,418 |
|
Capital projects in process |
|
|
2,071 |
|
|
|
1,262 |
|
Total property and equipment at cost |
|
$ |
69,476 |
|
|
$ |
59,147 |
|
Less: accumulated depreciation |
|
|
(44,229 |
) |
|
|
(38,188 |
) |
Total property and equipment, net |
|
$ |
25,247 |
|
|
$ |
20,959 |
|
6. |
Intangible Assets and Goodwill |
There was no change in the carrying amount of goodwill of continuing operations during the years ended December 31, 2021 or 2020. At each of December 31, 2021 and December 31, 2020, the gross amount of goodwill of continuing operations totaled $517.0 million, and we had accumulated impairment losses of $182.4 million.
Intangible assets subject to amortization at December 31, 2021 and 2020 consisted of the following:
(In thousands) |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net |
|
Acquired technology |
|
$ |
1,483 |
|
|
$ |
(1,483 |
) |
|
|
— |
|
Distributor and provider networks |
|
|
8,709 |
|
|
|
(8,709 |
) |
|
|
— |
|
Total |
|
$ |
10,192 |
|
|
$ |
(10,192 |
) |
|
$ |
— |
|
52
As all intangible assets subject to amortization were fully amortized as of December 31, 2016, no amortization was incurred during the years ended December 31, 2021, 2020, and 2019, and no amortization expense is expected over the next five years and thereafter.
At December 31, 2021 and 2020, intangible assets not subject to amortization consisted of a tradename of $29.0 million.
7. |
Share-Based Compensation |
During 2021 we had four types of share-based awards outstanding to our employees and directors: stock options, restricted stock units, performance-based stock units, and market stock units. All performance-based stock units were vested as of December 31, 2021. We believe that our share-based awards align the interests of our employees and directors with those of our stockholders.
We grant options under our stock incentive plan at fair value on the date of grant. The options generally vest over or at the end of three years based on service conditions and expire seven or ten years from the date of grant. Restricted stock units generally vest over three or four years. Performance-based stock units had a multi-year performance period and vested approximately two or three years from the grant date. Market stock units granted during 2020 have a three-year performance period and will vest at the end of such period based on total shareholder return.
We recognize share-based compensation expense for options, restricted stock units, and performance-based stock units on a straight-line basis over the vesting period. We account for forfeitures as they occur. We recognize share-based compensation expense for market stock units if the requisite service period is rendered, even if the market condition is never satisfied. All awards generally provide for accelerated vesting upon a change in control or normal or early retirement (as defined in the applicable equity award agreement or stock incentive plan). At December 31, 2021, we had reserved approximately 1.1 million shares for future equity grants under our stock incentive plans.
Following are certain amounts recognized in the consolidated statements of operations for share-based compensation arrangements for the years ended December 31, 2021, 2020, and 2019. We did not capitalize any share-based compensation costs during these periods.
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
(In millions) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
Share-based compensation included in cost of revenue |
|
$ |
2.5 |
|
|
$ |
2.7 |
|
|
$ |
2.2 |
|
Share-based compensation included in selling, general and
administrative expenses |
|
|
7.6 |
|
|
|
6.2 |
|
|
|
3.4 |
|
Share-based compensation included in restructuring and related
charges |
|
|
— |
|
|
|
0.8 |
|
|
|
— |
|
Share-based compensation included in continuing operations |
|
$ |
10.1 |
|
|
$ |
9.7 |
|
|
$ |
5.6 |
|
Share-based compensation included in discontinued operations |
|
|
— |
|
|
|
4.4 |
|
|
|
13.2 |
|
Total share-based compensation |
|
$ |
10.1 |
|
|
$ |
14.1 |
|
|
$ |
18.8 |
|
Total income tax benefit recognized in continuing operations |
|
|
2.6 |
|
|
|
2.5 |
|
|
|
1.4 |
|
As of December 31, 2021, there was $10.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our stock incentive plan. That total cost is expected to be recognized over a weighted average period of 1.4 years.
Stock Options
We use a lattice-based binomial option valuation model ("lattice binomial model") to estimate the fair values of stock options. We base expected volatility on historical volatility due to the low volume of traded options on our stock. The expected term of options granted is derived from the output of the lattice binomial model and represents
53
the period of time that options granted are expected to be outstanding. We used historical data to estimate expected option exercise and post-vesting employment termination behavior within the lattice binomial model.
The following table sets forth the weighted average grant-date fair values of options and the weighted average assumptions we used to develop the fair value estimates for the years ended December 31, 2021 and 2020. There were no stock options granted during fiscal 2019.
|
|
Year Ended
December 31,
2021 |
|
|
Year Ended
December 31,
2020 |
|
|
Year Ended
December 31,
2019 |
|
Weighted average grant-date fair value of options per share |
|
$ |
13.31 |
|
|
$ |
8.20 |
|
|
$ |
— |
|
Expected term (in years) |
|
|
6.3 |
|
|
|
6.2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
|
|
63.1 |
% |
|
|
63.2 |
% |
|
|
— |
|
Expected dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Risk-free rate |
|
|
1.4 |
% |
|
|
0.7 |
% |
|
|
— |
|
A summary of options as of December 31, 2021 and the activity during the year then ended is presented below:
Options |
|
Shares
(In thousands) |
|
|
Weighted
Average
Exercise
Price
Per Share |
|
|
Weighted
Average
Remaining
Contractual
Term
(In years) |
|
|
Aggregate
Intrinsic Value
(In thousands) |
|
Outstanding at January 1, 2021 |
|
|
422 |
|
|
$ |
17.83 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
178 |
|
|
|
26.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(81 |
) |
|
|
12.47 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(24 |
) |
|
|
17.64 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(2 |
) |
|
|
35.82 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
|
493 |
|
|
$ |
21.75 |
|
|
|
5.4 |
|
|
$ |
2,805 |
|
Exercisable at December 31, 2021 |
|
|
122 |
|
|
$ |
22.82 |
|
|
|
3.4 |
|
|
$ |
906 |
|
The total intrinsic value, which represents the difference between the market price of the underlying common stock and the option's exercise price, of options exercised during the years ended December 31, 2021, 2020, and 2019 was $0.9 million, $0.6 million, and $0.6 million, respectively.
Cash received from option exercises under all share-based payment arrangements during 2021 was $0.7 million. The actual tax benefit realized during 2021 for the tax deductions from option exercises totaled $0.2 million. We issue new shares of common stock upon exercise of stock options or vesting of restricted stock units, restricted stock awards, performance-based stock units, and market stock units.
Nonvested Shares
The fair value of restricted stock units and performance-based stock units is determined based on the closing bid price of the Company's common stock on the grant date. The weighted average grant-date fair value of restricted stock units granted during the years ended December 31, 2021, 2020, and 2019 was $24.15, $11.17, and $19.68, respectively. The weighted average grant-date fair value of performance-based stock units granted during the years ended December 31, 2020 and 2019 was $21.49 and $20.20, respectively. No performance-based stock units were granted during 2021. The Monte Carlo simulation valuation model is used to determine the fair value of market stock units. The weighted average grant-date fair value of all market stock units granted during 2020 was $18.84. No market stock units were granted during 2021 or 2019.
