Party City Holdco Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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

For the transition period from to

Commission file number 001-37344

Party City Holdco Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

Registrant’s telephone number, including area code:

(914) 345-2020

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value: $0.01/share

PRTY

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 30, 2020, 110,646,150 shares of the Registrant’s common stock were outstanding.

PARTY CITY HOLDCO INC.

Form 10-Q

September 30, 2020

TABLE OF CONTENTS

		Page

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019		3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended September 30, 2020 and September 30, 2019		4

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2020 and September 30, 2019		5

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

Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2020 and September 30, 2019		7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and September 30, 2019		8

Notes to Condensed Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures about Market Risk		45

Item 4. Controls and Procedures		45

PART II

Item 1. Legal Proceedings		46

Item 1A. Risk Factors		46

Item 6. Exhibits		47

Signature		48

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2020			December 31, 2019
	(Note 2) (Unaudited)			(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	170,562		$	34,917
Accounts receivable, net		149,825			149,109
Inventories, net		630,357			658,419
Prepaid expenses and other current assets		112,038			51,685
Total current assets		1,062,782			894,130
Property, plant and equipment, net		206,447			243,572
Operating lease asset		741,524			802,634
Goodwill		669,564			1,072,330
Trade names		383,666			530,320
Other intangible assets, net		34,505			45,060
Other assets, net		9,521			7,273
Total assets	$	3,108,009		$	3,595,319
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	303,894		$	128,806
Accounts payable		179,938			152,300
Accrued expenses		202,636			150,921
Current portion of operating lease liability		194,476			155,471
Income taxes payable		—			35,905
Current portion of long-term obligations		14,342			71,524
Total current liabilities		895,286			694,927
Long-term obligations, excluding current portion		1,334,338			1,503,987
Long-term portion of operating lease liability		677,183			720,735
Deferred income tax liabilities, net		49,508			126,081
Other long-term liabilities		15,559			16,517
Total liabilities		2,971,874			3,062,247
Redeemable securities		—			3,351
Commitments and contingencies
Stockholders’ equity:
Common stock (110,573,555 and 94,461,576 shares outstanding and 121,848,074 and 121,662,540 shares issued at September 30, 2020 and December 31, 2019, respectively)		1,371			1,211
Additional paid-in capital		970,145			928,573
Accumulated deficit		(469,040	)		(37,219	)
Accumulated other comprehensive loss		(38,907	)		(35,734	)
Total Party City Holdco Inc. stockholders’ equity before common stock held in treasury		463,569			856,831
Less: Common stock held in treasury, at cost (11,274,519 and 27,200,964 shares at September 30, 2020 and December 31, 2019, respectively)		(327,170	)		(327,086	)
Total Party City Holdco Inc. stockholders’ equity		136,399			529,745
Noncontrolling interests		(264	)		(24	)
Total stockholders’ equity		136,135			529,721
Total liabilities, redeemable securities and stockholders’ equity	$	3,108,009		$	3,595,319

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended September 30,
	2020			2019
Revenues:
Net sales	$	532,053		$	538,345
Royalties and franchise fees		1,722			1,886
Total revenues		533,775			540,231
Cost of sales		355,923			373,413
Wholesale selling expenses		11,950			16,084
Retail operating expenses		97,100			111,595
Franchise expenses		2,795			3,274
General and administrative expenses		42,191			43,062
Art and development costs		4,257			5,927
Development stage expenses		—			2,728
Store impairment and restructuring charges		1,926			2,574
Goodwill, intangibles and long-lived assets impairment		44,732			259,100
Total expenses		560,874			817,757
(Loss) from operations		(27,099	)		(277,526	)
Interest expense, net		13,422			29,424
Other (income) expense, net		(2,873	)		2,047
(Gain) on debt refinancing		(273,149	)		—
Income (loss) before income taxes		235,501			(308,997	)
Income tax (benefit)		(4,164	)		(27,252	)
Net income (loss)		239,665			(281,745	)
Less: Net (loss) attributable to noncontrolling interests		(42	)		(212	)
Net income (loss) attributable to common shareholders of Party City Holdco Inc.	$	239,707		$	(281,533	)
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	2.25		$	(3.02	)
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	2.24		$	(3.02	)
Weighted-average number of common shares-Basic		106,709,307			93,346,448
Weighted-average number of common shares-Diluted		106,875,631			93,346,448
Dividends declared per share	$	—		$	—
Comprehensive income (loss)	$	244,607		$	(288,573	)
Less: Comprehensive (loss) attributable to noncontrolling interests		(42	)		(213	)
Comprehensive income (loss) attributable to common shareholders of Party City Holdco Inc.	$	244,649		$	(288,360	)

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

	Nine Months Ended September 30,
	2020			2019
Revenues:
Net sales	$	1,198,160		$	1,611,149
Royalties and franchise fees		4,349			6,089
Total revenues		1,202,509			1,617,238
Cost of sales		890,587			1,065,511
Wholesale selling expenses		37,115			50,929
Retail operating expenses		250,502			302,756
Franchise expenses		9,225			9,813
General and administrative expenses		162,118			126,497
Art and development costs		13,095			17,568
Development stage expenses		2,932			7,966
(Gain) on sale/leaseback transaction		—			(58,381	)
Store impairment and restructuring charges		20,818			25,817
Goodwill, intangibles and long-lived assets impairment		581,380			259,100
Total expense		1,967,772			1,807,576
(Loss) from operations		(765,263	)		(190,338	)
Interest expense, net		63,954			88,857
Other expense, net		4,287			6,643
(Gain) on debt refinancing		(273,149	)		—
(Loss) before income taxes		(560,355	)		(285,838	)
Income tax (benefit)		(128,293	)		(21,809	)
Net (loss)		(432,062	)		(264,029	)
Less: Net (loss) attributable to noncontrolling interests		(241	)		(352	)
Net (loss) attributable to common shareholders of Party City Holdco Inc.	$	(431,821	)	$	(263,677	)
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(4.41	)	$	(2.83	)
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(4.41	)	$	(2.83	)
Weighted-average number of common shares-Basic		97,872,174			93,271,392
Weighted-average number of common shares-Diluted		97,872,174			93,271,392
Dividends declared per share	$	—		$	—
Comprehensive (loss)	$	(435,235	)	$	(266,883	)
Less: Comprehensive (loss) attributable to noncontrolling interests		(241	)		(364	)
Comprehensive (loss) attributable to common shareholders of Party City Holdco Inc.	$	(434,994	)	$	(266,519	)

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at June 30, 2020	$	1,211	$	941,745		$	(708,747	)	$	(43,849	)	$	190,360		$	(327,170	)	$	(136,810	)	$	(206	)	$	(137,016	)
Net income (loss)		—		—			239,707			—			239,707			—			239,707			(42	)		239,665
Stock option expense – time – based		—		111			—			—			111			—			111			—			111
Restricted stock units – time-based		—		429			—			—			429			—			429			—			429
Restricted stock unit expense – performance-based		—		481			—			—			481			—			481			—			481
Acquired non-controlling interest		—		(202	)		—			—			(202	)		—			(202	)		(16	)		(218	)
Issuance of Stock for New Debt		160		27,581			—			—			27,741			—			27,741			—			27,741
Foreign currency adjustments		—		—			—			5,076			5,076			—			5,076			—			5,076
Impact of foreign exchange contracts, net		—		—			—			(134	)		(134	)		—			(134	)		—			(134	)
Balance at September 30, 2020	$	1,371	$	970,145		$	(469,040	)	$	(38,907	)	$	463,569		$	(327,170	)	$	136,399		$	(264	)	$	136,135

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at June 30, 2019	$	1,210	$	926,838	$	513,130		$	(45,216	)	$	1,395,962		$	(327,086	)	$	1,068,876		$	211		$	1,069,087
Net income (loss)		—		—		(281,533	)		—			(281,533	)		—			(281,533	)		(212	)		(281,745	)
Stock option expense		—		409		—			—			409			—			409			—			409
Restricted stock units – time-based		—		610		—			—			610			—			610			—			610
Restricted stock units – performance-based		—		560		—			—			560			—			560			—			560
Director – non-cash compensation		—		148		—			—			148			—			148			—			148
Warrant expense		—		128		—			—			128			—			128			—			128
Exercise of stock option		1		56		—			—			57			—			57			—			57
Foreign currency adjustments		—		—		—			(6,920	)		(6,920	)		—			(6,920	)		(1	)		(6,921	)
Impact of foreign exchange contracts, net		—		—		—			93			93			—			93			—			93
Balance at September 30, 2019	$	1,211	$	928,749	$	231,597		$	(52,043	)	$	1,109,514		$	(327,086	)	$	782,428		$	(2	)	$	782,426

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2019	$	1,211	$	928,573	$	(37,219	)	$	(35,734	)	$	856,831		$	(327,086	)	$	529,745		$	(24	)	$	529,721
Net loss		—		—		(431,821	)		—			(431,821	)		—			(431,821	)		(241	)		(432,062	)
Stock option expense – time – based		—		671		—			—			671			—			671			—			671
Stock option expense – performance – based				7,847		—			—			7,847			—			7,847			—			7,847
Restricted stock units – time – based		—		1,568		—			—			1,568			—			1,568			—			1,568
Restricted stock unit expense – performance-based		—		481		—			—			481			—			481			—			481
Director – non-cash compensation		—		75		—			—			75			—			75			—			75
Warrant expense (see Note 19 – Kazzam, LLC)		—		1,033		—			—			1,033			—			1,033			—			1,033
Acquired non-controlling interest		—		2,316		—			—			2,316			—			2,316			1			2,317
Treasury stock purchases		—		—		—			—			—			(84	)		(84	)		—			(84	)
Issuance of Stock for Debt exchange including costs		160		27,581		—			—			27,741			—			27,741			—			27,741
Foreign currency adjustments		—		—		—			(3,111	)		(3,111	)		—			(3,111	)		—			(3,111	)
Impact of foreign exchange contracts, net		—		—		—			(62	)		(62	)		—			(62	)		—			(62	)
Balance at September 30, 2020	$	1,371	$	970,145	$	(469,040	)	$	(38,907	)	$	463,569		$	(327,170	)	$	136,399		$	(264	)	$	136,135

	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Total Party City Holdco Inc. Stockholders’ Equity Before Common Stock Held In Treasury			Common Stock Held In Treasury			Total Party City Holdco Inc. Stockholders’ Equity			Non- Controlling Interests			Total Stockholders’ Equity
Balance at December 31, 2018	$	1,208	$	922,476	$	495,777		$	(49,201	)	$	1,370,260		$	(326,930	)	$	1,043,330		$	291		$	1,043,621
Cumulative effect of change in accounting principle, net (see Note 2)		—		662		(503	)		—			159			—			159			—			159
Balance at December 31, 2018, as adjusted	$	1,208	$	923,138	$	495,274		$	(49,201	)	$	1,370,419		$	(326,930	)	$	1,043,489		$	291		$	1,043,780
Net income (loss)		—		—		(263,677	)		—			(263,677	)		—			(263,677	)		(352	)		(264,029	)
Stock option expense		—		1,150		—			—			1,150			—			1,150			—			1,150
Restricted stock units – time-based		—		1,543		—			—			1,543			—			1,543			—			1,543
Restricted stock units – performance-based		—		1,036		—			—			1,036			—			1,036			—			1,036
Director – non-cash compensation		—		313		—			—			313			—			313			—			313
Warrant expense		—		386		—			—			386			—			386			—			386
Exercise of stock options		3		1,142		—			—			1,145			—			1,145			—			1,145
Acquired non-controlling interest		—		41		—			—			41			—			41			71			112
Treasury Stock purchases		—		—		—			—			—			(156	)		(156	)		—			(156	)
Foreign currency adjustments		—		—		—			(2,208	)		(2,208	)		—			(2,208	)		(12	)		(2,220	)
Impact of foreign exchange contracts, net		—		—		—			(634	)		(634	)		—			(634	)		—			(634	)
Balance at September 30, 2019	$	1,211	$	928,749	$	231,597		$	(52,043	)	$	1,109,514		$	(327,086	)	$	782,428		$	(2	)	$	782,426

See accompanying notes to unaudited condensed consolidated financial statements.

