Basis of Presentation and Recent Developments

3 Months Ended

Mar. 31, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation and Recent Developments

1. Basis of Presentation and Recent Developments

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

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

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

In late 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China.  In January 2020, COVID-19 spread to other countries, including the United States, and efforts to contain the spread of COVID-19 intensified.  In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, the United States declared a national emergency concerning the pandemic, and many state and local governments ordered all but certain essential businesses closed and imposed stay-at-home orders and social distancing guidelines for individuals to contain and combat the outbreak and spread of COVID-19, resulting in significantly reduced demand for many businesses that have continued in operation.  Our operations and financial results have been significantly impacted by the pandemic, and we have taken a number of actions in response, including the following:

• By March 31, 2020, substantially all of the fitness centers in our national network were temporarily closed, which had an adverse impact on the results of operations in our Healthcare segment for the first quarter of 2020 because a significant portion of our Healthcare segment revenues from our SilverSneakers program is based on member visits to a fitness partner location.  

• COVID-19-related developments did not have a material impact on the results of operations or cash flows of our Nutrition segment for the quarter ended March 31, 2020.  While overall, we have not experienced any significant disruptions, interruptions, or increased costs related to our supply chain, inventory, or distribution channels as a result of COVID-19, we have experienced some delays in fulfilling orders for our Nutrition segment’s products due to some employees of our fulfillment provider testing positive for COVID-19.

• While the disruption caused by the COVID-19 pandemic is currently expected to be temporary, given the continued uncertainty surrounding COVID-19, in March 2020, we borrowed $75 million under our revolving credit facility as a precautionary measure to increase our cash position and maintain financial flexibility, which amount is due to be repaid in March 2024. The proceeds from the drawdown are

available to be used for working capital and other general corporate purposes. As of March 31, 2020, outstanding debt under our credit agreement was $1,088 million, and we had $83.0 million of cash and cash equivalents.  While the COVID-19 pandemic has created significant uncertainty as to general economic and market conditions for the remainder of 2020 and beyond, as of the date of this report, we believe our cash on hand, expected cash flows from operations, and anticipated available credit under the Credit Agreement will be sufficient to fund our operations, principal and interest payments, and capital expenditures for the next 12 months.

• We are focused on preserving our liquidity and managing our cash flow, including, but not limited to, managing our working capital, optimizing tax savings under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), curtailing capital expenditures, reducing discretionary spending, and reducing compensation costs.  In April 2020, we furloughed approximately 13% of our employees.  The Company will continue to pay healthcare insurance premiums for the furloughed employees. The Compensation Committee of the Company’s Board of Directors (the “Board”) approved a 25% reduction in base salary for the Company’s executive officers and certain other employees for the period from April 20, 2020 through August 23, 2020.  Additionally, the Board approved a 100% reduction in the annual cash retainer and annual committee retainers payable to non-management members of the Board who are standing for reelection at the 2020 Annual Meeting of Stockholders (except for Daniel G. Tully who does not receive compensation for his service on the Board) for a period of four months, beginning May 1, 2020 or as soon thereafter as reasonably practicable.  We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include requiring remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing, and the adoption of work-from-home arrangements.

• As a result of the COVID-19 pandemic, in March 2020, we experienced a significant decline in the Company’s market capitalization and in the actual and forecasted operating results of our Healthcare segment, in addition to the unfavorable change in market conditions.  As a result, management concluded that there were triggering events during the first quarter of 2020 necessitating an impairment evaluation of our goodwill and indefinite-lived intangible assets.  Through this evaluation, management concluded that the fair value of goodwill allocated to the Nutrition business unit as well as the fair value of the Nutrisystem tradename were below their carrying amounts, and we recorded an impairment loss of $199.5 million, including $80.0 million related to the Nutrisystem tradename and $119.5 million related to goodwill allocated to the Nutrition segment.