As of April 20, 2020, there have been 16 audit opinions on annual reports for SEC filers that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months.
Of those going concern opinions, 11 are repeat going concerns, meaning that in the past – prior to the pandemic – the company was experiencing difficulties that could impact their ability to continue operating. For those companies, the unknowns regarding the extent of future coronavirus impacts contribute additional uncertainty, but the coronavirus is not a primary reason for the going concern.
For the five companies with new going concerns for fiscal year 2019, the impacts of the COVID-19 pandemic are expected to have a material adverse effect on results of operations, cash flows, and liquidity. However, three of these companies had certain pre-existing uncertainties prior to the pandemic – such as debt covenant obligations, recurring operating losses and negative operating cash flows – so it is not surprising that impacts from the coronavirus would contribute additional uncertainty, resulting in substantial doubt about their ability to continue as a going concern.
Copa Holdings S.A. [NYSE: CPA]
For Copa Holdings S.A., a Panama-based provider of airline passenger and cargo service, COVID-19 has had direct impacts on the demand for air travel, significantly reducing forward sales for the next few months. The travel restrictions in place, including the suspension of international passenger flights in Tocumen International Airport, where the Company’s hub is located, compelled the Company to suspend all its operations in the near term. The disruption in operations has contributed substantial doubt to the Company’s ability to continue as a going concern for the next 12 months.
Per management’s discussion, the Company is taking measures to maintain robust liquidity levels, including the acceleration of collection of accounts receivable, negotiating longer payment terms with its suppliers, and drawing approximately $300 million from its currently available lines of credit. Copa Holdings also has the ability to generate $400 million through refinancing its unencumbered aircraft, engines, and spare parts, and requesting advances from banks secured by future maturities of investments, increasing the Company’s cash position to around $1.0 billion as of March 15, 2020.
Copa Holdings is reducing operational expenses and non-essential capital expenditure outflows, and expects to decrease its monthly cash burn ration to $70 million per month for the remainder of 2020. The Company anticipates that the measures taken will provide ample resources to endure prolonged downturn in demand.
Dave & Buster’s Entertainment, Inc. [Nasdaq: PLAY]
For Dave & Buster’s Entertainment, an operator of dining and entertainment establishments, the COVID-19 pandemic has had direct impacts, including the closure of all 137 operating stores.
Per management’s discussion, the pandemic will have material adverse impacts on revenues, results of operations and cash flows for an uncertain amount of time, raising substantial doubt about the Company’s ability to continue as a going concern. As of March 31, 2020, Dave & Buster’s had approximately $0.99 million cash on hand and $0.75 million funded debt on their credit facility.
Due to the current events, Dave & Buster’s was granted a waiver of default by its lenders and the Company requested certain concessions from landlords and business partners, but there is no assurance that the requests for relief will be granted.
Town Sports International Holdings Inc. [Nasdaq: CLUB]
For Town Sports International Holdings, an operator of fitness facilities in the US, the audit opinion specifically cites the Company’s term loan facility maturing in November 2020 and management’s determination that it does not have sufficient sources of cash to satisfy this obligation as an area of concern. That, coupled with the material adverse impacts of the COVID-19 pandemic, contributed to the reasons underlying the going concern modification.
Per management’s discussion, as of December 31, 2019, the outstanding principal on the Company’s 2013 Term Loan Facility of $177.8 million was classified as a current liability, and management disclosed that it does not have sufficient sources of cash to satisfy the obligation on date of maturity.
The pre-existing current liability related to the Term Loan Facility and insufficient cash has been further complicated by the coronavirus. Town Sports was mandated to close approximately 95% of their clubs, materially affecting revenue and cash flow for an unknown amount of time. The Company has taken steps to cut operating costs and conserve cash, including borrowing $12.4 million from its 2013 Revolving Credit Facility.
Regardless of steps taken to mitigate the impacts, the recent events have had a material adverse effect on results of operations, cash flows, and liquidity, and as a result, Town Sports expects to record material asset impairments during the quarter ending March 31, 2020.
Iconix Brand Group, Inc. [Nasdaq: ICON]
For Iconix Brand Group, a brand management company, the audit opinion specifically cites recurring losses and certain debt agreements which require compliance with financial covenants as an area of concern. That, coupled with the potential for material adverse impacts of the COVID-19 pandemic, contributed to the reasons underlying the going concern modification.
Per management’s discussion, continuing as a going concern is dependent upon continued operations, which is dependent on Iconix’s ability to meet its financial requirements, raise capital, and carry out future operations. On March 30, 2020, Iconix entered a waiver to its Senior Secured Term Loan that, among other things, waived an event of default due to the going concern.
Management asserts that Iconix has recently had positive cash flows, but the potential adverse impacts on operating results, liquidity, and financial condition raises substantial doubt about the Company’s ability to continue operations for the next twelve months.
Novation Companies, Inc. [OTC: NOVC]
For Novation Companies, a health care staffing company, the audit opinion cites net operating losses and negative operating cash flow, in addition to potential impacts of COVID-19, as reasons why there is substantial doubt about the Company’s ability to continue as a going concern.
During 2019, Novation incurred a net loss of $10.2 million and generated negative operating cash flow of $5.2 million.
According to management’s discussion, continuing as a going concern is dependent upon the ability of the Company’s cash to cover current obligations. At the end of 2019, the Company had $2.0 million in cash and cash equivalents and experienced lower than anticipated cash flows from its subsidiaries due to increasing costs and customer changes. Management disclosed that Novation had a significant annual cash outflow related to paying interest under its senior note agreements at LIBOR plus 3.5% per year.
An amendment to the Company’s Note Purchase Agreement and waiver of interest payments through April 2022 significantly improved their forecasted cash position; despite this improvement in their cash position, due to the added uncertainty stemming from the coronavirus pandemic and its unknown impact on cash flows, Novation has been unable to alleviate substantial doubt about the Company’s ability to continue as a going concern.
This pandemic is likely to exacerbate the issue for companies already facing financial hardship and present additional challenges to companies in certain industries – like consumer discretionary goods, food and services, and the travel industry. We expect to see more going concern opinions due to the uncertainty cause by COVID-19.
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