54
The three tables below set forth a summary of our nonvested shares as of December 31, 2021, as well as activity during the year then ended. The total grant-date fair value of shares vested during the years ended December 31, 2021, 2020, and 2019 was $10.9 million, $13.6 million, and $23.5 million, respectively.
|
|
Restricted Stock Units |
|
|
|
Shares
(In thousands) |
|
|
Weighted-
Average
Grant Date
Fair Value |
|
Nonvested at January 1, 2021 |
|
|
1,241 |
|
|
$ |
11.58 |
|
Granted |
|
|
164 |
|
|
|
24.15 |
|
Vested |
|
|
(803 |
) |
|
|
11.43 |
|
Forfeited |
|
|
(21 |
) |
|
|
15.48 |
|
Nonvested at December 31, 2021 |
|
|
581 |
|
|
$ |
15.20 |
|
|
|
Performance Stock Units |
|
|
|
Shares
(In thousands) |
|
|
Weighted-
Average
Grant Date
Fair Value |
|
Nonvested at January 1, 2021 |
|
|
86 |
|
|
$ |
20.30 |
|
Vested |
|
|
(84 |
) |
|
|
20.31 |
|
Forfeited |
|
|
(2 |
) |
|
|
19.71 |
|
Nonvested at December 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
Market Stock Units |
|
|
|
Shares
(In thousands) |
|
|
Weighted-
Average
Grant Date
Fair Value |
|
Nonvested at January 1, 2021 |
|
|
150 |
|
|
$ |
18.84 |
|
Nonvested at December 31, 2021 |
|
|
150 |
|
|
$ |
18.84 |
|
Income tax expense is comprised of the following:
|
|
Year Ended December 31, |
|
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
16,421 |
|
|
$ |
526 |
|
|
$ |
3,051 |
|
State |
|
|
5,431 |
|
|
|
881 |
|
|
|
830 |
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
5,658 |
|
|
|
14,114 |
|
|
|
11,853 |
|
State |
|
|
(1,165 |
) |
|
|
2,009 |
|
|
|
4,559 |
|
Total |
|
$ |
26,345 |
|
|
$ |
17,530 |
|
|
$ |
20,293 |
|
55
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table sets forth the significant components of our net deferred tax liability and asset as of December 31, 2021 and 2020:
(In thousands) |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
Accruals and reserves |
|
$ |
467 |
|
|
$ |
1,137 |
|
Deferred compensation |
|
|
169 |
|
|
|
604 |
|
Share-based payments |
|
|
1,279 |
|
|
|
2,909 |
|
Lease liability |
|
|
2,936 |
|
|
|
4,993 |
|
Section 163(j) interest limitation |
|
|
2,902 |
|
|
|
370 |
|
Interest rate swap |
|
|
2,830 |
|
|
|
5,964 |
|
Unrealized losses |
|
|
— |
|
|
|
3,720 |
|
Net operating loss carryforwards |
|
|
19,962 |
|
|
|
10,608 |
|
Capital loss carryforwards |
|
|
145,330 |
|
|
|
149,608 |
|
|
|
|
175,875 |
|
|
|
179,913 |
|
Valuation allowance |
|
|
(148,754 |
) |
|
|
(152,295 |
) |
|
|
$ |
27,121 |
|
|
$ |
27,618 |
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
(5,614 |
) |
|
$ |
(4,516 |
) |
Intangible assets |
|
|
(14,986 |
) |
|
|
(14,868 |
) |
Unrealized gains |
|
|
(6,972 |
) |
|
|
— |
|
Right-of-use assets |
|
|
(2,732 |
) |
|
|
(4,633 |
) |
|
|
|
(30,304 |
) |
|
|
(24,017 |
) |
Net long-term deferred tax (liability) asset |
|
$ |
(3,183 |
) |
|
$ |
3,601 |
|
In 2019, upon closing of the acquisition of Nutrisystem, we evaluated the realizability of beginning-of-the-year deferred tax assets and increased the valuation allowance on deferred tax assets related to state net operating loss carryforwards by $1.8 million. We also recorded a $0.9 million reduction in deferred tax assets related to state income tax credits. These two adjustments increased our income tax expense for 2019 by approximately $2.7 million. In 2020, upon closing of the Nutrisystem divestiture, we evaluated the realizability of beginning-of-the-year deferred tax assets and decreased the valuation allowance on deferred tax assets related to state net operating loss carryforwards by $2.7 million.
At December 31, 2021, we provided a total valuation allowance of $148.8 million, which consisted of (i) $2.4 million of deferred tax assets associated with our international net operating loss carryforwards, (ii) $11.0 million of deferred tax assets associated with our state net operating loss carryforwards, and (iii) $135.4 million for deferred tax assets related to capital loss carryforwards generated in the 2020 sale of Nutrisystem. Capital loss carryforwards can only be used to offset future capital gains and cannot be used to offset any future operating losses the Company may incur. We reduced our valuation allowance at December 31, 2021 by $9.9 million based on the positive evidence provided by the $39.2 million unrecognized capital gain in our equity ownership in Sharecare. We recorded a total decrease in our valuation allowance of $3.5 million for the year ended December 31, 2021. Our valuation allowance at December 31, 2020 totaled $152.3 million.
At December 31, 2021, we had international net operating loss carryforwards totaling approximately $8.3 million, $8.0 million of which have an indefinite carryforward period, approximately $344.1 million of state net operating loss carryforwards expiring between 2026 and 2040, and approximately $573.4 million of capital loss carryforwards expiring in 2025.
We recorded a tax effect of $2.8 million in 2021 related to our interest rate swap agreements to stockholder’s equity as a component of accumulated other comprehensive income (loss).
The difference between income tax expense computed using the statutory federal income tax rate and the effective rate is as follows:
56
|
|
Year Ended December 31, |
|
(In thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
Statutory federal income tax |
|
$ |
28,081 |
|
|
$ |
15,624 |
|
|
$ |
13,757 |
|
State income taxes, less federal income tax benefit |
|
|
6,675 |
|
|
|
3,607 |
|
|
|
3,048 |
|
Executive compensation |
|
|
2,172 |
|
|
|
1,062 |
|
|
|
150 |
|
Change in valuation allowance |
|
|
(14,275 |
) |
|
|
(2,659 |
) |
|
|
2,509 |
|
Share-based compensation |
|
|
(2,644 |
) |
|
|
426 |
|
|
|
210 |
|
State income tax credits |
|
|
— |
|
|
|
— |
|
|
|
954 |
|
Capital loss expiration |
|
|
7,139 |
|
|
|
— |
|
|
|
— |
|
Prior year tax adjustments |
|
|
(970 |
) |
|
|
(592 |
) |
|
|
(464 |
) |
Net impact of foreign operations |
|
|
69 |
|
|
|
3 |
|
|
|
(9 |
) |
Other |
|
|
98 |
|
|
|
59 |
|
|
|
138 |
|
Income tax expense |
|
$ |
26,345 |
|
|
$ |
17,530 |
|
|
$ |
20,293 |
|
Uncertain Tax Positions
As of December 31, 2021, we had no unrecognized tax benefits that would affect our effective tax rate. During 2020, we recorded a $1.1 million decrease to unrecognized tax benefits primarily related to the unrecognized tax benefits divested in the sale of Nutrisystem. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.
The aggregate changes in the balance of unrecognized tax benefits, exclusive of interest, were as follows. There were no changes in unrecognized tax benefits during 2021.
(In thousands) |
|
|
|
|
Unrecognized tax benefits at December 31, 2019 |
|
$ |
1,061 |
|
Increases related to prior year tax positions |
|
|
84 |
|
Decreases due to lapse of statute of limitations |
|
|
(20 |
) |
Decreases related to Nutrisystem divestiture |
|
|
(1,125 |
) |
Unrecognized tax benefits at December 31, 2020 |
|
$ |
— |
|
We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions. Tax years remaining subject to examination in the U.S. Federal jurisdiction include 2018 to present.
We account for leases under ASC 842. We maintain lease agreements principally for our office spaces and certain equipment. We maintain two sublease agreements with respect to one of our office locations, each of which continues through the initial term of our master lease agreement. Such sublease income and payments, while they reduce our rent expense, are not considered in the value of the right-of-use asset or lease liability. With the exception of two finance leases related to a network server and office equipment, all of our leases are classified as operating leases. In the aggregate, our leases generally have remaining lease terms of seven to 33 months, some of which include options to extend the lease for additional periods. Such extension options were not considered in the value of the right-of-use asset or lease liability because it is not probable that we will exercise the options to extend. If applicable, allocations among lease and non-lease components would be achieved using relative standalone selling prices.