PARTY CITY HOLDCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2020			2019
Cash flows used in operating activities:
Net (loss) income	$	(432,062	)	$	(264,029	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization expense		57,796			62,380
Amortization of deferred financing costs and original issuance discounts		3,276			3,511
Provision for doubtful accounts		5,746			1,110
Deferred income tax benefit		(76,833	)		(26,458	)
Change in operating lease liability/asset		32,121			(23,361	)
Undistributed (income) loss in equity method investments		356			(195	)
Loss (gain) on disposal of assets		83			(59,088	)
Non-cash adjustment for store impairment and restructuring charges		16,595			19,443
Goodwill, intangibles and long-lived assets impairment		581,380			259,100
Non-employee equity-based compensation (see Note 19 – Kazzam, LLC)		1,033			386
Stock option expense – time – based		671			1,150
Stock option expense – performance – based		7,847			—
Restricted stock unit expense – time-based		1,568			1,543
Restricted stock unit and restricted cash awards expense – performance-based		510			1,036
Directors – non-cash compensation		75			313
Gain on debt refinancing		(273,149	)		—
Changes in operating assets and liabilities, net of effects of acquired businesses:
(Increase) in accounts receivable		(8,562	)		(23,712	)
Decrease (increase) in inventories		27,959			(35,628	)
Increase in prepaid expenses and other current assets		(64,715	)		(11,009	)
Decrease (increase) in accounts payable, accrued expenses and income taxes payable		61,478			(88,771	)
Net cash used in operating activities		(56,827	)		(182,279	)
Cash flows (used in) provided by investing activities:
Cash paid in connection with acquisitions, net of cash acquired		(362	)		(9,485	)
Capital expenditures		(32,095	)		(45,769	)
Proceeds from disposal of property and equipment		82			113,845
Net cash (used in) provided by investing activities		(32,375	)		58,591
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(122,373	)		(106,133	)
Proceeds from loans, notes payable and long-term obligations		369,785			203,381
Stock repurchases		(85	)		(156	)
Exercise of stock options		—			1,145
Debt issuance costs		(19,955	)		(411	)
Net cash provided by financing activities		227,372			97,826
Effect of exchange rate changes on cash and cash equivalents		(2,659	)		1,220
Net increase (decrease) in cash and cash equivalents and restricted cash		135,511			(24,642	)
Cash and cash equivalents and restricted cash at beginning of period		35,176			59,219
Cash and cash equivalents and restricted cash at end of period	$	170,687		$	34,577
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	55,999		$	97,744
Cash paid during the period for income taxes, net of refunds	$	24,421		$	34,357

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share)

Note 1 – Description of Business

Party City Holdco Inc. (the “Company” or “Party City Holdco”) is the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of September 30, 2020 the Company’s retail operations include 829 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com and others.

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

Note 2 – Basis of Presentation and Recently Issued Accounting Pronouncements

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

The majority of our retail operations define a fiscal year (“Fiscal Year”) as the 52-week period or 53-week period ended on the Saturday nearest December 31st of each year and define fiscal quarters (“Fiscal Quarter”) as the four interim 13-week periods following the end of the previous Fiscal Year, except in the case of a 53-week Fiscal Year when the fourth Fiscal Quarter is extended to 14 weeks. The condensed consolidated financial statements of the Company combine the Fiscal Quarters of our retail operations with the calendar quarters of our wholesale operations. The Company has determined the differences between the retail operation’s Fiscal Year and Fiscal Quarters and the calendar year and calendar quarters to be insignificant.

Operating results for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2020. Our business is subject to substantial seasonal variations as our retail segment has historically realized a significant portion of its net sales, cash flows and net income in the fourth quarter of each year, principally due to its Halloween season sales in October and, to a lesser extent, other year-end holiday sales. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement in and the general level of raw material costs and the uncertainty surrounding the impact of the COVID-19 pandemic.

Recently Issued and Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The new guidance improves and clarifies the fair value measurement disclosure requirements of ASC 820. The new disclosure requirements include the disclosure of the changes in unrealized gains or losses included in other comprehensive (loss) income for recurring Level 3 fair value measurements held at the end of the reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance was effective for fiscal years beginning after December 15, 2019. The Company has adopted this guidance effective January 1, 2020, prospectively and the adoption and application of this standard did not have a material impact to the consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”. The ASU simplifies the accounting for non-employee share-based payments. The Company adopted the update during the first quarter of 2019. The pronouncement requires companies to record the impact of adoption, if any, as a cumulative-effect adjustment to retained earnings as of the adoption date. Therefore, on January 1, 2019, the Company decreased retained earnings by $503. Additionally, the Company increased additional paid-in capital by $662 and recorded a $159 deferred income tax asset.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The pronouncement amends the existing hedge accounting model in order to enable entities to better portray the economics of their risk management activities in their financial statements. The Company adopted the update during the first quarter of 2019 and such adoption had no impact on the Company’s consolidated financial statements.

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

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The ASU changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU requires that an entity measure and recognize expected credit losses at the time the asset is recorded, while considering a broader range of information to estimate credit losses including macroeconomic conditions that correlate with historical loss experience, delinquency trends and aging behavior of receivables, among others. The Company has adopted this guidance effective January 1, 2020, prospectively, with respect to its receivables, and the adoption and application of this standard did not have a material impact to the consolidated financial statements during the first nine months of 2020.

The Company maintains allowances for credit losses resulting from the inability of the Company’s customers to make required payments. Judgment is required in assessing the ultimate realization of these receivables, including consideration of the Company’s history of receivable write-offs, the level of past due accounts and the economic status of the Company’s customers. In an effort to identify adverse trends relative to customer economic status, the Company assesses the financial health of the markets it operates in and performs periodic credit evaluations of its customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for credit losses and occur only after all collection efforts have been exhausted. The Company will continue to actively monitor the impact of the COVID-19 pandemic on expected losses. At September 30, 2020 and December 31, 2019, the allowance for credit losses was $9,590 and $4,786, respectively.

In February 2016, the FASB issued ASU 2016-02, “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by companies’ leases. The Company’s lease portfolio is primarily comprised of store leases, manufacturing and distribution facility leases, warehouse leases and office leases.

The Company adopted the new lease standard during the first quarter of 2019 and, to the extent required by the pronouncement, recognized a right of use asset and liability for its operating lease arrangements with terms of greater than twelve months. The pronouncement had no impact on the Company’s consolidated statement of operations and comprehensive loss and it did not impact the Company’s compliance with its debt covenants. Additionally, the standard requires companies to make certain annual disclosures, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Note 3 – Store Impairment and Restructuring Charges

The Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”). After careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of stores, which are primarily located in close proximity to other Party City stores. In 2019, 55 stores were identified for closure, out of which 35 stores were closed in 2019 and 20 stores were closed in January 2020. In addition, 21 stores identified for closure in the first quarter of 2020 were closed in the third quarter. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company evaluated the recoverability of long lived assets at the open stores and recorded an impairment charge associated with the operating lease asset and property, plant and equipment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19. In conjunction with the store optimization program and store impairment, during the three and nine months ended September 30, 2020 and 2019, the Company recorded the following charges:

	Three Months Ended September 30,
	2020		2019
Inventory reserves	$	1,184	$	—
Operating lease asset impairment		137		—
Labor and other costs incurred closing stores		1,789		2,574
Total	$	3,110	$	2,574

	Nine Months Ended September 30,
	2020		2019
Inventory reserves	$	12,880	$	21,285
Operating lease asset impairment		14,530		14,149
Property, plant and equipment impairment		2,065		4,680
Labor and other costs incurred closing stores		4,223		6,327
Severance		—		661
Total	$	33,698	$	47,102

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

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

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

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

Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment

The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1 or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace participants would use in making their estimates of fair value. Significant assumptions and estimates are required, including, but not limited to, projecting future cash flows, determining appropriate discount rates and terminal growth rates, and other assumptions, to estimate the fair value of goodwill and indefinite lived intangible assets. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

During the three months ended March 31, 2020, the Company identified intangible assets’ impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of March 31, 2020. The interim impairment tests were performed using an income approach. The Company recognized non-cash pre-tax goodwill impairment charges at March 31, 2020 of $253,110 and $148,326 against the goodwill associated with its retail and wholesale reporting units, respectively.

In addition, during the three months ended March 31, 2020, the Company recorded an impairment charge of $131,287 and $3,925 on its Party City and Halloween City tradenames, respectively. During 2019, there was no impairment on the Party City trade name and the Company recorded a Halloween City trade name impairment charge of $6,575.

During the three months ended September 30, 2019, the Company identified an impairment indicator associated with its market capitalization and performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of September 30, 2019. The interim impairment tests were performed using a combination of a market approach and an income approach. As a result of a sustained decline in the Company’s market capitalization, the Company recognized non-cash pre-tax goodwill impairment charges at September 30, 2019 of $224,100 and $35,000 against the goodwill associated with its retail and wholesale reporting units, respectively.

During the three months ended September 30, 2020 the Company has determined that the fair value of certain indefinite-lived intangible assets is lower than the related book values. Additionally, for certain long-lived assets it is more likely than not that those long-lived assets will be disposed significantly before the end of their previously estimated useful lives. As a result, impairment charges of $11,032, $2,423 and $31,277 were recorded in the third quarter on its business indefinite-lived trade name intangibles, finite-lived intangibles and tangible assets, respectively.

Note 5 – Sale/Leaseback Transaction

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

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

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

However, for the Los Lunas property, the present value of the lease payments is greater than substantially all of the fair value of the assets. Therefore, the lease is a finance lease and sale accounting treatment is prohibited. As such, the Company is accounting for the proceeds as a financing lease. As of September 30, 2020 and December 31, 2019 $11,846 and $11,990 is recorded as a part of a Finance lease, respectively.

In conjunction with the sale/leaseback transaction, the Company amended its Term Loan Credit Agreement. The amendment required the Company to use half of the proceeds from the transaction, net of costs, to paydown part of the outstanding balance under such debt agreement. Additionally, the amendment required the Company to pay an immaterial “consent fee” to the lenders. As the Term Loan Credit Agreement is a loan syndication, the Company assessed, on a creditor-by-creditor basis, whether the amendment should be accounted for as an extinguishment or a modification. The Company concluded that, for each creditor, the amendment should be accounted for as a modification. Therefore, no capitalized deferred financing costs or original issuance discounts were written off in conjunction with the amendment.

During June 2019, the Company used proceeds from the sale (net of costs) described in this Note 5 – Sale/Leaseback Transaction to paydown outstanding loans under the Term Loan Credit Agreement and the ABL Facility in an aggregate amount of $125,864, of which $62,770 was used to prepay the outstanding term loans and the balance was used to paydown the ABL Facility. See Note 16 – Current and Long-Term Obligations.

Note 6 – Disposition of Assets

On October 1, 2019, the Company sold its Canadian-based Party City stores to a Canadian-based retailer for $131,711 and entered into a 10-year supply agreement under which the acquirer agreed to purchase product from the Company for such Party City stores, as well as acquirer’s other stores. On September 30, 2020, PCHI prepaid approximately $17,500 of the term loans outstanding under the Term Loan Credit Agreement. PCHI was required to make such prepayment in accordance with the terms of the Term Loan Credit Agreement in connection with the Company’s sale of its Canadian-based Party City stores. Consistent with the terms of Term Loan Credit Agreement, PCHI reinvested such proceeds in assets used or useful in the business of PCHI and its subsidiaries and entered into binding commitments to reinvest a certain portion of such proceeds by March 30, 2021, such that the total amount of the sale proceeds so reinvested or committed to be reinvested is approximately $97,000 (of which approximately $84,800 was invested or is committed to be reinvested towards capital expenditures and $12,200 was invested or is committed to be reinvested towards permitted acquisitions). Under the Term Loan Credit Agreement, PCHI was permitted to deduct $15,000 on account of a single asset sale transaction prior to prepaying any term loans from net cash proceeds of an asset sale.

Note 7 – Inventories

Inventories consisted of the following:

	September 30, 2020		December 31, 2019
Finished goods	$	581,735	$	606,036
Raw materials		28,640		34,259
Work in process		19,982		18,124
	$	630,357	$	658,419

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

The Company estimates retail inventory shrinkage for the period between physical inventory dates on a store-by-store basis. Inventory shrinkage estimates can be affected by changes in merchandise mix and changes in actual shortage trends. The shrinkage rate from the most recent physical inventory, in combination with historical experience, is the basis for estimating shrinkage.

