Camping World Holdings, Inc. - Quarter Report: 2016 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,  D.C.  20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2016

 

OR

 

 

For the transition period from _____________ to _______________

 

Commission file number:  001-37908

 

CAMPING WORLD HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

(847) 808-3000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☐  No  ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No  ☐ 

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐  No  ☒

 

As of November 10, 2016, the registrant had 18,935,916 shares of Class A common stock, 62,002,729 shares of Class B common stock and one share of Class C common stock outstanding.

 

 

 

Camping World Holdings, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding expected new retail location openings, including greenfield locations and acquired locations; profitability of new retail locations; future capital expenditures and debt service obligations; refinancing, retirement or exchange of outstanding debt; expectations regarding consumer behavior and growth; our comparative advantages and our plans and ability to expand consumer base; our ability to respond to changing business and economic conditions; volatility in sales; our ability to drive growth; and expectations regarding increase of certain expenses are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘could,’’ ‘‘intends,’’ ‘‘targets,’’ ‘‘projects,’’ ‘‘contemplates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential’’ or ‘‘continue’’ or the negative of these terms or other similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these important factors include, but are not limited to, the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. For a further discussion of the risks relating to our business, see “Item 1A—Risk Factors” in Part II of this Quarterly Report on Form 10-Q.

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Camping World Holdings, Inc.

Balance Sheets (unaudited)

 

 

See accompanying Notes to Balance Sheets.

Camping World Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1: Organization

 

CWGS, Inc. was formed as a Delaware corporation on March 8, 2016. On June 8, 2016, we effected a name change from CWGS, Inc. to Camping World Holdings, Inc. (“CWH”). CWH was formed for the purpose of completing an initial public offering and related transactions in order to carry on the business of CWGS Enterprises, LLC (“CWGS, LLC”).

 

As described in more detail in Note 4: Subsequent Events, on October 13, 2016, we completed our initial public offering (“IPO”) of 11,363,636 shares of our Class A common stock at a public offering price of $22.00 per share, receiving $233.4 million in proceeds, net of underwriting discounts and commissions, which were used to purchase 11,363,636 newly-issued common units of CWGS, LLC from CWGS, LLC at a price per unit equal to the initial public offering price per share of Class A common stock sold in the IPO less underwriting discounts and commissions. In addition, on November 4, 2016, the underwriters exercised their option, in part, to purchase an additional 508,564 shares of Class A common stock. On November 9, 2016, we closed on the purchase of the additional 508,564 shares of Class A common stock and received $10.4 million in additional proceeds, net of underwriting discounts and commissions, which we used to purchase 508,564 newly-issued common units from CWGS, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions.

 

Subsequent to the IPO and related reorganization transactions, we became a holding company and our principal asset is the common units of CWGS, LLC that we own. As the sole managing member of CWGS, LLC, we have the sole voting interest in, and operate and control all of the business and affairs of, CWGS, LLC, and through its subsidiaries, conduct our business. As a result, beginning in the fourth quarter of 2016, we will consolidate the financial results of CWGS, LLC and will report a non-controlling interest representing the CWGS, LLC interests held by the “Continuing Equity Owners,” whom we define as collectively, ML Acquisition Company, a Delaware limited liability company, indirectly owned by each of Stephen Adams and our Chairman and Chief Executive Officer, Marcus Lemonis ("ML Acquisition”), funds controlled by Crestview Partners II GP, L.P. and, collectively, our named executive officers (excluding Marcus Lemonis), Andris A. Baltins and K. Dillon Schickli, who are members of our board of directors, and certain other current and former non-executive employees and former directors, in each case, who held profit units in CWGS, LLC pursuant to CWGS, LLC’s equity incentive plan that was in existence prior to our IPO and who received common units of CWGS, LLC in exchange for their profit units in connection with the Transactions (as defined herein) (collectively, the “Former Profit Unit Holders”) and each of their permitted transferees that own common units in CWGS, LLC and who may redeem at each of their options their common units for, at our election (determined solely by our independent directors (within the meaning of the rules of the New York Stock Exchange) who are disinterested), cash or newly-issued shares of our Class A common stock.