Upon adoption of ASC 842, we determined our estimated discount rate for existing leases as of January 1, 2019 based on the incremental borrowing rate that most closely aligned with the remaining lease term and payment schedule, as provided by our financial institution. The discount rates for leases entered into after January 1, 2019 were determined based on similarly secured borrowings available to us as of lease inception.
The following table shows the right-of-use assets and lease liabilities recorded on the balance sheet:
57
|
December 31, 2021 |
|
|
December 31, 2020 |
|
(In thousands) |
|
|
|
|
|
|
|
Right-of-use assets: |
|
|
|
|
|
|
|
Operating |
$ |
10,327 |
|
|
$ |
17,145 |
|
Finance |
|
368 |
|
|
|
994 |
|
Total leased assets |
$ |
10,695 |
|
|
$ |
18,139 |
|
|
|
|
|
|
|
|
|
Lease liabilities: |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Operating |
$ |
7,610 |
|
|
$ |
7,408 |
|
Finance |
|
397 |
|
|
|
644 |
|
Non-current |
|
|
|
|
|
|
|
Operating |
$ |
3,487 |
|
|
$ |
11,097 |
|
Finance |
|
- |
|
|
|
397 |
|
Total lease liabilities |
$ |
11,494 |
|
|
$ |
19,546 |
|
The following table shows the components of lease expense:
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
(In thousands) |
2021 |
|
|
2020 |
|
Finance lease cost: |
|
|
|
|
|
|
|
Amortization of leased assets |
$ |
626 |
|
|
$ |
686 |
|
Interest of lease liabilities |
|
42 |
|
|
|
86 |
|
Operating lease cost |
|
7,578 |
|
|
|
7,872 |
|
Total lease cost before subleases |
$ |
8,246 |
|
|
$ |
8,644 |
|
Sublease income |
|
(5,377 |
) |
|
|
(5,452 |
) |
Total lease cost, net |
$ |
2,869 |
|
|
$ |
3,192 |
|
The following provides information related to the lease term and discount rate as of December 31, 2021:
Weighted Average Remaining Lease Term (years) |
|
|
|
|
Operating leases |
|
|
1.7 |
|
Finance leases |
|
|
0.6 |
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
Operating leases |
|
|
4.9 |
% |
Finance leases |
|
|
5.9 |
% |
As of December 31, 2021, maturities of lease liabilities for each of the next five years and thereafter were as follows:
|
|
Operating Leases |
|
|
Financing |
|
(In thousands) |
|
Lease Payments |
|
Sublease Receipts |
|
Net |
|
|
Leases |
|
2022 |
|
|
7,957 |
|
|
(5,732 |
) |
|
2,225 |
|
|
|
403 |
|
2023 |
|
|
2,518 |
|
|
(957 |
) |
|
1,561 |
|
|
|
— |
|
2024 |
|
|
1,083 |
|
|
— |
|
|
1,083 |
|
|
|
— |
|
Total lease payments |
|
|
11,558 |
|
$ |
(6,689 |
) |
$ |
4,869 |
|
|
|
403 |
|
Less: interest |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
(6 |
) |
Present value of lease liabilities |
|
$ |
11,097 |
|
|
|
|
|
|
|
|
$ |
397 |
|
58
Supplemental cash flow information related to leases was as follows:
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
(In thousands) |
|
2021 |
|
|
2020 |
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
Operating cash flow attributable to operating leases |
|
$ |
(3,921 |
) |
|
$ |
(3,492 |
) |
Operating cash flow attributable to finance leases |
|
|
(42 |
) |
|
|
(86 |
) |
Financing cash flow attributable to finance leases |
|
|
(642 |
) |
|
|
(622 |
) |
For the years ended December 31, 2021 and 2020, there were no noncash transactions related to leases.
The Company’s debt, net of unamortized deferred loan costs and original issue discount, consisted of the following at December 31, 2021 and 2020 was as follows:
(In thousands) |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
Term Loan A |
|
$ |
— |
|
|
$ |
124,035 |
|
Term Loan B |
|
|
394,000 |
|
|
|
372,240 |
|
|
|
|
394,000 |
|
|
|
496,275 |
|
Less: deferred loan costs and original issue discount |
|
|
(13,496 |
) |
|
|
(29,569 |
) |
Total debt |
|
|
380,504 |
|
|
|
466,706 |
|
Less: current portion |
|
|
— |
|
|
|
(7,456 |
) |
Total long-term debt |
|
$ |
380,504 |
|
|
$ |
459,250 |
|
Credit Facility
On June 30, 2021, we entered into a new Credit Agreement (the “Credit Agreement”) with a group of lenders, Morgan Stanley Senior Funding, Inc., as general administrative agent, term loan facility administrative agent and collateral agent (“Morgan Stanley”), and Truist Bank, as revolving facility agent and swingline lender (“Truist”). The Credit Agreement replaced our prior Credit and Guaranty Agreement, dated March 8, 2019 (the “Prior Credit Agreement”), with a group of lenders, Credit Suisse AG, Cayman Islands Branch, as general administrative agent, term facility agent and collateral agent, and Truist, as revolving facility agent and swingline lender. The Credit Agreement provides us with (i) a $400.0 million term loan B facility (the “Term Loan B”), (ii) a $100.0 million revolving credit facility that includes a $30.0 million sublimit for swingline loans and a $40.0 million sublimit for letters of credit (the “Revolving Credit Facility”), and (iii) uncommitted incremental accordion facilities in an aggregate amount at any date equal to the greater of $167.5 million or 100% of our Consolidated EBITDA (as defined in the Credit Agreement) for the then-preceding four fiscal quarters, plus additional amounts based on, among other things, satisfaction of certain financial ratio requirements. As of December 31, 2021, outstanding debt under the Credit Agreement was $380.5 million, and availability under the revolving credit facility totaled $99.5 million as calculated under the most restrictive covenant.
Upon execution of the Credit Agreement, we recorded a loss on extinguishment of debt of $18.2 million, which related to the write-off of certain unamortized original issue discount and deferred loan costs associated with the Prior Credit Agreement. Additionally, we incurred third-party costs of $0.8 million related to the execution of the Credit Agreement and the transactions that are the subject thereof, which were recorded as loss on modification of debt.
We used the proceeds of the Term Loan B and cash on hand to repay all of the outstanding indebtedness under the Prior Credit Agreement, and to pay transaction costs and expenses. Proceeds of the Revolving Credit Facility also may be used for general corporate purposes of the Company and its subsidiaries.
59
We are required to repay Term Loan B loans in consecutive quarterly installments, each in the amount of 0.25% of the aggregate initial amount of such loans, payable on September 30, 2021 and on the last day of each succeeding quarter thereafter until maturity on June 30, 2028, at which time the entire outstanding principal balance of such loans is due and payable in full. We are permitted to make voluntary prepayments of borrowings under the Term Loan B at any time without penalty, except for a 1% premium with respect to the principal of Term Loan B loans prepaid within six months after the date of the Credit Agreement using proceeds from certain specified repricing transactions. In October 2021, we made voluntary prepayments of $5.0 million on the Term Loan B, which prepaid all scheduled quarterly installments due through December 31, 2022.
We are required to repay in full any outstanding swingline loans and revolving loans, and to terminate or cash collateralize any outstanding letters of credit, under the Revolving Credit Facility on June 30, 2026. In addition, the Credit Agreement contains provisions that, beginning with fiscal year 2022, may require annual excess cash flow (as defined in the Credit Agreement and generally designed to equal cash generated by our business in excess of cash used in the business) to be applied towards the prepayment of the Term Loan B or the reduction of the Revolving Credit Facility, as determined by the Company in our discretion (“Excess Cash Flow Payment”). An Excess Cash Flow Payment is only required in the amount, if any, by which the Excess Cash Flow Amount exceeds $10.0 million for the applicable fiscal year. “Excess Cash Flow Amount” is equal to our excess cash flow for a given fiscal year multiplied by the following excess cash flow percentages based on our First Lien Net Leverage Ratio (as defined in the Credit Agreement) on the last day of such fiscal year: (a) 50% if the First Lien Net Leverage Ratio is greater than 3.25:1, (b) 25% if the First Lien Net Leverage Ratio is less than or equal to 3.25:1 but greater than 2.75:1, and (c) 0% if the First Lien Net Leverage Ratio is less than or equal to 2.75:1. Any potential mandatory Excess Cash Flow Payments are reduced by among other things, prepayments of the Term Loan B, any reductions of the Revolving Credit Facility, and prepayments of certain other indebtedness made during the applicable fiscal year. We were not required to make an Excess Cash Flow Payment for fiscal 2021.