Note 8 – Income Taxes

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

The effective income tax rate for the nine months ended September 30, 2020 of 22.9% is different from the statutory rate of 21.0% primarily due to the non-deductible portions of goodwill impairment charges (see Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment above for further discussion), the excludable portion of the cancellation of debt income, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Note 9 – Changes in Accumulated Other Comprehensive Loss

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

	Three Months Ended September 30, 2020
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at June 30, 2020	$	(45,621	)	$	1,772		$	(43,849	)
Other comprehensive (loss) income before reclassifications, net of tax		5,076			(321	)		4,755
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			187			187
Net current-period other comprehensive income		5,076			(134	)		4,942
Balance at September 30, 2020	$	(40,545	)	$	1,638		$	(38,907	)

	Three Months Ended September 30, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at June 30, 2019	$	(45,344	)	$	128		$	(45,216	)
Other comprehensive (loss) income before reclassifications		(6,920	)		166			(6,754	)
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			(73	)		(73	)
Net current-period other comprehensive income (loss)		(6,920	)		93			(6,827	)
Balance at September 30, 2019	$	(52,264	)	$	221		$	(52,043	)

	Nine Months Ended September 30, 2020
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2019	$	(37,434	)	$	1,700		$	(35,734	)
Other comprehensive (loss) before reclassifications, net of tax		(3,111	)		(251	)		(3,362	)
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive loss, net of income tax		—			189			189
Net current-period other comprehensive (loss) income		(3,111	)		(62	)		(3,173	)
Balance at September 30, 2020	$	(40,545	)	$	1,638		$	(38,907	)

	Nine Months Ended September 30, 2019
	Foreign Currency Adjustments			Impact of Foreign Exchange Contracts, Net of Taxes			Total, Net of Taxes
Balance at December 31, 2018	$	(50,056	)	$	855		$	(49,201	)
Other comprehensive (loss) income before reclassifications, net of income tax		(2,208	)		226			(1,982	)
Amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statement of operations and comprehensive income, net of income tax		—			(860	)		(860	)
Net current-period other comprehensive income (loss)		(2,208	)		(634	)		(2,842	)
Balance at September 30, 2019	$	(52,264	)	$	221		$	(52,043	)

Note 10 – Capital Stock

At September 30, 2020, the Company’s authorized capital stock consisted of 300,000,000 shares of $0.01 par value common stock and 15,000,000 shares of $0.01 par value preferred stock.

During 2013, Party City Holdco granted performance-based stock options to key employees and independent directors. For those performance-based options, vesting was contingent on Thomas H. Lee Partners, L.P. (“THL”) achieving specified investment returns when it sold its entire ownership stake in Party City Holdco. In June 2020, THL distributed its remaining shares. At the time of the THL distribution, there were 2,539,600 performance options outstanding with an average grant date fair value of $3.09. None of the performance-based options vested as the specified investment returns were not attained. The Company recorded compensation expense of $7,847 for the nine months ended September 30, 2020.

Note 11 – Segment Information

Industry Segments

The Company has two identifiable business segments. The Wholesale segment designs, manufactures, sources and distributes decorated party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. The Retail segment operates specialty retail party supply stores in the United States, principally under the names Party City and Halloween City, and it operates e-commerce websites, principally through the domain name Partycity.com. The Retail segment also franchises both individual stores and franchise areas throughout the United States, Mexico and Puerto Rico, principally under the name Party City. The Company’s industry segment data for the three months ended September 30, 2020 and September 30, 2019 was as follows:

	Wholesale			Retail			Consolidated
Three Months Ended September 30, 2020
Revenues:
Net sales	$	346,621		$	364,481		$	711,102
Royalties and franchise fees		—			1,722			1,722
Total revenues		346,621			366,203			712,824
Eliminations		(179,049	)		—			(179,049	)
Net revenues	$	167,572		$	366,203		$	533,775
Loss from operations	$	(12,738	)	$	(14,361	)	$	(27,099	)
Interest expense, net								13,422
Other expense, net								(2,873	)
Gain on debt refinancing								(273,149	)
Income before income taxes							$	235,501

	Wholesale			Retail			Consolidated
Three Months Ended September 30, 2019
Revenues:
Net sales	$	383,425		$	369,467		$	752,892
Royalties and franchise fees		—			1,886			1,886
Total revenues		383,425			371,353			754,778
Eliminations		(214,547	)		—			(214,547	)
Net revenues	$	168,878		$	371,353		$	540,231
Loss from operations	$	(32,424	)	$	(245,102	)	$	(277,526	)
Interest expense, net								29,424
Other expense, net								2,047
Loss before income taxes							$	(308,997	)

The Company’s industry segment data for the nine months ended September 30, 2020 and 2019 was as follows:

	Wholesale			Retail			Consolidated
Nine Months Ended September 30, 2020
Revenues:
Net sales	$	692,715		$	850,612		$	1,543,327
Royalties and franchise fees		—			4,349			4,349
Total revenues		692,715			854,961			1,547,676
Eliminations		(345,167	)		—			(345,167	)
Net revenues	$	347,548		$	854,961		$	1,202,509
Loss from operations	$	(232,178	)	$	(533,085	)	$	(765,263	)
Interest expense, net								63,954
Other expense, net								4,287
Gain on debt refinancing								(273,149	)
Loss before income taxes							$	(560,355	)

	Wholesale			Retail			Consolidated
Nine Months Ended September 30, 2019
Revenues:
Net sales	$	962,793		$	1,170,777		$	2,133,570
Royalties and franchise fees		—			6,089			6,089
Total revenues		962,793			1,176,866			2,139,659
Eliminations		(522,421	)		—			(522,421	)
Net revenues	$	440,372		$	1,176,866		$	1,617,238
Income (loss) from operations	$	30,096		$	(220,434	)	$	(190,338	)
Interest expense, net								88,857
Other expense, net								6,643
Loss before income taxes							$	(285,838	)

In 2019, the Company initiated a store optimization program under which the Company identified approximately 55 Party City stores to be closed. In addition, 21 stores were identified for closure in the first quarter of 2020 were closed in the third quarter. In conjunction with the program, during the three months ended September 30, 2020 and 2019 the Company’s Retail segment recorded $3,110 and $2,574 of store impairment and restructuring charges, respectively. In conjunction with the program, during the nine months ended September 30, 2020 and 2019 the Company’s Retail segment recorded $33,698 and $47,102 of store impairment and restructuring charges, respectively. See Note 3 – Store Impairment and Restructuring Charges for further detail.

During June 2019, the Company’s Wholesale segment sold its main distribution center in Chester, New York, its metallic balloons manufacturing facility in Eden Prairie, Minnesota and its injection molded plastics manufacturing facility in Los Lunas, New Mexico. The aggregate sale price was $128,000 and, during the three months ended June 30, 2019, the Company’s Wholesale segment recorded a $58,381 gain on the sale in the Company’s condensed consolidated statement of operations and comprehensive income. See Note 5 – Sale/Leaseback Transaction for further detail.

During the three months ended March 31, 2020, the Company identified intangible assets’ impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units and its other indefinite lived intangible assets as of March 31, 2020. As a result, the Company recognized non-cash pre-tax goodwill and trade name impairment charges. See Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment for further detail.

Note 12 – Commitments and Contingencies

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

Note 13 – Derivative Financial Instruments

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

Foreign Exchange Risk Management

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

The foreign currency exchange contracts are reflected in the condensed consolidated balance sheets at fair value. At September 30, 2020 and December 31, 2019, the Company had foreign currency exchange contracts that qualified for hedge accounting. No components of these agreements were excluded in the measurement of hedge effectiveness. As these hedges are 100% effective, there is no current impact on earnings due to hedge ineffectiveness. The Company anticipates that substantially all unrealized gains and losses in accumulated other comprehensive loss related to these foreign currency exchange contracts will be reclassified into earnings at a later date.

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

Derivative Assets

Derivative Liabilities

September 30, 2020

December 31, 2019

September 30, 2020

December 31, 2019

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Balance

Sheet

Line

Fair

Value

Foreign Exchange Contracts

(a) PP

131

(a) PP

—

(b) AE

—

(a)	PP = Prepaid expenses and other current assets

(b)	AE = Accrued expenses

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

Derivative Instrument

September 30,

2020

December 31,

2019

Foreign Exchange Contracts

6,449

300

Note 14 – Fair Value Measurements

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

•

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

•

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

•

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

During 2017, the Company acquired a 28% ownership interest in Punchbowl, Inc. (“Punchbowl”), a provider of digital greeting cards and digital invitations. At such time, the Company provided Punchbowl’s other investors with the ability to “put” their interest in Punchbowl to the Company at a future date. Additionally, at such time, the Company received the ability to “call” the interest of the other investors. During the twelve months ended December 31, 2019, the option was terminated and the Company wrote off its asset related to the call option and reversed its liability related to the put option. Prior to such time, the Company had been adjusting the put liability to fair value on a recurring basis. The liability represented a Level 3 fair value measurement as it was based on unobservable inputs. In November 2019, the Company sold its ownership interest in Punchbowl, and recorded a net charge of $2,169 in other expenses, net for the option termination and the sale of its ownership interest.

During 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services. As part of Ampology’s compensation for designing, developing and launching the exchange platform, Ampology received an ownership interest in Kazzam. The interest had been recorded as redeemable securities in the mezzanine of the Company’s consolidated balance sheet as Ampology had the right to cause the Company to purchase the interest. The liability was adjusted to the greater of the current fair value or the original fair value at the time at which the ownership interest was issued (adjusted for any subsequent changes in the ownership interest percentage). On March 23, 2020, the Company agreed to purchase all of Ampology’s interest in Kazzam. Refer to Note 19 – Kazzam, LLC for further detail. As of December 31, 2019 the original value was greater and, therefore, the liabilities are not disclosed as fair value measurements. As of September 30, 2020 there is no liability.

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, lease assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value. See Note 3 – Store Impairment and Restructuring Charges and Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment for further detail.

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

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

	September 30, 2020
	Carrying Amount		Fair Value
Term Loan Credit Agreement	$	693,906	$	569,034
6.125% Senior Notes – due 2023		22,765		8,253
6.625% Senior Notes – due 2026		106,273		23,730
First Lien Party City Notes		207,925		155,153
First Lien Anagram Notes		150,958		158,056
Second Lien Anagram Notes		152,104		120,162

The fair values represent Level 2 fair value measurements as the debt instruments trade in inactive markets.

Note 15 – Earnings Per Share

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

Basic and diluted loss per share is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020			2019
Net (loss) income attributable to common shareholders of Party City Holdco Inc.	$	239,707	$	(281,533	)	$	(431,821	)	$	(263,677	)
Weighted average shares - Basic		106,709,307		93,346,448			97,872,174			93,271,392
Effect of dilutive securities:
Warrants		—		—			—			—
Restricted stock units		166,324		—			—			—
Stock options		—		—			—			—
Weighted average shares - Diluted		106,875,631		93,346,448			97,872,174			93,271,392
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Basic	$	2.25	$	(3.02	)	$	(4.41	)	$	(2.83	)
Net (loss) income per share attributable to common shareholders of Party City Holdco Inc. - Diluted	$	2.24	$	(3.02	)	$	(4.41	)	$	(2.83	)

During the three months ended September 30, 2020, 3,475,621 stock options, 1,000,000 warrants and 263,727 restricted stock units were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. During the nine months ended September 30, 2020, 3,475,621 stock options, 1,000,000 warrants and 584,258 restricted stock units were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive. During the three and nine months ended September 30, 2019, 3,544,501 stock options, 596,000 warrants and 416,260 restricted stock units were excluded from the calculation of net loss per share attributable to common shareholders of Party City Holdco Inc. – diluted as they were anti-dilutive.

Note 16 – Current and Long-Term Obligations

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

	September 30, 2020			December 31, 2019
Term Loan Credit Agreement	$	693,906		$	718,596
6.125% Senior Notes – due 2023		22,765			347,015
6.625% Senior Notes – due 2026		106,273			494,910
First Lien Party City Notes		207,925			—
First Lien Anagram Notes		150,958			—
Second Lien Anagram Notes		152,104			—
Finance lease obligations		14,749			14,990
Total long-term obligations		1,348,680			1,575,511
Less: current portion		(14,342	)		(71,524	)
Long-term obligations, excluding current portion	$	1,334,338		$	1,503,987

Prior to April 2019, the Company had a $540,000 asset-based revolving credit facility (with a seasonal increase to $640,000 during a certain period of each calendar year) (the “ABL Facility”), which matures during August 2023 (subject to a springing maturity at an earlier date if the maturity date of certain of the Company’s other debt has not been extended or refinanced). It provides for (a) revolving loans, subject to a borrowing base, and (b) letters of credit, in an aggregate face amount at any time outstanding not to exceed $50,000. During April 2019, the Company amended the ABL Facility. Such amendment removed the seasonal component and made the ABL Facility a $640,000 facility with no seasonal modification component. In connection with the refinancing transactions as follows, PCHI (1) reduced the ABL revolving commitments and prepaid the outstanding ABL revolving loans, in each case, in an aggregate principal amount equal to $44,000 in accordance with the ABL Facility credit agreement, and (2) designated Anagram Holdings and each of its subsidiaries as an unrestricted subsidiary under the ABL Facility and the Term Loan Credit Agreement.