 

Note 2: Summary of Significant Account Policies

 

Basis of Accounting — The Balance Sheets are presented in accordance with accounting principles generally accepted in the United States of America. Separate statements of operations, comprehensive income, changes in stockholder’s equity, and cash flows have not been presented because as of September 30, 2016, we had not engaged in any business or other activities except in connection with our formation.

 

Income Taxes — We are treated as a subchapter C corporation, and therefore, are subject to both federal and state income taxes. CWGS Enterprises, LLC will continue to be recognized as a limited liability company, a pass-through entity for income tax purposes.

 

Note 3: Stockholder’s Equity

 

On March 8, 2016, our board of directors authorized CWH to issue 100 shares of common stock, par value of $0.01 per share, none of which have been issued or are outstanding.

 

In connection with our IPO, our board of directors approved an amended and restated certificate of incorporation (the "Amended and Restated Certificate of Incorporation”), which became effective on October 6, 2016. The Amended and Restated Certificate of Incorporation authorizes the issuance of up to 250,000,000 shares of Class A common stock, up to 75,000,000 shares of Class B common stock, one share of Class C stock, and 20,000,000 shares of preferred stock, having a par value of $0.01, $0.0001, $0.0001 and $0.0001 per share, respectively. Shares of our Class A common stock have both economic and voting rights. Shares of our Class B common stock and Class C common stock have no economic rights, but do have voting rights. Holders of shares of our Class A common stock, our Class B common stock and our Class C common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or our Amended and Restated Certificate of Incorporation. Holders of Class A common stock and Class B common stock are entitled to one vote per share on all matters presented to our stockholders generally; provided that, for as long as ML Acquisition and its permitted transferees of common units (the "ML Related Parties”), directly or indirectly, beneficially own in the aggregate 27.5% or more of all of the outstanding common units of CWGS, LLC, the shares of Class B common stock held by the ML Related Parties will entitle the ML Related Parties to the number of votes necessary such that the ML Related Parties, in the aggregate, cast 47% of the total votes eligible to be cast by all of our stockholders on all matters presented to a vote of our stockholders generally. Additionally, the holder of our one share Class C common stock is entitled to the number of votes necessary such that the holder casts 5% of the total votes eligible to be cast by all of our stockholders on all matters presented to a vote of our stockholders generally. We issued our one share of Class C common stock to ML RV Group, LLC, a Delaware limited liability company, wholly-owned by our Chairman and Chief Executive Officer, Marcus Lemonis.  Upon a Class C Change of Control (as defined in our Amended and Restated Certificate of Incorporation), our Class C common stock shall no longer have any voting rights, such share of our Class C common stock will be cancelled for no consideration and will be retired, and we will not reissue such share of Class C common stock.

 

The Amended and Restated Certificate of Incorporation and our amended and restated bylaws provide that our board of directors may consist of up to nine directors, and that our board of directors be divided into three classes, as nearly equal in number as possible, with the directors in each class serving for a three-year term, and one class being elected each year by our stockholders.

 

Note 4: Subsequent Events

 

Reorganization Transactions

 

On October 6, 2016, in connection with the completion of our IPO, we completed a series of reorganization transactions (the “Transactions”). The Transactions included the following:

 

 

 

 

 

 

 

The Transactions were effected on October 6, 2016, prior to the time our Class A common stock was registered under the Securities Exchange Act of 1934, as amended, and prior to the completion of our IPO.

 

CWGS, LLC Recapitalization

 

As noted above, the CWGS LLC Agreement, among other things, appointed us as CWGS, LLC’s sole managing member and reclassified all outstanding membership interests in CWGS, LLC as non-voting common units. Although we have a minority economic interest in CWGS, LLC, as the sole managing member, we have the sole voting power in, and control the management of, CWGS, LLC. As a result, beginning in the fourth quarter of 2016, we will consolidate CWGS, LLC's financial results and report a non-controlling interest related to the portion of CWGS, LLC not owned by us.