Borrowings under the Credit Agreement bear interest at variable rates based on a margin or spread in excess of either (1) one-month, three-month or six-month LIBOR (or, if available to all lenders holding the particular class of loans, 12-month LIBOR), which may not be less than 0.00%, or (2) the greatest of (a) the prime lending rate of the agent bank for the particular facility, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the “Base Rate”), as selected by the Company. The Base Rate may not be less than 1.00%. The LIBOR margin for Term Loan B loans is 4.25%, and the LIBOR margin for revolving loans varies between 4.25% and 3.75% depending on our First Lien Net Leverage Ratio (as defined in the Credit Agreement). The Base Rate margin for Term Loan B loans is 3.25%, and the Base Rate margin for revolving loans varies between 3.25% and 2.75%, depending on our First Lien Net Leverage Ratio.
Based on the Company’s elections, borrowings under the Prior Credit Agreement bore interest at variable rates based on a margin or spread in excess of one-month LIBOR, which could not be less than zero. The LIBOR margin for Term Loan A loans was 4.25%, the LIBOR margin for Term Loan B loans was 5.25%, and the LIBOR margin for revolving loans varied between 3.75% and 4.25%, depending on our total Net Leverage Ratio, as defined in the Prior Credit Agreement.
In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024. Under these interest rate swap agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2%. As further explained in Note 14, during the fourth quarter of 2020 we concluded that five of the eight interest rate swaps no longer qualified for hedge accounting treatment, and we de-designated these derivatives. As of December 31, 2021, the eight interest rate swap agreements had current notional amounts totaling $600.0 million, of which $333.3 million related to effective hedges.
60
The following table shows the effective interest rates related to continuing operations for Term Loan A and Term Loan B (exclusive of payments related to de-designated interest rate swaps, which we do not classify as interest expense) for the years ended December 31, 2021 and 2020:
|
|
For the Year Ended December 31, |
|
Effective interest rate per annum |
|
2021 |
|
|
2020 |
|
Term Loan A under the Prior Credit Agreement |
|
|
6.58 |
% |
|
|
6.64 |
% |
Term Loan B under the Prior Credit Agreement |
|
|
7.22 |
% |
|
|
7.08 |
% |
Term Loan B under the Credit Agreement |
|
|
6.52 |
% |
|
|
— |
|
The Credit Agreement also provides for annual commitment fees ranging between 0.250% and 0.375% of the unused commitments under the Revolving Credit Facility, depending on our Total Net Leverage Ratio (as defined in the Credit Agreement), and annual letter of credit fees on the daily maximum amount available under outstanding letters of credit at the LIBOR margin for the Revolving Credit Facility. The Prior Credit Agreement provided for annual commitment fees ranging between 0.250% and 0.500% of the unused commitments under the prior revolving credit facility, depending on our total Net Leverage Ratio (as defined in the Prior Credit Agreement), and annual letter of credit fees on the daily outstanding availability under outstanding letters of credit at the applicable LIBOR margin for the prior revolving credit facility, depending on our total Net Leverage Ratio (as defined in the Prior Credit Agreement). We incurred total such commitment fees of $0.4 million, $0.5 million, and $0.5 million during the years ended December 31, 2021, 2020, and 2019, respectively.
Extensions of credit under the Credit Agreement are secured by guarantees from substantially all of the Company’s active material domestic subsidiaries and by security interests in substantially all of the Company’s and such subsidiaries’ assets, subject to certain specified exceptions.
With respect to the Revolving Credit Facility, the Credit Agreement contains a financial covenant that requires us to comply with a specified maximum First Lien Net Leverage Ratio if utilization of the Revolving Credit Facility exceeds a specified level as of the last day of any period of four consecutive fiscal quarters. The Credit Agreement also contains various other affirmative and negative covenants customary for financings of this type that, subject to certain exceptions, impose restrictions and limitations on the Company and certain of the Company’s subsidiaries with respect to, among other things, liens; indebtedness; changes in the nature of business; mergers and other fundamental changes; sales and other dispositions of assets (including equity interests in subsidiaries); loans, advances, guarantees, acquisitions and other investments; restricted payments (including dividends, distributions, buybacks, redemptions and repurchases with respect to equity interests); change in fiscal year; prepayments, redemptions or acquisitions for value with respect to junior lien, subordinated or unsecured debt; changes in organizational documents and junior debt agreements; negative pledges; restrictions on subsidiary distributions; transfers of material assets to subsidiaries that are not guarantors; and transactions with affiliates.
Based on our current assumptions with respect to the COVID-19 pandemic, including, among other things, the outstanding principal on the term loan under our Credit Agreement and the anticipated average monthly total participation levels of our members at our fitness partner locations, we currently believe we will be in compliance with the covenants under the Credit Agreement over the next 12 months.
The following table summarizes the minimum annual principal payments and repayments of the revolving advances under the Credit Agreement for each of the next five years and thereafter:
61
(In thousands) |
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
2022 |
|
|
— |
|
|
2023 |
|
|
4,000 |
|
|
2024 |
|
|
4,000 |
|
|
2025 |
|
|
4,000 |
|
|
2026 |
|
|
4,000 |
|
|
2027 and thereafter |
|
|
378,000 |
|
|
Total |
|
$ |
394,000 |
|
|
11. |
Commitments and Contingencies |
Weiner Lawsuit
On November 6, 2017, United Healthcare issued a press release announcing expansion of its fitness benefits (“United Press Release”), and the market price of the Company's shares of common stock, par value $0.001 per share (“Common Stock”) dropped on that same day.
On November 20, 2017, Eric Weiner, claiming to be a stockholder of the Company, filed a complaint in the United States District Court for the Middle District of Tennessee (“Weiner Lawsuit”). The Weiner Lawsuit names as defendants the Company, the Company's former chief executive officer, chief financial officer, and a former executive who served as both chief accounting officer and interim chief financial officer. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the United Press Release. On April 3, 2018, the Court appointed the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, and on January 29, 2020, the Court entered an order certifying the class of stockholders who purchased Company Common Stock between March 6, 2017 and November 6, 2017. On April 23, 2021, the parties reached a settlement in principle of the Weiner Lawsuit pursuant to which defendants’ insurers will pay the entire settlement amount in exchange for a release of claims. On June 10, 2021, the parties filed a joint stipulation and agreement of settlement with the Court, and plaintiffs filed a motion for preliminary approval of the settlement. On June 15, 2021, the Court issued an order preliminarily approving the settlement, and following a settlement approval hearing held on October 4, 2021, the Court entered a final judgment approving the proposed settlement on October 7, 2021.
Shareholder Lawsuits: Strougo, Cobb, and Delaware Lawsuits
On February 25, 2020, Robert Strougo, claiming to be a stockholder of the Company, filed a complaint in the United States District Court for the Middle District of Tennessee (the "Strougo Lawsuit"). On August 18, 2020, the Court appointed Sheet Metal Workers Local No. 33, Cleveland District, Pension Fund as lead plaintiff. Plaintiff filed its amended complaint on November 13, 2020. The amended complaint is on behalf of a putative class of stockholders who purchased Company Common Stock between March 8, 2019 and February 19, 2020 and names as defendants the Company, the Company's chief financial officer, former chief executive officer, and former president and chief operating officer. The amended complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the performance of and accounting for the Nutrisystem business that the Company acquired on March 8, 2019. The defendants filed a motion to dismiss the amended complaint on December 4, 2020. On July 29, 2021, the Court issued an order denying the defendants’ motion to dismiss. On October 26, 2021, Plaintiff filed a motion for class certification, which Defendants have opposed. The parties are currently engaged in discovery, and a trial date has been set for September 12, 2023.