In the first nine months of 2020 the Company drew down $269.8 million under the ABL Facility. At September 30, 2020, $100.1 million was invested in US Treasury funds with maturities of less than three months. The Company had approximately $178.5 million of availability under the ABL Facility as of September 30, 2020.

Completion of Refinancing Transactions

On July 30, 2020 (the “Settlement Date”), the Company and certain of its direct or indirect subsidiaries, including PCHI, Anagram Holdings, LLC, a Delaware limited liability company and wholly owned direct subsidiary of PCHI (“Anagram Holdings”), and Anagram International, Inc., a Minnesota corporation and wholly owned direct subsidiary of Anagram Holdings, completed certain refinancing transactions, including, among other things: (i) the exchange of $327,076 of 6.125% Senior Notes due 2023 (the “2023 Notes”) and $392,746 of 6.625% Senior Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “Existing Notes”) issued by PCHI, in each case tendered in the Company’s offers to exchange pursuant to the terms described in a confidential offering memorandum, for (A) $156,669 of Senior Secured First Lien Floating Rate Notes due 2025 (the “First Lien Party City Notes”) issued by PCHI; (B) $84,687 of 10.00% PIK/Cash Senior Secured Second Lien Notes due 2026 (the “Second Lien Anagram Notes”) issued by Anagram Holdings and Anagram International (together, the “Anagram Issuers”); and (C) 15,942,551 shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”); (ii) the issuance of $110,000 in the aggregate of 15.00% PIK/Cash Senior Secured First Lien Notes due 2025 (the “First Lien Anagram Notes”) by the Anagram Issuers and an additional $5,000 of First Lien Party City Notes in connection with a rights offering and a private placement, as applicable; and (iii) the solicitations of certain consents with respect to the indentures governing Existing Notes.

The First Lien Party City Notes were issued pursuant to an indenture, dated as of the Settlement Date, among PCHI, as issuer, certain guarantors party thereto (the “Party City Guarantors”) and Ankura Trust Company, LLC (“Ankura”), as trustee and collateral trustee. The First Lien Party City Notes were issued in an aggregate amount of $161,669 and will mature on July 15, 2025. Interest on the First Lien Party City Notes accrues from the Settlement Date at a floating rate equal to the 6-month London Inter-Bank Offered Rate plus 500 basis points (with a floor of 75 basis points) per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing January 15, 2021. The First Lien Party City Notes are senior secured obligations of PCHI and the Party City Guarantors. The First Lien Party City Notes are pari passu in right of payment with all of PCHI’ other senior indebtedness, including the existing senior secured term loan facility and the ABL Facility, and are structurally subordinated to the First Lien Anagram Notes and the Second Lien Anagram Notes, to the extent of the value of the Anagram Collateral (as defined below). The First Lien Party City Notes are secured by a first priority lien on collateral that includes liens on substantially all assets (other than certain accounts, inventory, deposit accounts, securities accounts, related assets and general intangibles) of the Party City Guarantors, in each case subject to certain exceptions and permitted liens.

The First Lien Anagram Notes were issued pursuant to an indenture, dated as of the Settlement Date, among Anagram Holdings, as issuer, Anagram International, as co-issuer, certain guarantors party thereto (the “Anagram Guarantors”) and Ankura, as trustee and collateral trustee. The First Lien Anagram Notes were issued in an aggregate amount of $110,000 and will mature on August 15, 2025. Interest on the First Lien Anagram Notes accrues from the Settlement Date at (i) a rate of 10.00% per annum, payable in cash; and (ii) a rate of 5.00% per annum payable by increasing the principal amount of the outstanding First Lien Anagram Notes or issuing additional First Lien Anagram Notes, as the case may be, in each case payable semi-annually in arrears on February 15 and August 15 of each year, commencing February 15, 2021. The First Lien Anagram Notes are senior secured obligations of the Anagram Issuers and are pari passu in right of payment with all of the Anagram Issuers’ other senior indebtedness. The First Lien Anagram Notes are secured by a first priority lien on collateral that consists of substantially all assets and properties of the Anagram Issuers and the Anagram Guarantors, subject to certain exceptions and permitted liens (the “Anagram Collateral”). Such security interests are senior in priority to the security interests in such assets that secure the Second Lien Anagram Notes.

The Second Lien Anagram Notes were issued pursuant to an indenture, dated as of the Settlement Date, among Anagram Holdings, as issuer, Anagram International, as co-issuer, the Anagram Guarantors and Ankura, as trustee and collateral trustee. The Second Lien Anagram Notes were issued in an aggregate amount of $84,687 and will mature on August 15, 2026. Interest on the Second Lien Anagram Notes accrues from the Settlement Date at (i) a rate of 5.00% per annum, payable, at the Anagram Issuers’ option, entirely in cash or entirely by increasing the principal amount of the outstanding Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes, as the case may be; and (ii) a rate of 5.00% per annum payable by increasing the principal amount of the outstanding Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes, as the case may be, in each case payable semi-annually in arrears on February 15 and August 15 of each year, commencing February 15, 2021; provided, however, that on August 15, 2025, interest will be required to be paid by increasing the principal amount of the Second Lien Anagram Notes or issuing the principal amount of the Second Lien Anagram Notes or issuing additional Second Lien Anagram Notes. On February 15, 2026, the Anagram Issuers will prepay in cash a portion of the Second Lien Anagram Notes then outstanding in an amount necessary such that the Second Lien Anagram Notes are not treated as “applicable high yield discount obligations” within the meaning of Section 163(i) of the Internal Revenue Code of 1986, as amended. The Second Lien Anagram Notes are senior secured obligations of the Anagram Issuers and are pari passu in right of payment with all of the Anagram Issuers’ other senior indebtedness. The Second Lien Anagram Notes are secured by a second priority lien on the Anagram Collateral. Such security interests are junior to the security interests in such assets that secure the First Lien Anagram Notes.

The Company evaluated the refinancing transaction in accordance with ASC 470-60 Troubled Debt Restructuring. The exchange of the 2023 Notes and 2026 Notes for the First Lien Party City Notes, Second Lien Anagram Notes and shares of Company Common Stock, as well as the concurrent purchase by the participants in the exchange of First Lien Anagram Notes represents a troubled debt restructuring (“TDR”). As the future undiscounted cash flows of the restructured debt were less than the net carrying value of the Existing Notes (including accrued interest and unamortized discount) adjusted for Common Stock issued to the participants in the exchange and such participants’ purchase of and lenders’ participation in the First Lien Anagram Notes, the Company recognized a gain of $273,149 which reflects $18,902 of third-party fees incurred, and $27,007 of Common Stock issued in the exchange. The Company received $39,544 of cash from the participants in the exchange related to $44,500 of principal amount of First Lien Anagram Notes with an undiscounted value of $82,160, which includes interest expense. Interest expense is not currently recognized for this portion of the restructured debt.

Another portion of the restructured debt related to one holder of Existing Notes did not result in gain recognition as the undiscounted cash flows of the restructured debt was higher than the carrying value of the existing debt. The carrying amount of this portion of the restructured debt is $32,328 and the interest expense will be recognized prospectively at a 3.5% effective interest rate. Amounts attributed to purchasers of the First Lien Anagram Notes who were not participants in the exchange (principal balance of $50,500) are recognized at consideration received less allocated transaction costs (netting to $45,678) and the effective interest method will be used to recognize interest expense prospectively.

Note 17 – Revenue from Contracts with Customers

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Retail Net Sales:
North American Party City Stores	$	358,246	$	363,633	$	829,281	$	1,164,253
Other		6,235		5,834		21,331		6,524
Total Retail Net Sales	$	364,481	$	369,467	$	850,612	$	1,170,777
Royalties and Franchise Fees		1,722		1,886		4,349		6,089
Total Retail Revenue	$	366,203	$	371,353	$	854,961	$	1,176,866
Wholesale Net Sales:
Domestic	$	79,388	$	82,670	$	177,263	$	231,257
International		88,184		86,208		170,285		209,115
Total Wholesale Net Sales	$	167,572	$	168,878	$	347,548	$	440,372
Total Consolidated Revenue	$	533,775	$	540,231	$	1,202,509	$	1,617,238

Note 18 – Cash, Cash Equivalents and Restricted Cash

The Company’s September 30, 2020 consolidated balance sheet included $170,562 of cash and cash equivalents (with maturities of less than three months) and $125 of restricted cash. The Company’s December 31, 2019 consolidated balance sheet included $34,917 of cash and cash equivalents and $259 of restricted cash.

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

Note 19 – Kazzam, LLC

During the first quarter of 2017, the Company and Ampology, a subsidiary of Trivergence, reached an agreement to form a new legal entity, Kazzam, LLC (“Kazzam”), for the purpose of designing, developing and launching an online exchange platform for party-related services.

At December 31, 2019, although the Company owned 26% of Kazzam’s equity, Kazzam was a variable interest entity and the Company consolidated Kazzam into the Company’s financial statements. Further, the Company was funding all of Kazzam’s start-up activities via a loan to Kazzam and recorded its operating results in “development stage expenses” in the Company’s consolidated statement of operations and comprehensive (loss) income. Ampology’s ownership interest in Kazzam had been recorded in redeemable securities in the mezzanine of the Company’s consolidated balance sheet.

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

On March 23, 2020, the Company agreed to purchase Ampology’s interest in Kazzam in exchange for a three-year royalty on net service revenue and a warrant to purchase up to 1,000,000 shares of the Company’s common stock. The acquisition of Ampology’s interest in Kazzam is an equity transaction and the difference between the fair value of the consideration transferred and the carrying value of Ampology’s interest in Kazzam is recorded within the consolidated statement of stockholders’ equity.

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

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

Business Overview

Our Company

We are the leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue. The Company is a popular one-stop shopping destination for party supplies, balloons, and costumes. In addition to being a great retail brand, the Company is a global, world-class organization that combines state-of-the-art manufacturing and sourcing operations, and sophisticated wholesale operations complemented by a multi-channel retailing strategy and e-commerce retail operations. The Company is a leading player in its category and vertically integrated in its breadth and depth. The Company designs, manufactures, sources and distributes party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts and stationery throughout the world. As of September 30, 2020, the Company’s retail operations include 829 specialty retail party supply stores (including franchise stores) throughout the United States and Mexico operating under the names Party City and Halloween City, and e-commerce websites, including through the domain name PartyCity.com and others.

In addition to our retail operations, we are also one of the largest global designers, manufacturers and distributors of decorated consumer party products, with items found in over 40,000 retail outlets worldwide, including independent party supply stores, mass merchants, grocery retailers, e-commerce merchandisers and dollar stores. Our products are available in over 100 countries with the United Kingdom (“U.K.”), Canada, Germany, Mexico and Australia among the largest end markets for our products outside of the United States.

How We Assess the Performance of Our Company

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

Segments

We have two reporting segments: Retail and Wholesale.

Our retail segment generates revenue primarily through the sale of our party supplies, which are sold under the Amscan, Designware, Anagram and Costumes USA brand names through Party City, Halloween City and PartyCity.com. For the nine months ended September 30, 2020, 81.4% of the product that was sold by our retail segment was supplied by our wholesale segment and 30.2% of the product that was sold by our retail segment was self-manufactured.

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

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

Financial Measures

Revenues. Revenue from retail store operations is recognized at the point of sale as control of the product is transferred to the customer at such time. Retail e-commerce sales are recognized when the consumer receives the product as control transfers upon delivery. We estimate future retail sales returns and record a provision in the period in which the related sales are recorded based on historical information. Retail sales are reported net of taxes collected.

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

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

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

Comparable Retail Same-Store Sales. The growth in same-store sales represents the percentage change in same-store sales in the period presented compared to the prior year. Same-store sales include stores that were temporarily closed in 2020 due to COVID-19 but exclude the net sales of a store for any period if the store was not open during the same period of the prior year. Acquired stores are excluded from same-store sales until they are converted to the Party City format and included in our sales for the comparable period of the prior year. Comparable sales are calculated based upon stores that were open at least thirteen full months as of the end of the applicable reporting period. When a store is reconfigured or relocated within the same general territory, the store continues to be treated as the same store. If, during the period presented, a store was closed, sales from that store up to and including the closing day are included as same-store sales as long as the store was open during the same period of the prior year. Same-store sales for the Party City brand include North American retail e-commerce sales.