 

The Amended and Restated Certificate of Incorporation discussed in Note 3 and the CWGS LLC Agreement noted above requires CWGS, LLC and us to, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of common units owned by us and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners (other than the Former Profit Unit Holders) and the number of common units owned by the Continuing Equity Owners (other than the Former Profit Unit Holders). We may issue shares of Class B common stock only to the extent necessary to maintain the one-to-one ratio between the number of common units of CWGS, LLC held by the Continuing Equity Owners (other than the Former Profit Unit Holders) and the number of shares of Class B common stock issued to the Continuing Equity Owners (other than the Former Profit Unit Holders). Shares of Class B common stock are transferable only together with an equal number of common units of CWGS, LLC. Only permitted transferees of common units held by the Continuing Equity Owners (other than the Former Profit Unit Holders) will be permitted transferees of Class B common stock.

 

The Continuing Equity Owners may from time to time at each of their options require CWGS, LLC to redeem all or a portion of their common units in exchange for, at our election (determined solely by our independent directors (within the meaning of the rules of the New York Stock Exchange (the “NYSE”) who are disinterested), newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each common unit redeemed, in each case in accordance with the terms of the CWGS LLC Agreement; provided that, at our election (determined solely by our independent directors (within the meaning of the rules of the NYSE) who are disinterested), we may effect a direct exchange of such Class A common stock or such cash, as applicable, for such common units. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of common units pursuant to the terms of the CWGS LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner (other than Former Profit Unit Holders) will

be cancelled for no consideration on a one-for-one basis with the number of common units so redeemed or exchanged.

 

Reorganization Mergers

 

In connection with the IPO, the Original Equity Owners merged with and into CWH or a wholly owned subsidiary of CWH, for which CWH issued an aggregate of 7,063,716 shares of Class A common stock as consideration for the 7,063,716 aggregate common units held by such entities and canceled a corresponding number of shares of Class B common stock. Upon consummation of the mergers, we recognized the 7,063,716 common units at carrying value, as these transactions are considered to be between entities under common control.

 

We also acquired the tax attributes of the Original Equity Owners, which are recorded generally as deferred tax assets at the time for certain of the mergers. These attributes include the original basis adjustments arising from the original acquisition of common units by the Original Equity Owners, as described below.

 

Tax Receivable Agreement

 

On October 6, 2016, CWH entered into the Tax Receivable Agreement that provides for the payment by Camping World Holdings, Inc. to the Continuing Equity Owners and Crestview Partners II GP, L.P. of 85% of the amount of tax benefits, if any, that Camping World Holdings, Inc. actually realizes, or in some circumstances is deemed to realize, as a result of (i) increases in tax basis resulting from the purchase of common units from Crestview Partners II GP, L.P. in exchange for Class A common stock in connection with the consummation of the IPO and the related Transactions and any future redemptions that are funded by CWH and any future redemptions or exchanges of common units by Continuing Equity Owners as described above and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement. CWGS, LLC intends to have in effect an election under Section 754 of the Internal Revenue Code effective for each taxable year in which a redemption or exchange (including deemed exchange) of common units for cash or stock occurs. These tax benefit payments are not conditioned upon one or more of the Continuing Equity Owners or Crestview Partners II GP, L.P. maintaining a continued ownership interest in CWGS, LLC. In general, the Continuing Equity Owner’s and Crestview Partners II GP, L.P.’s rights under the Tax Receivable Agreement are assignable, including to transferees of its common units in CWGS, LLC (other than Camping World Holdings, Inc. as transferee pursuant to a redemption or exchange of common units in CWGS, LLC). We expect to benefit from the remaining 15% of the tax benefits, if any, that we may actually realize.