62
On April 9, 2020, John Cobb, claiming to be a stockholder of the Company, filed a derivative complaint in the United States District Court for the Middle District of Tennessee naming the Company as a nominal defendant and certain current and former directors and officers as defendants (the “Cobb Lawsuit”). The complaint asserts claims for breach of Section 14(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, and waste of corporate assets, largely tracking the factual allegations in the Strougo Lawsuit. The plaintiff seeks monetary damages on behalf of the Company, restitution, and certain corporate governance and internal procedural reforms. On June 9, 2020, the United States Magistrate Judge approved the parties’ stipulation to stay the case pending the resolution of defendants’ motion to dismiss in the Strougo Lawsuit. On August 23, 2021, the parties submitted another joint stipulation proposing to further extend the stay.
In July 2020, three putative derivative complaints were filed in the United States District Court for the District of Delaware by the following individuals claiming to be stockholders of the Company: Patrick Yerby, Thomas R. Conte, Melvyn Klein, and Mark Ridendour (the “Delaware Derivative Lawsuits”). The complaints largely track the allegations, named defendants, asserted claims, and requested relief of the Cobb Lawsuit. The three Delaware Derivative Lawsuits have been consolidated. On August 24, 2021, the court entered an order staying the case.
Given the uncertainty of litigation and the preliminary stage of the Strougo Lawsuit, Cobb Lawsuit, and Delaware Derivative Lawsuits, we are not currently able to predict the probable outcome of the matter or to reasonably estimate a range of potential loss, if any. We intend to vigorously defend ourselves against these lawsuits.
Trademark Lawsuit: Pacific Packaging Lawsuit
On May 31, 2019, Pacific Packaging Concepts, Inc. (“Pacific Packaging”) filed a complaint in the U.S. District Court for the Central District of California, Western Division, naming as defendants two former subsidiaries of the Company; Nutrisystem, Inc. and Nutri/System IPHC, Inc (“Pacific Packaging Lawsuit”). In its complaint, Pacific Packaging alleged that the defendants’ use of Pacific Packaging’s federally registered trademark, Fresh Start, in advertisements for its weight management program and shakes constitutes federal trademark infringement, counterfeit trademark infringement, false designation of origin, federal trademark dilution, unfair competition, false advertising, common law unfair competition, and common law trademark infringement. The complaint seeks injunctive relief and monetary damages in an unspecified amount. On August 29, 2019, the defendants filed their Answer to Complaint. On July 23, 2021, the Court granted the defendant’s motion for summary judgment dismissing certain of plaintiff’s damages claims, namely any claim for royalty damages and claims related to profits based on reverse confusion. The case was set for trial on March 1, 2022. In connection with the sale of Nutrisystem, the Company agreed to indemnify Kainos for losses arising out of this matter and retained the right to control the defense thereof. On January 11, 2022, the parties reached a settlement in principle of the Pacific Packaging Lawsuit pursuant to which defendants’ insurers will pay the entire settlement amount except for the amount of $25,000 representing the deductible on the policy, which will be paid by the Company pursuant to its indemnification agreement with Kainos. The settlement is subject to the negotiation and execution of a definitive written settlement agreement.
Other
Additionally, from time to time, we are subject to contractual disputes, claims and legal proceedings that arise in the ordinary course of our business. Some of the legal proceedings pending against us as of the date of this report are expected to be covered by insurance policies. As these matters are subject to inherent uncertainties, our view of these matters may change in the future. We expense legal costs as incurred.
12. |
Investment in Equity Securities |
At December 31, 2020 and during the first two quarters of 2021, we owned 159,309 shares of common stock of a predecessor (“Legacy Sharecare”) of Sharecare, Inc. (“Sharecare”) that we acquired in connection with the sale of our total population health services business to Legacy Sharecare in July 2016. These shares did not have a readily determinable fair value through June 30, 2021. As permitted under ASC 321, “Investments – Equity Securities” (“ASC 321”), we elected to measure such shares at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer (of which there were none). The carrying value of the shares at December 31, 2020 of $10.8 million was
63
reported in “Other assets” on our consolidated balance sheet in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Form 10-K”) but has been reclassified in this report to a new line item, “Investment in equity securities, long-term.”
On February 12, 2021, Legacy Sharecare announced that it had entered into a merger agreement with Falcon Capital Acquisition Corp. (“FCAC”) and FCAC Merger Sub, Inc. (“Merger Sub”) pursuant to which Legacy Sharecare would merge with and into Merger Sub with Sharecare surviving as a wholly owned subsidiary of FCAC (the “Sharecare Transaction”). The Sharecare Transaction was consummated effective July 1, 2021. As a result, our shares of common stock of Legacy Sharecare were converted into shares of common stock of Sharecare (“Sharecare Common Stock”), with 2.4% of such shares being converted into and paid to us in cash. Consequently, in July 2021, we received $2.7 million in cash as well as 11,079,331 shares of Sharecare Common Stock (“Sharecare Equity Security”). Our cost basis in the Sharecare Equity Security is $10.5 million or $0.95 average cost per share. Sharecare Common Stock began trading on The Nasdaq Stock Market LLC on July 2, 2021 under the trading symbol “SHCR”.
The Sharecare Equity Security is subject to restrictions on resale, including a customary lockup period. The lockup period continues until the earlier of one year after the effective time of the Sharecare Transaction or such other time at which the Sharecare Common Stock trades at a certain minimum price for 20 trading days in any 30-day trading period beginning on or after November 28, 2021. In addition, between December 28, 2021 and March 27, 2022 (the “First Sale Window”), we are permitted to sell up to 750,000 shares. Between March 28, 2022 and July 1, 2022, we may sell up to 750,000 shares plus any portion of the 750,000 shares we were permitted to, but did not, sell during the First Sale Window.
Subsequent to the consummation of the Sharecare Transaction in July 2021, the fair value of the Sharecare Equity Security became readily determinable. Accordingly, beginning in July 2021, we carry the Sharecare Equity Security on our consolidated balance sheet at fair value, and we recognize any changes in fair value of the Sharecare Equity Security in net income as unrealized gains or losses, as required under ASC 321. At December 31, 2021, the Sharecare Equity Security is reported as a current asset on our consolidated balance sheet in “Investment in equity securities”. During the year ended December 31, 2021, we recorded a realized gain of $2.5 million based on the $2.7 million cash proceeds received from the Sharecare Transaction, and we recorded an unrealized gain of $39.2 million based on the change in fair value of the Sharecare Equity Security. The realized and unrealized gain were each recorded to other (income) expense, net (see Note 17).
During 2021, based on the positive evidence provided by the capital gains realized in the current year and anticipated to be realized from a future disposal of the Sharecare Equity Security that would allow a portion of these capital loss carryforwards to reduce taxable income, we reversed $10.6 million of a valuation allowance of deferred tax assets related to capital loss carryforwards. Such reversal resulted in an income tax benefit that fully offset the income tax expense that would have otherwise resulted from the combined realized and unrealized gains of $41.7 million. Therefore, there was no net income tax expense associated with the realized and unrealized gains related to the Sharecare Equity Security during the year ended December 31, 2021. The capital loss carryforwards expire on December 31, 2025, if unused. We currently expect to dispose of the Sharecare Equity Security prior to the expiration of the capital loss carryforwards.
13. |
Fair Value Measurements |
We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.
64
Fair Value Hierarchy
The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
Level 1: |
Quoted prices in active markets for identical assets or liabilities; |
|
Level 2: |
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-based valuation techniques in which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
|
Level 3: |
Unobservable inputs that are supported by little or no market activity and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure certain assets at fair value on a nonrecurring basis in the fourth quarter of each year, including the following:
|
• |
reporting units measured at fair value as part of a goodwill impairment test; and |
|
• |
indefinite-lived intangible assets measured at fair value for impairment assessment. |
Each of these assets above is classified as Level 3 within the fair value hierarchy.