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

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

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

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

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

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

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

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

Development Stage Expenses. Development stage expenses represent start-up activities related to Kazzam, LLC (“Kazzam”).

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

Adjusted Net Income (Loss). Adjusted net income (loss) represents our net income (loss), adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation and impairment charges. We present adjusted net income because we believe it assists investors in comparing our performance across reporting periods on a consistent basis by eliminating the impact of items that we do not believe are indicative of our core operating performance.

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

Results of Operations

Impact of the COVID-19 Pandemic

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

The Company began reopening stores on May 1, 2020, in accordance with state and local health ordinances, and by June 22, 2020, all stores were re-opened. But our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. The disruption to the global economy and to our business, the sustained decline in market capitalization, and reduced fair value of certain intangibles and long-lived assets, resulted in the Company recognizing non-cash pre-tax impairment charges for the nine months ended September 30, 2020.

As described in Note 16 – Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, the Company recognized a gain on debt refinancing transactions.

Three Months Ended September 30, 2020 Compared To Three Months Ended September 30, 2019

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

	Three Months Ended September 30,
	2020						2019
	(Dollars in thousands)
Revenues:
Net sales	$	532,053		99.7		%	$	538,345		99.7		%
Royalties and franchise fees		1,722		0.3				1,886		0.3
Total revenues		533,775		100.0				540,231		100.0
Expenses:
Cost of sales		355,923		66.7				373,413		69.1
Wholesale selling expenses		11,950		2.2				16,084		3.0
Retail operating expenses		97,100		18.2				111,595		20.7
Franchise expenses		2,795		0.5				3,274		0.6
General and administrative expenses		42,191		7.9				43,062		8.0
Art and development costs		4,257		0.8				5,927		1.1
Development stage expenses		—		0.0				2,728		0.5
Store impairment and restructuring charges		1,926		0.4				2,574		0.5
Goodwill, intangibles and long-lived assets impairment		44,732		8.4				259,100		48.0
Total expenses		560,874		105.1				817,757		151.4
(Loss) from operations		(27,099	)	(5.1	)			(277,526	)	(51.4	)
Interest expense, net		13,422		2.5				29,424		5.4
Other (income) expense, net		(2,873	)	(0.5	)			2,047		0.4
(Gain) on debt refinancing		(273,149	)	(51.2	)			—		0.0
Income (loss) before income taxes		235,501		44.1				(308,997	)	(57.2	)
Income tax (benefit)		(4,164	)	(0.8	)			(27,252	)	(5.0	)
Net income (loss)		239,665		44.9				(281,745	)	(52.2	)
Less: Net (loss) attributable to noncontrolling interests		(42	)	—				(212	)	—
Net income (loss) attributable to common shareholders of Party City Holdco Inc.	$	239,707		44.9		%	$	(281,533	)	(52.1	)	%
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	2.25					$	(3.02	)
Net income (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	2.24					$	(3.02	)

Revenues

Total revenues for the third quarter of 2020 were $533.8 million and were $6.4 million, or 1.2%, lower than the third quarter of 2019. The following table sets forth the Company’s total revenues for the three months ended September 30, 2020 and 2019.

	Three Months Ended September 30,
	2020							2019
	Dollars in Thousands			Percentage of Total Revenues				Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	346,621			64.9		%	$	383,425			71.0		%
Eliminations		(179,049	)		(33.5	)			(214,547	)		(39.7	)
Net wholesale		167,572			31.4				168,878			31.3
Retail		364,481			68.3				369,467			68.4
Total net sales		532,053			99.7				538,345			99.7
Royalties and franchise fees		1,722			0.3				1,886			0.3
Total revenues	$	533,775			100.0		%	$	540,231			100.0		%

Retail

Retail net sales during the third quarter of 2020 were $364.5 million and were $5.0 million, or 1.3%, lower than during the third quarter of 2019. Retail net sales at our North American Party City stores totaled $329.9 million and were $3.5 million, or 1.1% higher than in the third quarter of 2019. Growth in same-store sales for the Party City brand was partially offset by lower non-comp sales from the divestiture of 65 Canadian Party City stores in October 2019 and the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. In addition, store sales increased due to the acquisition of two franchise stores and the opening of two new stores during the twelve months ended September 30, 2020. Global retail e-commerce sales totaled $32.9 million during the third quarter of 2020 and were $4.6 million, or 12.2% lower than during the corresponding quarter of 2019. Sales at the temporary Halloween City stores totaled $0.7 million and were $3.8 million lower than in the third quarter of 2019 due to opening 25 Halloween City stores in 2020 compared to 256 stores in 2019. Sales at other store formats totaled $1.0 million during the third quarter of 2020.

Same-store sales for the Party City brand (including North American retail e-commerce sales) increased by 8.3% during the third quarter of 2020, principally due to growth in everyday sales particularly in the balloon, birthday, and entertaining categories.

Our North American retail e-commerce sales, which include our Amazon marketplace sales, decreased by 28.7% compared to the third quarter of 2019 and, when adjusting for the impact of our “buy online, pick-up in store” program which includes our curbside pickup and delivery (such sales are included in our store sales), increased by 36.0%.

Excluding the impact of e-commerce, same-store sales increased by 4.5%.

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

Wholesale

Wholesale net sales during the third quarter of 2020 totaled $167.6 million and were $1.3 million, or 0.8%, lower than the third quarter of 2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $57.9 million and were $8.0 million, or 12.1% lower than during 2019 principally due to lower demand from independent third party customers partially offset by growth in Party City franchise stores and mass channel business. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $21.5 million during the third quarter of 2020 and were $4.7 million, or 27.9%, higher than during the corresponding quarter of 2019 principally due to demand growth in domestic distributor and value channels. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $88.2 million and were $2.0 million, or 2.3%, higher than in 2019. Foreign currency translation positively impacted sales by approximately $1.5 million.

Intercompany sales to our retail affiliates totaled $179.0 million during the third quarter of 2020 and were $35.5 million lower than during the corresponding quarter of 2019. Intercompany sales represented 51.7% of total wholesale sales during the third quarter of 2020 and were 16.5% lower than during the third quarter of 2019, principally due to a planned reduction in purchases as part of the initiative to reduce the overall product assortment as well as the impact of fewer Party City Corporate stores due to the sale of 65 Canadian Party City stores in October 2019 and the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the third quarter of 2020 totaled $1.7 million and were $0.2 million lower than during the third quarter of 2019 primarily due to the acquisition of 2 franchise stores and closure of 6 franchise stores during the twelve months ended September 30, 2020.

Gross Profit

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

	Three Months Ended September 30,
	2020					2019
	Dollars in Thousands		Percentage of Net Sales			Dollars in Thousands		Percentage of Net Sales
Retail	$	133,817		36.7	%	$	128,692		34.8	%
Wholesale		42,313		25.3			36,240		21.5
Total Gross Profit	$	176,130		33.1	%	$	164,932		30.6	%

The gross profit margin on net sales at retail during the third quarter of 2020 was 36.7% or 190 basis points higher than during the corresponding quarter of 2019. The increase was primarily due to lower sales promotions, favorable share of shelf gains, and lower year over year markdowns in conjunction with the Company’s “store optimization program” (see “operating expenses” below for further discussion) partially offset by increased costs of freight and helium. Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 29.6% during the third quarter of 2020 was 4.2% higher as compared to the third quarter of 2019. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 81.1% during the quarter or 2.8% higher than during the third quarter of 2019.

The gross profit margin on net sales at wholesale during the third quarters of 2020 and 2019 was 25.3% and 21.5%, respectively. The increase was principally due to favorable product mix including increased sale of metallic balloons and favorable customer mix.

Operating expenses

Wholesale selling expenses were $12.0 million during the third quarter of 2020 and were $4.1 million lower than during the corresponding quarter of 2019, largely due to lower payroll costs as well as lower travel, marketing, merchant and commission expenses. Wholesale selling expenses were 7.1% and 9.5% of net wholesale sales during the third quarters of 2020 and 2019, respectively.

Retail operating expenses during the third quarter of 2020 were $97.1 million and were $14.5 million lower than the corresponding quarter of 2019. The decrease was primarily due to the divestiture of 65 Canada Retail stores in October 2019, lower advertising spend, and lower payroll and occupancy costs due to the closure of 55 and 21 stores in conjunction with the 2019 and 2020 store optimization programs, respectively. These lower expenses were partially offset by higher costs associated with the acquisition of Livario and Webdots in November of 2019. Retail operating expenses were 26.6% and 30.2% of retail sales during the third quarters of 2020 and 2019, respectively.

Franchise expenses during the third quarter of 2020 and 2019 were $2.8 million and $3.3 million, respectively.

General and administrative expenses during the third quarters of 2020 totaled $42.2 million and were $0.9 million, or 2.0%, lower than in the third quarter of 2019 principally due to lower travel expenses, employee payroll costs, and stock compensation (see Note 10 – Capital Stock, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q), partially offset by higher bad debt, depreciation, and insurance expenses. General and administrative expenses as a percentage of total revenues were 7.9% and 8.0% during the third quarters of 2020 and 2019, respectively.

Art and development costs were $4.3 million and $5.9 million during the third quarters of 2020 and 2019, respectively.

Development stage expenses represent third quarter 2019 costs related to Kazzam which are zero in the third quarter of 2020 due to the acquisition of Ampology’s interest in Kazzam, LLC in an equity transaction in March of 2020. See Note 19 – Kazzam, LLC in Item 1 for further discussion.

During the three months ended March 31, 2020, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”) and, after careful consideration and evaluation of the store locations, the Company made the decision in the first quarter of 2020 to accelerate the optimization of its store portfolio with the closure of approximately 21 stores in the third quarter of 2020. Closed stores were primarily located in close proximity to other Party City stores. An additional $3.1 million expense was recorded for the stores during the three months ended September 30, 2020. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, for the three months ended March 31, 2020 the Company estimated lease impairment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19.

Interest expense, net

Interest expense, net, totaled $13.4 million during the third quarter of 2020, compared to $29.4 million during the third quarter of 2019. The decrease in interest principally reflects forgiveness of interest as part of the debt refinancing in the third quarter of 2020. Refer to Note 16 – Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion.

Other (income) expense, net

For the third quarters of 2020 and 2019, other (income) expense, net, totaled $(2.9) million and $2.0 million, respectively. The change is mostly due to termination of Punchbowl “put” and “call” options during 2019.

(Gain) on debt refinancing

Income tax benefit

The effective income tax rate for the three months ended September 30, 2020, (1.8)% is different from the statutory rate primarily due the excludable portion of the cancellation of debt income, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

Nine Months Ended September 30, 2020 Compared To Nine Months Ended September 30, 2019

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

	Nine Months Ended September 30,
	2020						2019
	(Dollars in thousands)
Revenues:
Net sales	$	1,198,160		99.6		%		$	1,611,149		99.6		%
Royalties and franchise fees		4,349		0.4					6,089		0.4
Total revenues		1,202,509		100.0					1,617,238		100.0
Expenses:
Cost of sales		890,587		74.1					1,065,511		65.9
Wholesale selling expenses		37,115		3.1					50,929		3.1
Retail operating expenses		250,502		20.8					302,756		18.7
Franchise expenses		9,225		0.8					9,813		0.6
General and administrative expenses		162,118		13.5					126,497		7.8
Art and development costs		13,095		1.1					17,568		1.1
Development stage expenses		2,932		0.2					7,966		0.5
Gain on sale/leaseback transaction		—		0.0					(58,381	)	(3.6	)
Store impairment and restructuring charges		20,818		1.7					25,817		1.6
Goodwill and intangibles impairment		581,380		48.3					259,100		16
Total expenses		1,967,772		163.6					1,807,576		111.8
(Loss) from operations		(765,263	)	(63.6	)				(190,338	)	(11.8	)
Interest expense, net		63,954		5.3					88,857		5.5
Other expense, net		4,287		0.4					6,643		0.4
(Gain) on debt refinancing		(273,149	)	(22.7	)				—		0.0
(Loss) before income taxes		(560,355	)	(46.6	)				(285,838	)	(17.7	)
Income tax (benefit)		(128,293	)	(10.7	)				(21,809	)	(1.3	)
Net (loss)		(432,062	)	(35.9	)				(264,029	)	(16.3	)
Less: Net (loss) attributable to noncontrolling interests		(241	)	—					(352	)	—
Net (loss) attributable to common shareholders of Party City Holdco Inc.	$	(431,821	)	(35.9	)	%		$	(263,677	)	(16.3	)	%
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Basic	$	(4.41	)					$	(2.83	)
Net (loss) per share attributable to common shareholders of Party City Holdco Inc.–Diluted	$	(4.41	)					$	(2.83	)

Revenues

Total revenues for the first nine months of 2020 were $1,202.5 million and were $414.7 million, or 25.6%, lower than the first nine months of 2019. The following table sets forth the Company’s total revenues for the nine months ended September 30, 2020 and 2019.