 

Initial Public Offering

 

As noted above, on October 13, 2016, we completed our IPO of 11,363,636 shares of Class A common stock at a public offering price of $22.00 per share. We received $233.4 million in proceeds, net of underwriting discounts and commissions, which we used to purchase 11,363,636 newly-issued common units from CWGS, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions. In addition, on November 4, 2016, the underwriters exercised their option, in part, to purchase an additional 508,564 shares of Class A common stock. On November 9, 2016, we closed on the purchase of the additional 508,564 shares of Class A common stock and received $10.4 million in additional proceeds, net of underwriting discounts and commissions, which we used to purchase 508,564 newly-issued common units from CWGS, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions. Immediately following the completion of the IPO and the underwriters’ exercise of their option to purchase additional shares of Class A common stock, there were 62,002,729 shares of Class B common stock outstanding, one share of Class C common stock outstanding, and 18,935,916 shares of Class A common stock outstanding, comprised of 11,872,200 shares issued as part of the IPO and the underwriters’ exercise of their option to purchase additional shares of Class A common stock and 7,063,716 shares issued in connection with the mergers described above.

 

Equity-Based Compensation

 

In connection with the IPO, on September 24, 2016, CWH adopted the Camping World Holdings, Inc. 2016 Equity Incentive Plan (the “2016 Plan”), which became effective on October 6, 2016 upon the effectiveness of the registration statement on form S-1 (File No. 333-211977), as amended.

 

We reserved a total of 14,693,518 shares of Class A common stock for issuance pursuant to the 2016 Plan. In connection with the IPO, we granted to certain of our directors and certain of our employees Class A common stock issuable pursuant to 1,134,809 stock options and 145,282 restricted stock units.

 

 

CWGS ENTERPRISES, LLC AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (unaudited)

(In thousands except per unit amounts)

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

CWGS Enterprises, LLC and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(In thousands except per unit amounts)

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

CWGS Enterprises, LLC and Subsidiaries

Condensed Consolidated Statement of Members' Deficit (unaudited)

(In thousands)

 

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

CWGS Enterprises, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

CWGS Enterprises, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

CWGS ENTERPRISES, LLC AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except member data)

 

Note 1: Summary of Significant Accounting Policies

 

Business and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of CWGS Enterprises, LLC and its subsidiaries (the “Company” or “CWGS, LLC”), have been prepared accordance with generally accepted accounting principles in the United States (“GAAP”) and include all information and footnotes required for interim financial statements presentation but do not include all disclosures required under GAAP for annual financial statements. In the opinion of management, the interim condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented.

The Company was formed in March 2011 when its then ultimate parent, AGI Holding Corp, indirectly contributed all of the membership interests of Affinity Group Holding, LLC (“AGH”) and FreedomRoads Holding Company, LLC (“FreedomRoads”) to CWGS Holding, LLC, CWGS, LLC’s immediate parent, which in turn, contributed the interest of AGH and FreedomRoads to CWGS, LLC. All material intercompany transactions and balances of the Company have been eliminated in consolidation.

 

The Company does not have any components of other comprehensive income recorded within its consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income in its consolidated financial statements.

 

Camping World Holdings, Inc. (“CWH”) was incorporated on March 8, 2016 for the purpose of facilitating an initial public offering and other related transactions in order to carry on our business. On October 13, 2016, CWH completed an initial public offering of 11,363,636 shares of Class A common stock at a public offering price of $22.00 per share (the “IPO”), receiving $233.4 million in proceeds, net of underwriting discounts and commissions, which were used to purchase 11,363,636 newly-issued common units of the Company at a price per unit equal to the initial public offering price per share of Class A common stock sold in the IPO less underwriting discounts and commissions. In addition, on November 4, 2016, the underwriters exercised their option, in part, to purchase an additional 508,564 shares of Class A common stock. On November 9, 2016, CWH closed on the purchase of the additional 508,564 shares of Class A common stock and received $10.4 million in additional proceeds, net of underwriting discounts and commissions, which CWH used to purchase 508,564 newly-issued common units from CWGS, LLC at a price per unit equal to the initial public offering price per share of Class A common stock in the IPO less underwriting discounts and commissions.