The fair value of a reporting unit is the price that would be received upon a sale of the unit as a whole in an orderly transaction between market participants at the measurement date. Following the sale of Nutrisystem effective December 9, 2020, we have a single reporting unit.
The COVID-19 pandemic has had and is having an adverse impact on the overall economy, resulting in rapidly changing market and economic conditions that have impacted the Company. In March 2020, we experienced a significant decline in our market capitalization and in our actual and forecasted operating results, in addition to the unfavorable change in market conditions. As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets (which consisted of the Nutrisystem tradename and the SilverSneakers tradename). Following these evaluations, we recorded a total impairment loss of $199.5 million related to the Nutrisystem goodwill and tradename during the first quarter of 2020, which amount is reflected in loss from discontinued operations. We determined there was no impairment related to the SilverSneakers tradename or the carrying value of goodwill related to continuing operations. During the third and fourth quarters of 2020, we recorded additional impairment losses of $66.2 million and $24.0 million, respectively, related to the Nutrition business, each of which is reflected in loss from discontinued operations.
During the fourth quarter of 2021, we reviewed goodwill for impairment related to our single reporting unit. We estimated the fair value of the reporting unit based on our market capitalization and compared such fair value to the carrying value of the reporting unit. Because the fair value of the reporting unit exceeded its carrying amount, we determined that the carrying value of goodwill was not impaired. Also during the fourth quarter of 2021, we estimated the fair value of our indefinite-lived intangible asset, the SilverSneakers tradename, using the relief-from-royalty method, which required significant assumptions such as the long-term growth rate of future revenues, the royalty rate for such revenue, and a discount rate. Changes in these estimates and assumptions could materially affect the estimate of fair value for the tradename. We determined that the carrying value of the tradename was not impaired based upon the impairment review.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
65
The following table presents our financial instruments measured at fair value on a recurring basis at December 31, 2021 and 2020.
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
|
Fair Value Measurements Using Input Types |
|
|
|
|
|
|
Fair Value Measurements Using Input Types |
|
|
|
|
|
(In thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in equity securities (1) |
|
$ |
49,746 |
|
|
$ |
— |
|
|
$ |
49,746 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets |
|
$ |
49,746 |
|
|
$ |
— |
|
|
$ |
49,746 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as effective hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
$ |
— |
|
|
$ |
8,705 |
|
|
$ |
8,705 |
|
|
$ |
— |
|
|
$ |
20,377 |
|
|
$ |
20,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
$ |
— |
|
|
$ |
6,938 |
|
|
$ |
6,938 |
|
|
$ |
— |
|
|
$ |
16,260 |
|
|
$ |
16,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
— |
|
|
$ |
15,643 |
|
|
$ |
15,643 |
|
|
$ |
— |
|
|
$ |
36,637 |
|
|
$ |
36,637 |
|
|
(1) |
Reflects ownership of Sharecare Common Stock, as described in Note 12. At December 31, 2021, we held 11,079,331 shares of Sharecare Common Stock. |
The fair value of the Sharecare Equity Security is determined based on the closing price of Sharecare’s common stock on the last trading day of the reporting period.
The fair values of interest rate swap agreements are primarily determined based on the present value of future cash flows using third-party pricing services with observable inputs, including interest rates, yield curves and applicable credit spreads.
Fair Value of Other Financial Instruments
The estimated fair value of each class of financial instruments at December 31, 2021 was as follows:
Cash and cash equivalents – The carrying amount of $60.1 million approximates fair value because of the short maturity of those instruments (less than three months).
Debt – The estimated fair value of outstanding borrowings under the Credit Agreement, which includes a term loan facility and a revolving credit facility (see Note 10), are determined based on the fair value hierarchy as discussed above.
The Term Loan B is actively traded and therefore is classified as a Level 1 valuation. The estimated fair value is based on an average of quotes as of December 31, 2021 from dealers who stand ready and willing to transact at those prices. We use a mid-market pricing convention (i.e., the mid-point of average bid and ask prices). The Revolving Credit Facility is not actively traded and therefore is classified as a Level 2 valuation based on the market for similar instruments. The fair value of outstanding borrowings under the Term Loan B at December 31, 2021 was estimated to equal the carrying value (excluding original issue discount and deferred loan costs) of $394.0 million. There were no outstanding borrowings under the Revolving Credit Facility at December 31, 2021.
14. |
Derivative Instruments and Hedging Activities |
We use derivative instruments to manage differences in the amount, timing, and duration of our known or expected cash payments related to our outstanding debt (i.e., interest rate risk). Some of these derivatives are designated and qualify as a hedge of the exposure to variability in expected future cash flows and are therefore
66
considered cash flow hedges. We account for derivatives in accordance with FASB ASC Topic 815, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet at fair value as either an asset or liability. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Changes in the derivative’s fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. We classify cash flows from settlement of our effective cash flow hedges in the same category as the cash flows from the related hedged items, generally within the operating activities in the consolidated statements of cash flows. We classify cash flows from settlement of our non-designated derivatives within the investing section of the consolidated statements of cash flows.
Cash Flow Hedges of Interest Rate Risk and Non-Designated Derivatives
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. The counterparties to the interest rate swap agreements expose us to credit risk in the event of nonperformance by such counterparties. However, at December 31, 2021, we do not anticipate nonperformance by these counterparties. Our interest rate swap agreements with each of the counterparties contain a provision whereby if we either default or are capable of being declared in default on any of our indebtedness, whether or not such default results in repayment of the indebtedness being accelerated by the lender, then we could also be declared in default on our derivative obligations.
Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in accumulated other comprehensive income or loss ("accumulated OCI") associated with such derivative instruments are reclassified into earnings in the period of de-designation.
In May 2019, we entered into eight amortizing interest rate swap agreements, each of which matures in May 2024. Under these agreements, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest equal to approximately 2.2%. Upon entering into the Purchase Agreement with Kainos on October 18, 2020, we determined that some of our hedged transactions would not materially occur in the initially identified time period since we expected to use the majority of the net proceeds from the sale to pay down a significant portion of outstanding debt. As a result, we concluded that five of our eight interest rate swaps no longer qualified for hedge accounting treatment. Accordingly, in the fourth quarter of 2020 we de-designated these five derivatives (“de-designated swaps”) and accelerated the reclassification of deferred gains and losses in accumulated OCI to income (loss) from discontinued operations as a result of the hedged forecasted transactions becoming probable not to occur. Upon de-designation in the fourth quarter of 2020, we recognized a pre-tax loss of $14.3 million in income (loss) from discontinued operations.
Additionally, upon de-designation in October 2020, we froze $3.2 million of previously deferred losses in accumulated OCI related to forecasted payments that are probable of occurring. We reclassify such deferred losses from accumulated OCI into earnings as an adjustment to interest expense during periods in which the forecasted transactions impact earnings, consistent with hedge accounting treatment. In the event that the related forecasted payments are probable of not occurring, the related loss in accumulated OCI will be recognized in earnings immediately.
We continue to maintain the effective hedging relationship between three interest rate swap agreements and the portion of our forecasted payments that is expected to remain highly probable of occurring. Our entering into the Credit Agreement on June 30, 2021 had no effect on the hedging designation of our interest rate swaps as the hedges are not tied to a specific debt instrument and the economic characteristics of the Credit Agreement are similar to those of the Prior Credit Agreement.
During the fourth quarter of 2020 we evaluated the likelihood and extent of potential future losses from the de-designated swaps. Such potential future losses are capped since the variable interest rate of our swaps is subject to a floor of 0%. Based on the LIBOR rates in effect at the time of de-designation, we decided to hold the de-designated
67
swaps as derivative instruments requiring mark-to-market accounting treatment, with any change in fair value recognized each period in current earnings.
At December 31, 2021, our interest rate swap agreements designated as effective cash flow hedges had current notional amounts totaling $333.3 million, and our de-designated interest rate swap agreements had current notional amounts totaling $266.7 million.