	Nine Months Ended September 30,
	2020							2019
	Dollars in Thousands			Percentage of Total Revenues					Dollars in Thousands			Percentage of Total Revenues
Net Sales:
Wholesale	$	692,715			57.6		%		$	962,793			59.5		%
Eliminations		(345,167	)		(28.7	)				(522,421	)		(32.3	)
Net wholesale		347,548			28.9					440,372			27.2
Retail		850,612			70.7					1,170,777			72.4
Total net sales		1,198,160			99.6					1,611,149			99.6
Royalties and franchise fees		4,349			0.4					6,089			0.4
Total revenues	$	1,202,509			100.0		%		$	1,617,238			100.0		%

Retail

Retail net sales during the first nine months of 2020 were $850.6 million and were $320.2 million, or 27.3%, lower than during the first nine months of 2019. Retail net sales at our North American Party City stores totaled $737.5 million and were $323.0 million, or 30.5% lower than in the first nine months of 2019 principally due to the temporary closure of all Party City stores in response to the COVID-19 pandemic starting on March 18, 2020 with all stores reopened by June 22, 2020. Additional factors impacting the sales decline included the divestiture of 65 Canadian Party City stores in October 2019, and the closure of 55 and 21 Party City stores in conjunction with the 2019 and 2020 store optimization programs, respectively. These negative factors affecting sales were partially offset by the acquisition of two franchise stores and the opening of two new stores during the twelve months ended September 30, 2020. Global retail e-commerce sales totaled $110.5 million during the first nine months of 2020 and were $6.5 million, or 6.3% higher than the first nine months of 2019. Sales at the temporary Halloween City stores totaled $0.7 million and were $3.8 million lower than in the first nine months of 2019 due to opening 25 Halloween City stores in 2020 compared to 256 stores in 2019. Sales at other store formats totaled $1.9 million during the first nine months of 2020.

Same-store sales for the Party City brand (including North American retail e-commerce sales) decreased by 21.8% during the first nine months of 2020, principally due to the impact of the temporary closure of all Party City stores in response to the COVID-19 pandemic.

Our North American retail e-commerce sales, which include our Amazon marketplace sales, decreased by 13.9% compared to the first nine months of 2019 and, when adjusting for the impact of our “buy online, pick-up in store” program which includes our curbside pickup and delivery launched on March 25, 2020 (such sales are included in our store sales), increased by 40.1%.

Excluding the impact of e-commerce, same-store sales decreased by 29.3%.

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

Wholesale

Wholesale net sales during the first nine months of 2020 totaled $347.5 million and were $92.9 million, or 21.1%, lower than the first nine months of 2019. Net sales to domestic party goods retailers and distributors (including our franchisee network) totaled $126.2 million and were $50.3 million, or 28.5%, lower than during 2019 principally due to lower distributor demand and closed franchise and independent party goods stores as a result of the COVID-19 pandemic. Net sales of metallic balloons to domestic distributors and retailers (including our franchisee network) totaled $51.1 million during the first nine months of 2020 and were $3.7 million, or 6.7%, lower than during the corresponding period of 2019 principally due to the negative impact of the COVID-19 pandemic earlier in the year partially offset by demand recovery in the domestic distributer and value channels later in the year. Our international sales (which include U.S. export sales and exclude U.S. import sales from foreign subsidiaries) totaled $170.3 million and were $38.8 million, or 18.6%, lower than in 2019. Foreign currency translation negatively impacted sales by approximately $0.7 million.

Intercompany sales to our retail affiliates totaled $345.2 million during the first nine months of 2020 and were $177.2 million lower than during the first nine months of 2019. Intercompany sales represented 49.8% of total wholesale sales during the first nine months of 2020 and were 33.9% lower than during the first nine months of 2019, principally reflecting the impact of the Party City store closures related to the COVID-19 pandemic. The intercompany sales of our wholesale segment are eliminated against the intercompany purchases of our retail segment in the consolidated financial statements.

Royalties and franchise fees

Royalties and franchise fees for the first nine months of 2020 totaled $4.3 million and were $1.8 million lower than during the first nine months of 2019 primarily due to lower sales as a result of store closures resulting from the COVID-19 pandemic.

Gross Profit

The following table sets forth the Company’s gross profit for the nine months ended September 30, 2020 and 2019.

	Nine Months Ended September 30,
	2020					2019
	Dollars in Thousands		Percentage of Net Sales				Dollars in Thousands		Percentage of Net Sales
Retail	$	257,035		30.2	%		$	436,761		37.3	%
Wholesale		50,538		14.5				108,877		24.7
Total Gross Profit	$	307,573		25.7	%		$	545,638		33.9	%

The gross profit margin on net sales at retail during the first nine months of 2020 was 30.2% or 710 basis points lower than during the corresponding nine months of 2019. The decrease was mainly due to sales deleverage from the temporary closure of all the Company’s retail stores in response to the COVID-19 pandemic starting on March 18, 2020 with all stores reopened by June 22, 2020. In addition, the increased costs of freight and helium contributed to the margin decline. The declines in margin were partially offset by margin increases due to favorable share of shelf gains and lower year over year markdowns in conjunction with the Company’s “store optimization program” (see “operating expenses” below for further discussion). Our manufacturing share of shelf (i.e., the percentage of our retail product cost of sales manufactured by our wholesale segment) of 30.2% during the first nine months of 2020 was 350 bps higher as compared to the first nine months of 2019. Our wholesale share of shelf at our Party City stores and our North American retail e-commerce operations (i.e., the percentage of our retail product cost of sales supplied by our wholesale segment) was 81.4% during the first nine months of 2020 or 340 bps higher than during the first nine months of 2019.

The gross profit margin on net sales at wholesale during the first nine months of 2020 and 2019 was 14.5% and 24.7%, respectively. The decrease was principally due to the deleveraging of distribution and manufacturing costs from lower sales to closed franchise and independent party stores due to the COVID-19 pandemic as well as increased rent associated with the sale leaseback transaction.

Operating expenses

Wholesale selling expenses were $37.1 million during the first nine months of 2020 and were $13.8 million lower than during the corresponding nine months of 2019 principally due to lower payroll costs as well as lower travel, marketing, merchant and commission expenses. Wholesale selling expenses were 10.7% and 11.6% of net wholesale sales during the first nine months of 2020 and 2019, respectively.

Retail operating expenses during the first nine months of 2020 were $250.5 million and were $52.3 million lower than the corresponding nine months of 2019. The decrease was mainly due to the COVID-19 pandemic impact on costs including employee payroll from furloughs and lower advertising and credit card fees. In addition, retail operating expenses were lower due to the sale of the 65 Canada Retail stores, and the closing of 55 US stores in conjunction with the store optimization program partially offset by higher costs associated with the acquisition of Livario and Webdots in November of 2019. Retail operating expenses were 29.4% and 25.9% of retail sales during the first nine months of 2020 and 2019, respectively.

Franchise expenses during the first nine months of 2020 and 2019 were $9.2 million and $9.8 million, respectively.

General and administrative expenses during the first nine months of 2020 totaled $162.1 million and were $35.6 million, or 28.2%, higher than in the first nine months of 2019 mainly due to higher professional fees, increased depreciation, stock compensation (see Note 10 – Capital Stock, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q), higher bad debt expense, and new executive leadership compensation partially offset by lower employee payroll from furloughs associated with the COVID-19 pandemic and less travel. General and administrative expenses as a percentage of total revenues were 13.5% and 7.8% during the first nine months of 2020 and 2019, respectively.

Art and development costs were $13.1 million and $17.6 million during the first nine months of 2020 and 2019, respectively.

Development stage expenses represent costs related to Kazzam.

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

During the first nine months of 2020 and 2019, the Company performed a comprehensive review of its store locations aimed at improving the overall productivity of such locations (“store optimization program”) and, after careful consideration and evaluation of the store locations, the Company made the decision to accelerate the optimization of its store portfolio with the closure of approximately 21 and 55 stores in the first nine months of 2020 and 2019, respectively. Closed stores were primarily located in close proximity to other Party City stores. These closings should provide the Company with capital flexibility to expand into underserved markets. In addition, the Company estimated lease impairment for open stores where sales were affected due to the outbreak of, and local, state and federal governmental responses to, COVID-19.

Goodwill, intangibles and long-lived assets impairment charges for the nine months ended September 30, 2020 were $581.4 million. The non-cash pre-tax impairment charges were the result of a sustained decline in the Company’s market capitalization, significantly reduced customer demand for its products due to COVID-19 and reduced fair value of certain intangibles and long-lived assets. See Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion.

Interest expense, net

Interest expense, net, totaled $64.0 million during the first nine months of 2020, compared to $88.9 million during the first nine months of 2019. The decrease in interest principally reflects lower debt following a debt refinancing in the third quarter of 2020. Refer to Note 16 – Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion.

Other expense, net

For the first nine months of 2020 and 2019, other expense, net, totaled $4.3 million and $6.6 million, respectively. The change is primarily due the termination of Punchbowl “put” and “call” options in 2019.

(Gain) on debt refinancing

Income tax benefit

The effective income tax rate for the nine months ended September 30, 2020, 22.9%, is different from the statutory rate primarily due the non-deductible portions of the goodwill impairment charges noted above, the excludable portion of the cancellation of debt income, state taxes, and a rate benefit related to the carryback of a net operating loss to years when the statutory income tax rate was 35.0%.

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

The Company presents adjusted EBITDA, adjusted net income and adjusted net income per common share - diluted as supplemental measures of its operating performance. The Company defines EBITDA as net income (loss) before interest expense, net, income taxes, depreciation and amortization and defines adjusted EBITDA as EBITDA, as further adjusted to eliminate the impact of certain items that the Company does not consider indicative of our core operating performance. These further adjustments are itemized below. Adjusted net income represents the Company’s net income (loss) adjusted for, among other items, intangible asset amortization, non-cash purchase accounting adjustments, amortization of deferred financing costs and original issue discounts, equity-based compensation, and impairment charges. Adjusted net income per common share – diluted represents adjusted net income divided by diluted weighted average common shares outstanding. The Company presents these measures as supplemental measures of its operating performance. You are encouraged to evaluate these adjustments and the reasons the Company considers them appropriate for supplemental analysis. In evaluating the measures, you should be aware that in the future the Company may incur expenses that are the same as, or similar to, some of the adjustments in this presentation. The Company’s presentation of adjusted EBITDA, adjusted net income and adjusted net income per common share-diluted should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items. The Company presents the measures because the Company believes they assist investors in comparing the Company’s performance across reporting periods on a consistent basis by eliminating items that the Company does not believe are indicative of its core operating performance. In addition, the Company uses adjusted EBITDA: (i) as a factor in determining incentive compensation, (ii) to evaluate the effectiveness of its business strategies and (iii) because its credit facilities use adjusted EBITDA to measure compliance with certain covenants. The Company also believes that adjusted net income and adjusted net income per common share - diluted are helpful benchmarks to evaluate its operating performance.