 

Subsequent to the IPO, CWH became a holding company and its principal asset is the common units of CWGS, LLC that it owns. As the sole managing member of CWGS, LLC, CWH has the sole voting interest in, and operates and controls all of our business and affairs, and through us and our subsidiaries, conducts our business. Our unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our prospectus, dated October 6, 2016, filed with the Securities and Exchange Commission (SEC) in accordance with Rule 424(b) of the Securities Act of 1933, as amended, on October 11, 2016.

 

Description of the Business

 

CWGS, LLC is a holding company and operates through its subsidiaries. The operations of the Company consist of two primary businesses: (i) Consumer Services and Plans, and (ii) Retail. The Company provides consumer services and plans offerings through its Good Sam brand and the Company provides its retail offerings through its Camping World brand. Within the Consumer Services and Plans segment, the Company primarily derives revenue from the sale of the following offerings: emergency roadside assistance; property and casualty insurance programs; travel assist programs; extended vehicle service contracts; co-

branded credit cards; vehicle financing and refinancing; club memberships; and publications and directories. Within the Retail segment, the Company primarily derives revenues from the sale of the following products: new vehicles; used vehicles; parts and service, including recreational vehicle (“RV”) accessories and supplies; and finance and insurance. The Company primarily operates in various regions throughout the United States and markets its products and services to RV owners and camping enthusiasts. At September 30, 2016, the Company operated 120 Camping World retail locations, of which 103 locations sell new and used RVs, and offer financing, and other ancillary services, protection plans, and products for the RV purchaser.

 

Use of Estimates

 

The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

 

Recent Accounting Policies

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-02, Leases (Topic 842). The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-to-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to adopt the amendments in the first quarter of 2019 and are currently evaluating the impacts of the amendments to our financial statements and accounting practices for leases.

 

In November 2015, the FASB issued an accounting pronouncement (“FASB ASU 2015-17”) which simplifies the balance sheet classification of deferred taxes. This pronouncement requires that all deferred tax assets and liabilities be classified as noncurrent in the classified balance sheet, rather than separating such deferred taxes into current and noncurrent amounts, as is required under current guidance. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, and may be applied either prospectively or retrospectively. We are currently in the process of evaluating the effects of the pronouncement on our consolidated financial statements.

 

In September 2015, the FASB issued ASU update No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments in Business Combinations (“ASU 2015-16”) which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, an acquirer will recognize a measurement period adjustment during the period which it determines the amount of the adjustment. This pronouncement is effective for fiscal years beginning after December 15, 2015. The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). Under ASU 2015-11, entities should measure inventory that is not measured using last-in, first-out (“LIFO”) or the retail inventory method, including inventory that is measured using first-in, first-out (“FIFO”) or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and clarifies the

principles for recognizing revenue. The core principle of ASU 2014-09 is that the entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued an update to ASU 2014-09 deferring the effective date for public entities, on a retrospective basis, to annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period for a public company. Early adoption is permitted, subject to certain conditions. We are currently evaluating the adoption method and impact ASU 2014-09 will have on our consolidated financial statements.

 

Note 2: Inventories, Net and Floor Plan Payable

 

Inventories consisted of the following (in thousands):

 

 

New and used vehicles are primarily financed by floor plan arrangements through a syndication of banks. The floor plan notes are collateralized by substantially all of the assets of FreedomRoads, LLC (“FR”), a wholly owned subsidiary of FreedomRoads, which operates the Camping World dealerships, and bear interest at one month London Interbank Offered Rate (“LIBOR”) plus 2.05% as of September 30, 2016 and 2.40% as of December 31, 2015. LIBOR, as defined, was 0.52% at September 30, 2016 and 0.36% as of December 31, 2015. Principal is due upon the sale of the related vehicle.

 

At September 30, 2016 and December 31, 2015, the principal amount outstanding under its floor plan financing facility (the "Floor Plan Facility") was $532.5 million and $598.4 million, respectively. Outstanding letters of credit under the Floor Plan Facility were $7.3 million at both September 30, 2016 and December 31, 2015. Floor plan interest expense for the nine months ended September 30, 2016 and September 30, 2015 was $14.9 million and $9.4 million, respectively.