We record all derivatives at estimated fair value in the consolidated balance sheet. Gains and losses on derivatives designated as effective cash flow hedges are recorded in accumulated OCI and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated OCI related to cash flow hedge derivatives will be reclassified to interest expense as we make interest payments on our variable-rate debt. As of December 31, 2021, we expect to reclassify $6.6 million, pre-tax, from accumulated OCI as an increase to interest expense within the next 12 months due to the scheduled payment of interest associated with our debt. Gains and losses on derivatives de-designated as effective cash flow hedges are recorded in the consolidated statement of operations as other (income) expense, net.
The estimated gross fair values of derivative instruments and their classification on the consolidated balance sheet at December 31, 2021 and 2020 were as follows:
(In thousands) |
|
December 31,
2021 |
|
|
December 31,
2020 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Derivatives designated as effective hedging
instruments: |
|
|
|
|
|
|
|
|
Current portion of long-term liabilities |
|
$ |
5,911 |
|
|
$ |
8,205 |
|
Other long-term liabilities |
|
|
2,794 |
|
|
|
12,172 |
|
|
|
$ |
8,705 |
|
|
$ |
20,377 |
|
|
|
|
|
|
|
|
|
|
Non-designated derivatives: |
|
|
|
|
|
|
|
|
Current portion of long-term liabilities |
|
$ |
4,714 |
|
|
$ |
6,548 |
|
Other long-term liabilities |
|
|
2,224 |
|
|
|
9,712 |
|
|
|
$ |
6,938 |
|
|
$ |
16,260 |
|
The following table presents the effect of cash flow hedge accounting on accumulated OCI as of December 31, 2021, 2020, and 2019:
(In thousands) |
|
For the Year Ended |
|
|
|
December 31, 2021 |
|
|
December 31,
2020 |
|
|
December 31,
2019 |
|
Derivatives designated as effective hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss related to effective portion of derivatives
recognized in accumulated OCI, gross of tax effect |
|
|
(3,284 |
) |
|
|
33,247 |
|
|
|
16,930 |
|
Loss related to effective portion of derivatives reclassified
from accumulated OCI to interest expense, gross of tax
effect |
|
|
(8,388 |
) |
|
|
(11,556 |
) |
|
|
(692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss related to de-designation of ineffective portion of
derivatives, gross of tax effect |
|
|
— |
|
|
|
(14,336 |
) |
|
|
— |
|
Previously deferred loss reclassified from accumulated
OCI to interest expense, gross of tax effect |
|
|
(600 |
) |
|
|
(239 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (income) loss, gross of tax |
|
|
(12,272 |
) |
|
|
7,116 |
|
|
|
16,238 |
|
The following table presents the impact that non-designated derivatives had on our consolidated statement of operations for the years ended December 31, 2021 and 2020:
68
(In thousands) |
|
Statement of
Operations
Classification |
|
Year Ended December 31, 2021 |
|
|
Year Ended December 31, 2020 |
|
|
Loss related to de-designation of
ineffective portion of
derivatives, gross of tax effect |
|
Income from discontinued operations, net of income tax |
|
$ |
— |
|
|
$ |
14,336 |
|
|
Net (gain) loss related to
ineffective portion of
derivatives, gross of tax effect |
|
Other (income) expense, net |
|
|
(2,627 |
) |
|
|
226 |
|
(1) |
Previously deferred loss related
to de-designated swaps
reclassified from accumulated
OCI, gross of tax effect |
|
Interest expense |
|
|
600 |
|
|
|
239 |
|
|
|
|
|
|
$ |
(2,027 |
) |
|
$ |
14,801 |
|
|
|
(1) |
This amount was reported in “Selling, general and administrative expenses” on our consolidated statement of operations in our 2020 Form 10-K. We have reclassified it in this report to a new line item, “Other (income) expense, net”, to conform to current classifications. |
69
15. |
Earnings (Loss) Per Share |
The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share for the years ended December 31, 2021, 2020, and 2019:
(In thousands except per share data) |
|
Year Ended December 31, |
|
Numerator: |
|
2021 |
|
|
2020 |
|
|
2019 |
|
Income from continuing operations attributable to Tivity
Health, Inc. - numerator for earnings (loss) per share |
|
$ |
107,376 |
|
|
$ |
56,869 |
|
|
$ |
45,217 |
|
Net income (loss) from discontinued operations attributable to
Tivity Health, Inc. - numerator for earnings (loss) per share |
|
|
(2,462 |
) |
|
|
(280,500 |
) |
|
|
(332,038 |
) |
Net income (loss) attributable to Tivity Health, Inc. - numerator for
earnings (loss) per share |
|
$ |
104,914 |
|
|
$ |
(223,631 |
) |
|
$ |
(286,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for basic income (loss) per share |
|
|
49,573 |
|
|
|
48,746 |
|
|
|
46,509 |
|
Effect of dilutive stock options and restricted stock units
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options |
|
|
60 |
|
|
|
29 |
|
|
|
90 |
|
Restricted stock units |
|
|
538 |
|
|
|
412 |
|
|
|
489 |
|
Performance-based stock units |
|
|
69 |
|
|
|
29 |
|
|
|
15 |
|
Market stock units |
|
|
184 |
|
|
|
1 |
|
|
|
— |
|
Shares used for diluted income (loss) per share |
|
|
50,424 |
|
|
|
49,217 |
|
|
|
47,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Tivity Health, Inc. - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.17 |
|
|
$ |
1.17 |
|
|
$ |
0.97 |
|
Discontinued operations |
|
$ |
(0.05 |
) |
|
$ |
(5.75 |
) |
|
$ |
(7.14 |
) |
Net income (loss) (1) |
|
$ |
2.12 |
|
|
$ |
(4.59 |
) |
|
$ |
(6.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Tivity Health, Inc. -
diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2.13 |
|
|
$ |
1.16 |
|
|
$ |
0.96 |
|
Discontinued operations |
|
$ |
(0.05 |
) |
|
$ |
(5.70 |
) |
|
$ |
(7.05 |
) |
Net income (loss) |
|
$ |
2.08 |
|
|
$ |
(4.54 |
) |
|
$ |
(6.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive securities outstanding not included in the computation of
earnings (loss) per share because their effect is anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock options |
|
|
226 |
|
|
|
186 |
|
|
|
70 |
|
Restricted stock units |
|
|
20 |
|
|
|
242 |
|
|
|
192 |
|
Performance-based stock units |
|
|
— |
|
|
|
24 |
|
|
|
— |
|
Restricted stock awards |
|
|
— |
|
|
|
26 |
|
|
|
102 |
|
|
(1) |
Figures may not add due to rounding. |
Market stock units and performance-based stock units outstanding are considered contingently issuable shares, and certain of these stock units were excluded from the calculations of diluted earnings per share for all periods presented because the performance criteria had not been met as of the end of the applicable reporting period.
70
The following tables summarize the changes in accumulated OCI, net of tax, for the years ended December 31, 2020 and 2021.
(In thousands) |
|
Interest
Rate Swaps |
|
Accumulated OCI, net of tax, as of January 1, 2020 |
|
$ |
(12,091 |
) |
Other comprehensive income (loss) before reclassifications, net of tax of
$8,491 |
|
|
(24,756 |
) |
Amounts reclassified from accumulated OCI, net of tax of $6,674 |
|
|
19,458 |
|
Accumulated OCI, net of tax, as of December 31, 2020 |
|
$ |
(17,389 |
) |
Other comprehensive income (loss) before reclassifications, net of tax of
$838 |
|
|
2,446 |
|
Amounts reclassified from accumulated OCI, net of tax of $2,296 |
|
|
6,692 |
|
Accumulated OCI, net of tax, as of December 31, 2021 |
|
$ |
(8,251 |
) |
The following table presents details about reclassifications out of accumulated OCI for the years ended December 31, 2021 and 2020:
(In thousands) |
|
Year Ended
December 31, 2021 |
|
|
Year Ended
December 31, 2020 |
|
|
Statement of
Operations
Classification |
Interest rate swaps |
|
$ |
8,988 |
|
|
$ |
11,795 |
|
|
Interest expense |
|
|
|
(2,296 |
) |
|
|
(3,012 |
) |
|
Income tax |
|
|
|
— |
|
|
|
10,675 |
|
|
Income from discontinued
operations, net of income tax |
Total amounts reclassified from
accumulated OCI |
|
$ |
6,692 |
|
|
$ |
19,458 |
|
|
Net of tax |
17. Other (Income) Expense, Net
The following table shows the detail of Other (income) expense, net for the years ended December 31, 2021 and 2020.