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
(Dollars in thousands)
Net (loss) income	$	239,665		$	(281,745	)	$	(432,062	)	$	(264,029	)
Interest expense, net		13,422			29,424			63,954			88,857
Income tax (benefit)		(4,164	)		(27,252	)		(128,293	)		(21,809	)
Depreciation and amortization		17,278			19,155			57,796			62,380
EBITDA		266,201			(260,418	)		(438,605	)		(134,601	)
Non-cash purchase accounting adjustments		—			—			—			2,757
Store impairment and restructuring charges (a)		6,763			8,694			36,285			54,960
Other restructuring, retention and severance (b)		2,957			(73	)		11,701			5,248
Goodwill, intangibles and long-lived assets impairment (c)		44,732			259,100			581,380			259,100
Deferred rent (d)		254			446			(2,618	)		(1,042	)
Closed store expense (e)		1,247			2,326			2,882			3,424
Foreign currency losses/(gains), net		(3,312	)		646			955			486
Stock option expense – time – based (f)		111			409			671			1,150
Stock option expense – performance – based (n)		—			—			7,847			—
Restricted stock unit and restricted cash awards expense – performance-based		510			—			510			—
Non-employee equity-based compensation (g)		—			128			1,033			386
Undistributed income (loss) in equity method investments		(59	)		7			356			(195	)
Corporate development expenses (h)		581			4,588			6,193			11,782
Restricted stock units – time-based (i)		429			610			1,568			1,543
Restricted stock unit expense – performance-based (m)		—			560			—			1,036
Non-recurring legal settlements/costs		661			194			7,170			1,795
(Gain) on debt refinancing (p)		(273,149	)		—			(273,149	)		—
Gain on sale/leaseback transaction (o)		—			—			—			(58,381	)
COVID - 19 (l)		679			—			71,059			—
Other		546			(75	)		3,034			217
Adjusted EBITDA	$	49,151		$	17,142		$	18,272		$	149,665

				Three Months Ended September 30, 2020 EBITDA Adjustments
	September 30, 2020 GAAP Basis (as reported)				Goodwill, intangibles and long-lived assets impairment (c)			Store impairment and restructuring charges (a)			Gain on debt refinancing (p)		Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)(n)			Deferred Rent (d)			Other restructuring, retention and severance (b)			Closed store expense (e)			COVID- 19 (l)			Foreign currency losses		Other			September 30, 2020 Non-GAAP basis
Revenues:
Net sales	$	532,053																																					$	532,053
Royalties and franchise fees		1,722																																						1,722
Total revenues		533,775																																						533,775
Cost of sales		355,923							(4,837	)													(80	)								(1,266	)				(469	)		349,271
Wholesale selling expenses		11,950																																						11,950
Retail operating expenses		97,100																					(224	)					(1,225	)		(1,745	)							93,906
Franchise expenses		2,795																																						2,795
General and administrative expenses		42,191												(370	)		(661	)		(1,050	)		50			(2,957	)		(22	)		2,332								39,513
Art and development costs		4,257																																						4,257
Store impairment and restructuring charges		1,926							(1,926	)																														—
Goodwill, intangibles and long-lived assets impairment		44,732				(44,732	)																																	—
Total expenses		560,874				(44,732	)		(6,763	)		—		(370	)		(661	)		(1,050	)		(254	)		(2,957	)		(1,247	)		(679	)		—		(469	)		501,692
(Loss) from operations		(27,099	)																																					32,083
Interest expense, net		13,422																																						13,422
Other (income) expense, net		(2,873	)											(211	)																				3,312		(18	)		210
(Gain) on debt refinancing		(273,149	)									273,149																												—
Income (loss) before income taxes		235,501																																						18,451
Interest expense, net		13,422																																						13,422
Depreciation and amortization		17,278																																						17,278
EBITDA		266,201																																						49,151
Adjustments to EBITDA		(217,050	)			(44,732	)		(6,763	)		273,149		(581	)		(661	)		(1,050	)		(254	)		(2,957	)		(1,247	)		(679	)		3,312		(487	)		—
Adjusted EBITDA	$	49,151			$	(44,732	)	$	(6,763	)	$	273,149	$	(581	)	$	(661	)	$	(1,050	)	$	(254	)	$	(2,957	)	$	(1,247	)	$	(679	)	$	3,312	$	(487	)	$	49,151

				Three Months Ended September 30, 2019 EBITDA Adjustments
	September 30, 2019 GAAP Basis (as reported)			Goodwill, intangibles and long-lived assets impairment (c)			Store impairment and restructuring charges (a)			Gain on sale/leaseback transaction (o)		Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units – time-based (f)(g)(i)(m)			Deferred Rent (d)			Other restructuring, retention and severance (b)		Closed store expense (e)			Foreign currency gains			Other		September 30, 2019 Non-GAAP basis
Revenues:
Net sales	$	538,345																																$	538,345
Royalties and franchise fees		1,886																																	1,886
Total revenues		540,231																																	540,231
Cost of sales		373,413						(6,120	)													(656	)												366,637
Wholesale selling expenses		16,084																																	16,084
Retail operating expenses		111,595																									(2,240	)							109,355
Franchise expenses		3,274																																	3,274
General and administrative expenses		43,062														(194	)		(1,707	)		210			73		(86	)							41,358
Art and development costs		5,927																																	5,927
Development stage expenses		2,728											(2,728	)																					—
Store impairment and restructuring charges		2,574						(2,574	)																										—
Goodwill, intangibles and long-lived assets impairment		259,100			(259,100	)																													—
Total expenses		817,757			(259,100	)		(8,694	)		—		(2,728	)		(194	)		(1,707	)		(446	)		73		(2,326	)		—			—		542,635
Income from operations		(277,526	)																																(2,404	)
Interest expense, net		29,424																																	29,424
Other expense, net		2,047											(1,860	)																(646	)		68		(391	)
Income before income taxes		(308,997	)																																(31,437	)
Interest expense, net		29,424																																	29,424
Depreciation and amortization		19,155																																	19,155
EBITDA		(260,418	)																																17,142
Adjustments to EBITDA		277,560			(259,100	)		(8,694	)		—		(4,588	)		(194	)		(1,707	)		(446	)		73		(2,326	)		(646	)		68		—
Adjusted EBITDA	$	17,142		$	(259,100	)	$	(8,694	)	$	—	$	(4,588	)	$	(194	)	$	(1,707	)	$	(446	)	$	73	$	(2,326	)	$	(646	)	$	68	$	17,142

				Nine Months Ended September 30, 2020 EBITDA Adjustments
	September 30, 2020 GAAP Basis (as reported)			Goodwill, intangibles and long-lived assets impairment (c)			Store impairment and restructuring charges (a)			Gain on debt refinancing (p)		Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units (f)(g)(i)(n)			Deferred Rent (d)			Other restructuring, retention and severance (b)			Closed store expense (e)			COVID- 19 (l)			Foreign currency losses			Other			September 30, 2020 Non-GAAP basis
Revenues:
Net sales	$	1,198,160																																					$	1,198,160
Royalties and franchise fees		4,349																																						4,349
Total revenues		1,202,509																																						1,202,509
Cost of sales		890,587						(15,467	)													(214	)		(4,437	)					(42,446	)					(898	)		827,125
Wholesale selling expenses		37,115											(1,840	)																	(623	)								34,652
Retail operating expenses		250,502																				2,685						(2,733	)		(16,312	)								234,142
Franchise expenses		9,225																													(672	)								8,553
General and administrative expenses		162,118											(570	)		(7,170	)		(10,596	)		147			(7,264	)		(149	)		(11,006	)								125,510
Art and development costs		13,095																																						13,095
Development stage expenses		2,932											(2,932	)																										—
(Gain) on sale/leaseback transaction		—																																						—
Store impairment and restructuring charges		20,818						(20,818	)																															—
Goodwill, intangibles and long-lived assets impairment		581,380			(581,380	)																																		—
Total expense		1,967,772			(581,380	)		(36,285	)		—		(5,342	)		(7,170	)		(10,596	)		2,618			(11,701	)		(2,882	)		(71,059	)		—			(898	)		1,243,077
(Loss) from operations		(765,263	)																																					(40,568	)
Interest expense, net		63,954																																						63,954
Other expense, net		4,287											(851	)					(1,033	)														(955	)		(2,492	)		(1,044	)
(Gain) on debt refinancing		(273,149	)								273,149																													—
(Loss) before income taxes		(560,355	)																																					(103,478	)
Interest expense, net		63,954																																						63,954
Depreciation and amortization		57,796																																						57,796
EBITDA		(438,605	)																																					18,272
Adjustments to EBITDA		456,877			(581,380	)		(36,285	)		273,149		(6,193	)		(7,170	)		(11,629	)		2,618			(11,701	)		(2,882	)		(71,059	)		(955	)		(3,390	)		—
Adjusted EBITDA	$	18,272		$	(581,380	)	$	(36,285	)	$	273,149	$	(6,193	)	$	(7,170	)	$	(11,629	)	$	2,618		$	(11,701	)	$	(2,882	)	$	(71,059	)	$	(955	)	$	(3,390	)	$	18,272

				Nine Months Ended September 30, 2019 EBITDA Adjustments
	September 30, 2019 GAAP Basis (as reported)			Goodwill, intangibles and long-lived assets impairment (c)			Store impairment and restructuring charges (a)			Gain on sale/leaseback transaction (o)		Corporate development expenses (h)			Legal			Stock Option Expense/Non- Employee Equity Compensation/ Restricted stock units (f)(g)(i)(m)			Deferred Rent (d)		Other restructuring, retention and severance (b)			Closed store expense (e)			Non-Cash Purchase Accounting Adjustments			Foreign currency gains			Other			September 30, 2019 Non-GAAP basis
Revenues:
Net sales	$	1,611,149																																				$	1,611,149
Royalties and franchise fees		6,089																																					6,089
Total revenues		1,617,238																																					1,617,238
Cost of sales		1,065,511						(29,143	)													831																	1,037,199
Wholesale selling expenses		50,929																																					50,929
Retail operating expenses		302,756																						(31	)		(3,111	)											299,614
Franchise expenses		9,813																																					9,813
General and administrative expenses		126,497														(1,795	)		(4,115	)		211		(5,217	)		(313	)											115,268
Art and development costs		17,568																																					17,568
Development stage expenses		7,966											(7,965	)																									1
Gain on sale/leaseback transaction		(58,381	)								58,381																												—
Store impairment and restructuring charges		25,817						(25,817	)																														—
Goodwill, intangibles and long-lived assets impairment		259,100			(259,100	)																																	—
Total expenses		1,807,576			(259,100	)		(54,960	)		58,381		(7,965	)		(1,795	)		(4,115	)		1,042		(5,248	)		(3,424	)		—			—			—			1,530,392
Income from operations		(190,338	)																																				86,846
Interest expense, net		88,857																																					88,857
Other expense, net		6,643											(3,817	)																(2,757	)		(486	)		(22	)		(439	)
(Loss) before income taxes		(285,838	)																																				(1,572	)
Interest expense, net		88,857																																					88,857
Depreciation and amortization		62,380																																					62,380
EBITDA		(134,601	)																																				149,665
Adjustments to EBITDA		284,266			(259,100	)		(54,960	)		58,381		(11,782	)		(1,795	)		(4,115	)		1,042		(5,248	)		(3,424	)		(2,757	)		(486	)		(22	)		—
Adjusted EBITDA	$	149,665		$	(259,100	)	$	(54,960	)	$	58,381	$	(11,782	)	$	(1,795	)	$	(4,115	)	$	1,042	$	(5,248	)	$	(3,424	)	$	(2,757	)	$	(486	)	$	(22	)	$	149,665

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
(Dollars in thousands, except per share amounts)
Income (loss) before income taxes	$	235,501		$	(308,997	)	$	(560,355	)	$	(285,838	)
Intangible asset amortization		2,899			3,553			8,444			10,528
Non-cash purchase accounting adjustments		—			424			—			4,200
Amortization of deferred financing costs and original issuance discounts (j)		875			1,222			3,276			3,511
Store impairment and restructuring charges (a)		1,321			8,694			29,475			54,960
Other restructuring charges (b)		2,622			(263	)		10,139			2,822
Goodwill, intangibles and long-lived assets impairment (c)		44,732			259,100			581,380			259,100
Non-employee equity-based compensation (g)		—			128			1,033			386
Refinancing charges (j)		—			—			—			36
Non-recurring legal settlements/costs		605			—			7,026			—
Stock option expense – time – based (f)		110			409			671			1,150
Stock option expense – performance – based (n)		—			—			7,847			—
Gain on sale/leaseback transaction (o)		—			—			—			(58,381	)
(Gain) on debt refinancing (p)		(273,149	)		—			(273,149	)		—
Restricted stock unit expense – performance-based (m)		—			560			—			1,036
COVID - 19 (l)		733			—			71,113			—
Adjusted income (loss) before income taxes		16,249			(35,170	)		(113,100	)		(6,490	)
Adjusted income tax (benefit) expense (k)		5,234			(9,459	)		(36,416	)		(2,117	)
Adjusted net (loss) income	$	11,015		$	(25,711	)	$	(76,684	)	$	(4,373	)
Adjusted net (loss) income per common share – diluted	$	0.10		$	(0.28	)	$	(0.78	)	$	(0.05	)
Weighted-average number of common shares-diluted		106,875,631			93,346,448			97,872,174			93,271,392

(a)

During the three and nine months ended September 30, 2019, the Company initiated a store optimization program under which it identified 55 stores for closure, out of which 35 stores were closed in 2019 and 20 stores were closed in January 2020. In addition, 21 stores identified for closure in the first quarter of 2020 were closed in the third quarter. In conjunction with the program, during the nine months ended September 30, 2020, the Company recorded the following charges: inventory reserves: $12,880, operating lease asset impairment: $14,530 (including $6,051 related primarily to its active stores that were closed in earlier in 2020 due to COVID-19), plant and equipment impairment: $2,065 and labor and other costs related to closing the stores: $4,223. During the first nine months ended September 30, 2019, the Company recorded the following charges related to the store optimization program: inventory reserves: $21,285, operating lease asset impairment: $14,149, property, plant and equipment impairment: $4,680, labor and other costs relates to closing stores: $6,327 and severance: $661. See Note 3 – Store Impairment and Restructuring Charges in Item 1 for further discussion. Additionally, during the process of liquidating the inventory in such stores, the Company lost margin of $5,230.