 

On July 1, 2016, FR entered into Amendment No. 1 to the Sixth Amended and Restated Credit Agreement for the Floor Plan Facility to, among other things, increase the available amount under the Floor Plan Facility from $880.0 million to $1.18 billion, amend the applicable borrowing rate margin on LIBOR and Base Rate Loans ranging from 2.05% to 2.50% and 0.55% and 1.00%, respectively, based on the consolidated current ratio at FR, and extend the maturity date to June 30, 2019. The letter of credit commitment within the Floor Plan Facility remained at $15.0 million.

 

The credit agreement governing the Floor Plan Facility contains certain financial covenants. FR was in compliance with all debt covenants at September 30, 2016 and December 31, 2015.

 

Note 3: Goodwill and Intangible Assets

 

Goodwill

 

The following is a summary of changes in the Company’s goodwill by reportable segments for the nine months ended September 30, 2016 (in thousands):

 

 

The Company evaluates goodwill for impairment on an annual basis during the fourth quarter, or more frequently if events or changes in circumstances indicate that the Company’s goodwill or indefinite-lived intangible assets might be impaired. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the Company is required to perform the second step of the two-step goodwill impairment test to measure the amount of the impairment loss based on qualitative assessments.

 

Intangible Assets

 

Finite-lived intangible assets and related accumulated amortization consisted of the following at September 30, 2016 and December 31, 2015 (in thousands):

 

 

Our principal identifiable finite-lived intangible assets are membership and customer lists with weighted-average useful lives of approximately five years each.

 

Note 4: Long-Term Debt

 

Long-term debt consists of the following:

 

 

CWGS Credit Facility

 

On November 20, 2013, CWGS Group, LLC, a wholly owned subsidiary of CWGS, LLC, entered into a $545.0 million senior secured credit facility (the “Existing Senior Secured Credit Facilities”) consisting of a $525.0 million term loan facility (the “Existing Term Loan Facility”), at an original issue discount of $5.3 million or 1.00%, and a $20.0 million revolving credit facility (the “Existing Revolving Credit Facility”). In December 2014 and December 2015, CWGS Group, LLC secured an additional $117.0 million and $55.0 million, respectively, of term loan borrowings under the Existing Senior Secured Credit Facilities for which the proceeds were primarily used to purchase dealerships within FreedomRoads. In June 2015, CWGS Group, LLC secured an additional $95.0 million of term loan borrowings under the Senior Secured Credit Facilities for which the proceeds were primarily used to pay distributions to the CWGS, LLC members. On September 21, 2016, the Company amended the Senior Secured Credit Facilities to, among other things, amend the change of control definition and other technical changes to  facilitate its transition to a public company, provide additional borrowings of $135.0 million under the Existing Term Loan Facility, increasing the Existing Term Loan Facility to $828.2 million, net of original issue discount and finance costs totaling $16.5 million, and to permit a distribution of a portion of the proceeds to the members of CWGS, LLC. The net proceeds were used to fund a $100.0 million special cash distribution to the members of CWGS, LLC on September 21, 2016, and the remainder of the proceeds will be used for general corporate purposes, including the potential acquisition of dealerships.

 