(In thousands) |
|
Year Ended
December 31, 2021 |
|
|
Year Ended
December 31, 2020 |
|
Unrealized gain on investment in equity securities (Note 12) |
|
$ |
(39,232 |
) |
|
$ |
— |
|
Realized gain on investment in equity securities (Note 12) |
|
|
(2,469 |
) |
|
|
— |
|
Unrealized (gain) loss related to ineffective portion of derivatives
(Note 14) |
|
|
(2,627 |
) |
|
|
226 |
|
Other (income) expense, net |
|
$ |
(44,328 |
) |
|
$ |
226 |
|
18. |
Segment Disclosures and Concentrations of Risk |
Following the sale of Nutrisystem in December 2020, the results of which have been classified as discontinued operations for all periods presented, we have one operating and reportable segment. Therefore, all required segment information can be found in the consolidated financial statements. Our determination that we operate as a single segment is consistent with the financial information regularly viewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.
71
Geographic Information
Long-lived assets and revenue from external customers attributable to our operations in the United States accounted for 100% of our consolidated long-lived assets and revenues as of and for the years ended December 31, 2021 and 2020.
Major Customers and Concentration of Credit Risk
During 2021 and 2020, our top three customers together accounted for 40% and 39%, respectively, of our revenues from continuing operations. Financial instruments that potentially subject us to concentrations of credit risk primarily include cash and cash equivalents, derivative financial instruments, and accounts receivable. Our cash and cash equivalents are placed with, and our derivative instruments are transacted with, major financial institutions. At December 31, 2021, we had two customers that each accounted for 10% or more of our accounts receivable, net and individually comprised approximately 22% and 35% of our consolidated accounts receivable, net at December 31, 2021. At December 31, 2020, we had two customers that each accounted for 10% or more of our accounts receivable, net and individually comprised approximately 26% and 33% of our consolidated accounts receivable, net at December 31, 2020.
As discussed in Note 11, on January 11, 2022, we reached a settlement in principle of the Pacific Packaging Lawsuit pursuant to which our insurers will pay the entire settlement amount except for the amount of $25,000 (twenty-five thousand dollars) representing the deductible on the policy, which will be paid by the Company. Accordingly, as of December 31, 2021, we have recorded a current liability (in “Accrued liabilities”) equal to the entire settlement amount and a current asset (in “Other current assets”) equal to the settlement amount less $25,000.
20. |
Quarterly Financial Information (unaudited) |
The following tables contain selected unaudited statements of operations for each quarter of 2021 and 2020. As further discussed in Note 1, our results from continuing operations do not include the results of Nutrisystem, which we sold effective December 9, 2020.
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2021 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth (1) |
|
Revenues |
|
$ |
108,085 |
|
|
$ |
120,071 |
|
|
$ |
126,289 |
|
|
$ |
126,808 |
|
Gross margin |
|
|
48,269 |
|
|
|
48,837 |
|
|
|
49,178 |
|
|
|
46,056 |
|
Income (loss) before income taxes |
|
|
27,564 |
|
|
|
8,958 |
|
|
|
112,624 |
|
|
|
(15,424 |
) |
Income (loss) from continuing operations |
|
|
19,944 |
|
|
|
8,771 |
|
|
|
103,699 |
|
|
|
(25,038 |
) |
Income (loss) from discontinued operations,
net of income tax |
|
|
(808 |
) |
|
|
(414 |
) |
|
|
(932 |
) |
|
|
(308 |
) |
Net income (loss) |
|
|
19,136 |
|
|
|
8,357 |
|
|
|
102,767 |
|
|
|
(25,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (2) |
|
$ |
0.41 |
|
|
$ |
0.18 |
|
|
$ |
2.09 |
|
|
$ |
(0.50 |
) |
Discontinued operations (2) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Net income (2)(3) |
|
$ |
0.39 |
|
|
$ |
0.17 |
|
|
$ |
2.07 |
|
|
$ |
(0.51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (2) |
|
$ |
0.40 |
|
|
$ |
0.17 |
|
|
$ |
2.06 |
|
|
$ |
(0.50 |
) |
Discontinued operations (2) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Net income (2)(3) |
|
$ |
0.38 |
|
|
$ |
0.17 |
|
|
$ |
2.04 |
|
|
$ |
(0.50 |
) |
72
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth (4) |
|
Revenues |
|
$ |
159,692 |
|
|
$ |
81,923 |
|
|
$ |
95,481 |
|
|
$ |
100,617 |
|
Gross margin |
|
|
42,713 |
|
|
|
45,879 |
|
|
|
45,382 |
|
|
|
44,168 |
|
Income before income taxes |
|
|
11,411 |
|
|
|
23,959 |
|
|
|
23,236 |
|
|
|
15,793 |
|
Income from continuing operations |
|
|
8,275 |
|
|
|
17,202 |
|
|
|
16,750 |
|
|
|
14,642 |
|
Income (loss) from discontinued operations,
net of income tax |
|
|
(206,381 |
) |
|
|
11,309 |
|
|
|
(59,168 |
) |
|
|
(26,260 |
) |
Net income (loss) |
|
|
(198,106 |
) |
|
|
28,511 |
|
|
|
(42,418 |
) |
|
|
(11,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (2) |
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
$ |
0.34 |
|
|
$ |
0.30 |
|
Discontinued operations (2) |
|
$ |
(4.25 |
) |
|
$ |
0.23 |
|
|
$ |
(1.21 |
) |
|
$ |
(0.54 |
) |
Net income (loss) (2)(3) |
|
$ |
(4.08 |
) |
|
$ |
0.59 |
|
|
$ |
(0.87 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (2) |
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
Discontinued operations (2) |
|
$ |
(4.22 |
) |
|
$ |
0.23 |
|
|
$ |
(1.20 |
) |
|
$ |
(0.53 |
) |
Net income (loss) (2)(3) |
|
$ |
(4.05 |
) |
|
$ |
0.58 |
|
|
$ |
(0.86 |
) |
|
$ |
(0.23 |
) |
|
(1) |
Loss from continuing operations for the fourth quarter of 2021 includes an unrealized loss of $41.4 million related to the change in fair value of the Sharecare Equity Security and an unrealized gain of $1.9 million related to the de-designated swaps, each of which was recorded to other (income) expense, net. The income tax benefit that would have otherwise resulted from the unrealized loss of $41.4 million was fully offset by income tax expense due to an increase in the valuation allowance on deferred tax assets related to capital loss carryforwards; therefore, there was no net income tax benefit associated with this loss. In addition, loss from continuing operations for the fourth quarter of 2021 includes a total of $0.5 million related to CEO transition costs, acquisition and integration costs, and project costs, which was primarily recorded to selling, general, and administrative expenses. Finally, the impact of potentially dilutive securities for the three months ended December 31, 2021 was not considered because the impact would be anti-dilutive. |
|
(2) |
We calculated earnings per share for each of the quarters based on the weighted average number of shares and dilutive securities outstanding for each period. Accordingly, the sum of the quarters may not necessarily be equal to the full year income per share. |
|
(3) |
Figures may not add due to rounding. |
|
(4) |
Income from continuing operations for the fourth quarter of 2020 includes strategic project costs, CEO transition costs, and acquisition and integration costs of $2.3 million, $1.0 million, and $0.6 million, respectively, each of which were primarily recorded to selling, general, and administrative expenses. |