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

(c)	As a result of a sustained decline in market capitalization and reduced fair value of certain intangibles and long-lived assets, the Company recognized non-cash pre-tax goodwill and intangibles impairment charges for the nine months ended September 30, 2020 totaling $581.4 million.

(d)

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

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

(f)	Represents non-cash charges related to stock options – time-based and performance-based.

(g)	The acquisition of Ampology’s interest in Kazzam, LLC in an equity transaction. See Note 19 – Kazzam, LLC in Item 1 for further discussion.

(h)	Primarily represents costs for Kazzam (see Note 19 – Kazzam, LLC in Item 1 for further discussion) and third-party costs related to acquisitions (principally legal and diligence expenses).

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

(j)

During February 2018, the Company amended the Term Loan Credit Agreement. In conjunction with the amendment, the Company wrote-off capitalized deferred financing costs, original issue discounts and call premiums. The amounts are included in “Amortization of deferred financing costs and original issuance discounts” in the adjusted net income table above.

(k)

Represents income tax expense/benefit after excluding the specific tax impacts for each of the pre-tax adjustments. The tax impacts for each of the adjustments were determined by applying to the pre-tax adjustments the effective income tax rates for the specific legal entities in which the adjustments were recorded.

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

(m)	Non-cash charges for restricted stock units that vest based on performance conditions.

(n)

Represents non-cash charges related to stock options that vest based on performance conditions. For the three and nine months ended September 30, 2020, this includes a one-time compensation expense of $7,847 that resulted from THL not achieving specified investment returns. See Note 10, Capital Stock of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q.

(o)

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

(p)	As described in Note 16 – Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, the Company recognized a gain of $273,149 on debt refinancing transactions.

Liquidity

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

Per Note 16, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, as of September 30, 2020, the Company’s indebtedness principally consisted of: (i) a senior secured term loan facility (“Term Loan Credit Agreement”), (ii) 6.125% Senior Notes (the “2023 Notes”), (iii) 6.625% Senior Notes, (iv) First Lien Party City Notes (as defined below), (v) First Lien Anagram Notes (as defined below), and (vi) Second Lien Anagram Notes (as defined below). Additionally, the Company had an asset-based revolving credit facility (“ABL Facility”) that it draws down on as necessary.

In the first nine months of 2020 the Company drew down $269.8 million under the ABL Facility. At September 30, 2020, $100.1 million was invested in US Treasury funds with maturities of less than three months. The Company had approximately $ 178.5 million of availability under the ABL Facility as of September 30, 2020.

The Company evaluated the refinancing transaction in accordance with ASC 470-60 Troubled Debt Restructuring. The exchange of the 2023 Notes and 2026 Notes for the First Lien Party City Notes, Second Lien Anagram Notes, and shares of Common Stock, as well as the purchase by the participants in the exchange of First Lien Anagram Notes represents a troubled debt restructuring (“TDR”). As the future undiscounted cash flows of the restructured debt were less than the net carrying value of the Existing Notes (including accrued interest and unamortized discount) adjusted for Common Stock issued to the participants in the exchange and such participants’ purchase of the First Lien Anagram Notes, the Company recognized a gain of $273,149 which reflects $18,902 of third-party fees incurred and, $27,007 of Common Stock issued in the exchange. The Company received $39,544 of cash from the participants in the exchange related to $44,500 of principal amount of First Lien Anagram Notes with an undiscounted value of $82,160. Interest expense is not currently recognized for this portion of the restructured debt.

Another portion of the restructured debt related to one holder of Existing Notes not result in gain recognition as the undiscounted cash flows of the restructured debt was higher than the carrying value of the existing debt. The carrying amount of this portion of the restructured debt is $32,328 and the interest expense will be recognized prospectively at a 3.5% effective interest rate. Amounts attributed to purchasers of the First Lien Anagram Notes who were not participants in the exchange (principal balance of $50,500) are recognized at consideration received less allocated transaction costs (netting to $45,678) and the effective interest method will be used to recognize interest expense prospectively.

Cash Flow

Net cash used in operating activities totaled $56.8 million and $182.3 million during the nine months ended September 30, 2020 and 2019, respectively. The variance principally reflects decrease in accounts receivable due to decreased sales as well as reduced payments from lower inventory levels partially offset by increase in prepaid expenses and other current assets. Changes in operating assets and liabilities during the first nine months of 2020 resulted in cash provided of $16.2 million and during the first nine months of 2019 resulted in the cash used of $159.1 million.

Net cash used in investing activities totaled $32.4 million during the nine months ended September 30, 2020, as compared to $58.6 million provided by investing activities during the nine months ended September 30, 2019. Capital expenditures during the nine months ended September 30, 2020 and 2019 were $32.1 million and $45.8 million, respectively. Retail capital expenditures totaled $17.7 million during 2020. Wholesale capital expenditures during 2020 totaled $14.4 million.

Net cash provided by financing activities was $227.4 million during the nine months ended September 30, 2020 and $97.8 million during the nine months ended September 30, 2019. The variance was principally due to a $100.5 million of proceeds from the debt refinancing. For more information refer to Note 16, Current and Long-Term Obligations of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q, as of September 30, 2020.

As of September 30, 2020, the Company had approximately $178.5 million of availability under the ABL Facility.

Critical Accounting Estimates

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

We believe our application of accounting policies, and the estimates inherently required by these policies, are reasonable. These accounting policies and estimates are constantly re-evaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found the application of accounting policies to be reasonable, and actual results generally do not differ materially from those determined using necessary estimates.

Long-Lived and Intangible Assets (including Goodwill)

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

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

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

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

During the first and thirds quarter of 2020, the Company identified impairment indicators associated with its market capitalization and significantly reduced customer demand for its products due to COVID-19. As a result, the Company performed interim impairment tests on the goodwill at its retail and wholesale reporting units. As a result, the Company recorded a $581.4 million goodwill, intangibles and long-lived assets impairment charge. See Note 4 – Goodwill, Intangibles and Long-Lived Assets Impairment, of Item 1, “Condensed Consolidated Financial Statements (Unaudited)” in this Quarterly Report on Form 10-Q for further discussion. Should actual results differ from certain key assumptions used in the interim impairment test, including revenue and EBITDA growth, which are both impacted by economic conditions, or should other key assumptions change, including discount rates and market multiples, in subsequent periods the Company could record additional impairment charges for the goodwill of such reporting units.

Contractual Obligations

Other than as described above under “Liquidity”, there were no material changes to our future minimum contractual obligations as of December 31, 2019 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off Balance Sheet Arrangements

We had no off-balance sheet arrangements during the three months ended September 30, 2020 and the year ended December 31, 2019.

Seasonality

Wholesale Operations

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

Retail Operations

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

Cautionary Note Regarding Forward-Looking Statements

From time to time, including in this filing and, in particular, the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we make “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “expects,” “estimates,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect our current expectations and are based upon data available to us at the time the statements were made. An example of a forward-looking statement is our belief that our cash generated from operating activities and availability under our credit facilities will be adequate to meet our liquidity needs for at least the next 12 months. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in the section titled “Risk Factors” included in our Annual Report on Form 10-K filed with the SEC on March 12, 2020 and in the “Risk Factors” section of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. All forward-looking statements are qualified by these cautionary statements and are made only as of the date of this filing. Any such forward-looking statements, whether made in this filing or elsewhere, should be considered in context with the various disclosures made by us about our business. The following risks related to our business, among others, could cause actual results to differ materially from those described in the forward-looking statements:

•

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

•

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

•

the severity of the COVID-19 pandemic;

•

the duration of the COVID-19 pandemic;

•

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

•

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

•

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

•

our ability to compete effectively in a competitive industry;

•

fluctuations in commodity prices;

•

helium shortages;

•

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

•

successful implementation of our business strategy;

•

decreases in our Halloween sales;

•

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

•

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

•

disruption to the transportation system or increases in transportation costs;

•

product recalls or product liability;

•

economic slowdown affecting consumer spending and general economic conditions;

•

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

•

disruptions at our manufacturing facilities;

•

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

•

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

•

our international operations subjecting us to additional risks;

•

potential litigation and claims;

•

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

•

lack of available additional capital;

•

our inability to retain or hire key personnel;

•

risks associated with leasing substantial amounts of space;

•

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

•

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

•

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

•

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

•

our inability to successfully identify and integrate acquisitions;

•

adequacy of our intellectual property rights;

•

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

•

risks related to our substantial indebtedness;

•

risks associated with interest rate changes;

•

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

•

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

•

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our market risks since December 31, 2019 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 4. Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of September 30, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the three and nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Information in response to this Item is incorporated herein by reference from Note 12 – Commitments and Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

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

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

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of the virus. The global spread of COVID-19 and the measures to contain it have negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. Quarantines, stay-at-home orders and related measures have significantly reduced consumer spending as well as customer demand for our products. In addition, although all of our stores have reopened, these restrictions and other dislocations caused by the outbreak have disrupted our planning, branding and administrative functions, as well as that of our suppliers, transporters and customers. As a result, our business, operations, financial condition and liquidity have been and may continue to be materially and adversely affected. Further, the disruption to the global economy and to our business, along with the decline in our stock price, may negatively impact the carrying value of certain assets, including inventories, accounts receivables, intangibles, and goodwill. The full extent to which COVID-19 and the measures to contain it will impact our business, operations financial condition and liquidity will depend on the severity and duration of the COVID-19 outbreak and other future developments related to the response to the virus all of which are highly uncertain. As a result, we cannot predict the ultimate impact of COVID-19 on the Company and its operational and financial performance.

Our unrestricted subsidiaries under the Term Loan Credit Agreement, the ABL Facility credit agreement and the indenture governing the First Lien Party City Notes are not subject to the covenants under such agreements and do not guarantee or pledge assets to secure the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes or any future indebtedness not incurred by such unrestricted subsidiaries. As of the date of this report on Form 10-Q, the Anagram Issuers and their subsidiaries were unrestricted subsidiaries. Subject to compliance with the covenants contained in the Term Loan Credit Agreement, the ABL Facility credit agreement and the indenture governing the First Lien Party City Notes, we will be permitted to designate further subsidiaries as unrestricted subsidiaries. The creditors of the Anagram Issuers and their subsidiaries, including under the First Lien Anagram Notes and the Second Lien Anagram Notes will generally be entitled to payment of their claims from the assets of the Anagram Issuers and their subsidiaries before those assets would be available for distribution to us. In addition, the indentures governing the First Lien Anagram Notes and the Second Lien Anagram Notes limit the Anagram Issuers and their subsidiaries’ ability to make loans or other payments to fund payments in respect of the Term Loan Credit Agreement, the ABL Facility and the First Lien Party City Notes and the indenture governing the First Lien Anagram Notes requires the maintenance of certain minimum liquidity. As a result, the cash flow or assets of the Anagram Issuers and their subsidiaries may not be available to pay any of our debt other than debt incurred by the Anagram Issuers and their subsidiaries.

Item 6. Exhibits

Exhibit Number		Description

3.1		Certificate of Correction to Party City Holdco Inc.’s Second Amended and Restated Certificate of Incorporation filed on June 6, 2019, dated December 17, 2019 and corrected Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Party City Holdco Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019)

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

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

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

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

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

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

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

†	Management contract of compensatory plan or arrangement

*	Filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

			PARTY CITY HOLDCO INC.

	By:		/s/ Todd Vogensen
			Todd Vogensen
			Chief Financial Officer (Principal Financial Officer)

Date: November 9, 2020