Interest on the Existing Term Loan Facility floats at the Company’s option at a) LIBOR, subject to a 1.00% floor, plus an applicable margin of 4.75%, or b) an Alternate Base Rate (“ABR”) equal to 3.75% per annum plus the greater of the Prime Rate, Federal Funds Effective Rate plus 1/2 of 1.00%, LIBOR, or 2.00%. Interest on borrowings under the Existing Revolving Credit Facility is at the Company’s option of a) 4.25% to 4.50% per annum subject to a 1.00% floor in the case of a Eurocurrency loan, or b) 3.25% to 3.50% per annum plus the greater of the Prime Rate, Federal Funds Effective Rate plus 1/2 of 1.00%, LIBOR, or 2.00% in the case of an ABR loan, based on the Company’s ratio of net debt to consolidated earnings as defined in the Existing Senior Secured Credit Facilities. The Company also pays a commitment fee of 0.5% per annum on the unused amount of the Existing Revolving Credit Facility. Reborrowings under the Existing Term Loan Facility are not permitted. The quarterly scheduled principal prepayments on the term loan borrowings are $8.9 million. CWGS Group, LLC is required to prepay the term loan borrowings in an aggregate amount equal to 50% of excess cash flow, as defined in the Existing Senior Secured Credit Facilities, for such fiscal year. The required percentage prepayment of excess cash flow is reduced to 25% if the total leverage ratio, as defined, is 2.00 to 1.00 or greater but less than 2.50 to 1.00. If the total leverage ratio is less than 2.00 to 1.00, no prepayment of excess cash flow is required. As of December 31, 2015, CWGS Group, LLC’s excess cash flow offer, as defined, was $16.1 million and was presented to the term loan holders. The holders accepted $12.0 million of the prepayment offer and a principal payment in that amount was made on May 9, 2016.

 

The Existing Revolving Credit Facility matures on November 20, 2018, and the Existing Term Loan Facility matures on February 20, 2020. The funds available under the Revolving Credit Facility may be utilized for borrowings or letters of credit; however, a maximum of $10.0 million may be allocated to such letters of credit. As of September 30, 2016, the interest rate on the term debt was 5.75%, and permitted borrowings under the undrawn revolving credit facility were $20.0 million. As of September 30, 2016, the Company had available borrowings of $16.3 million and letters of credit in the aggregate amount of $3.7 million outstanding under the Existing Revolving Credit Facility. As of September 30, 2016, $828.2 million was outstanding under the Existing Term Loan Facility and no amounts were outstanding on the Existing Revolving Credit Facility.

 

CWGS, LLC and CWGS Group, LLC have no revenue-generating operations of their own. Their ability to meet the financial obligations associated with the Existing Senior Secured Credit Facilities is dependent on the earnings and cash flows of its operating subsidiaries, primarily Good Sam Enterprises, LLC and FR, and their ability to upstream dividends. The Existing Senior Secured Credit Facilities are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of the Company’s existing and future domestic restricted subsidiaries with the exception of FR and its subsidiaries. The Existing Senior Secured Credit Facilities contain certain restrictive covenants including, but not limited to, mergers, changes in the nature of the business, acquisitions, additional indebtedness, sales of assets, investments, and the prepayment of dividends subject to certain limitations and minimum operating covenants. The Company was in compliance with all debt covenants at September 30, 2016.

 

Note 5: Right to Use Liabilities

 

The Company leases operating facilities throughout the United States. The Company analyzes all leases in accordance with Accounting Standards Codification (“ASC”) 840 — Leases. In the first nine months of 2016, three leases were accounted for as operating leases after the completion of construction or the reduction in lease deposits to less than two month’s rent as they qualified for asset derecognition under the sale-leaseback accounting rules. This derecognition resulted in the removal of $20.0 million of right to use assets, and $20.1 million of right to use liabilities.

 

The Company has included the right to use assets in property and equipment, net, as follows (in thousands):

 

 

The following is a schedule by year of the future changes in the right to use liabilities as of September 30, 2016 (in thousands):

 

 

 

Note 6: Fair Value Measurements

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment.

 

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of  observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

 

 

The following methods and assumptions were used by us in estimating fair value disclosures for financial instruments:

 

Cash equivalents, accounts receivable, other assets, Notes Payable-floor plan, accounts payable, other current liabilities: The amounts reported in the accompanying Unaudited Condensed Consolidated Balance Sheets approximate fair value due to their short-term nature.

 

Fixed rate debt: Our fixed rate debt consists of amounts outstanding under our Existing Term Loan Facility. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 1). A summary of the aggregate carrying value and fair value of our fixed rate debt is as follows:

 

 

Non-financial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination.

 

Note 7: Commitments and Contingencies

 

The Company is obligated under various real estate operating leases for retail locations, distribution centers and office space, expiring in various years through February 2036.

 

On April 25, 2016 and May 1, 2016, Camping World entered into sponsorship agreements. The sponsorship agreements expire on January 1, 2025 and October 1, 2019, respectively. The aggregate sponsorship fees payable for each fiscal year are as follows as of September 30, 2016 (in thousands):

 

 

From time to time, the Company is involved in litigation arising in the normal course of business operations. The Company does not believe it is involved in any litigation that requires disclosure or will have a material adverse effect on its results of operations or financial position.

 

Note 8: Statement of Cash Flows

 

Supplemental disclosures of cash flow information for the nine months ended September 30 (in thousands):

 

 

2016:

 

In September 2016, FreedomRoads acquired the assets of an RV dealership for an aggregate purchase price of $8.2 million.

 

In September 2016, the Company assumed $0.2 million of customer deposits and paid $1.4 million in connection with the acquisition of five RV shows from M & P Productions, Inc.

 

In September 2016, a tenant improvement in the amount of $0.7 million was delivered by a lessor upon the construction completion date.

 

In June 2016, the Company assigned its equity interest in AutoMatch USA, LLC, an indirect wholly-owned subsidiary of the Company, in the form of a $38.8 million non-cash distribution (See Note 11 — AutoMatch Distribution). Included in the non-cash distribution were contracts in transit of $1.0 million, accounts receivable of $0.3 million, inventories of $20.3 million, property and equipment of $17.1 million, and prepaid expenses and other assets of $0.1 million.

 

In January 2016, the Company acquired equipment through third party capital lease arrangements totaling $2.0 million.

 

In the first quarter of 2016, the Company derecognized $15.4 million of fixed assets and right to use liabilities for two leases that qualified as operating leases after completion of construction in 2016.  In the three months ended September 30, 2016, the Company derecognized $4.6 million of fixed assets and $4.7 million of right to use liabilities for our lease that qualified as an operating lease after the reduction in lease deposits to less than two month’s rent.

 

In January 2016, FreedomRoads acquired the assets of an RV dealership group comprised of four locations for an aggregate purchase price of approximately $58.9 million plus real property of $9.5 million (see Note 9 — Acquisitions). The purchase was funded through $22.6 million of borrowings under the Floor Plan Facility and the balance through a capital contribution provided by the net proceeds of the incremental debt issuance in December 2015 under the Company’s Existing Senior Secured Credit Facilities.

 

In January 2016, Camping World acquired the assets of a wholesale parts dealer for $1.4 million, comprised of inventory of $1.2 million, intangible assets of $1.3 million, receivables of $1.0 million, prepaid expenses of $0.1 million, and accrued liabilities of $2.2 million.

 

2015:

 

Certain real estate lease agreements were capitalized in accordance with ASC 840 — Leases. The value of the real property, other than land of $15.3 million, was capitalized as a right to use asset with a corresponding $15.3 million included as a right to use liabilities.

 

Note 9: Acquisitions

 

In the first quarter of 2016 and 2015, a subsidiary of the Company acquired the assets or stock of multiple dealership locations. The Company used its working capital, a combination of cash and floor plan financing and member’s capital contributions to complete the acquisitions. The acquired businesses were recorded at their preliminary estimated fair values under the purchase method of accounting. The balance of the purchase prices in excess of fair value of the assets acquired and liabilities assumed was recorded as goodwill.

 

In 2016, concurrent with the acquisition of dealership businesses, the Company purchased real properties for $12.9 million from related parties of the sellers. For the nine months ended September 30, 2016, the Company sold other real properties to a third party in sale-leaseback transactions for $7.3 million. In 2015, the Company purchased real property of $44.5 million related to the acquisition of dealership assets In the nine months ended September 30, 2015, the Company sold other real properties to a third party in sale-leaseback transactions for $33.6 million.

 

A summary of the purchase price allocations for the acquisitions consists of the following: