Happy Action Parks and Resorts, LLC (the “Company”) is a private company that owns and operates 20 action parks with attached resorts across the United States. The Company was wholly owned by Ken Investors, but in November 2019, Ken sold 65% of its interest in the Company to the Black Group (“BG”), one of the largest institutional investment firms in the United States, with over $600 billion under management. Based upon the amount paid for the controlling interest, the Company is valued at $3.5 billion. The transaction was accounted for as a business combination under ASC 805: Business Combinations, with all assets and liabilities recorded at fair market value. In conjunction with the acquisition, the Company entered into a new debt agreement for $2.1 billion and used the proceeds to repay all previous outstanding debt. BG’s long-term plan is to invest additional capital to grow the number of action parks owned and operated by the Company and then eventually take the Company public through an IPO.

Due to the change in ownership, the Company’s current audit firm had an independence issue and was required to resign from the audit. The Company’s CFO, Howard Blum, initiated a competitive bid process with other public accounting firms for the 2019 audit and selected NIU Students as his new auditing firm (this is where you come in). Howard indicated that the audit is normally done by the end of March, but due to the purchase/sale transaction happening late in the year and with new auditors, he has requested from his audit committee and his lender that the Company has until the end of May 2020 to complete the audit and issue the report.

In mid-March 2020, there is a large-scale breakout out of the COVID-19 virus, which results in public health issues. The Federal government and a large number of state governments issued closure orders for public places and as a result all of the Company’s action parks/resorts are closed for the foreseeable future. The closures have resulted in a significant decline in cash flows from operations. To mitigate cash flow loses, the Company institutes furloughs for all non-essential employees until the action parks/resorts can be reopened. Howard also engages his operations team to prepare new cash flow budgets assuming various reopening dates and various levels of occupancy through the remainder of 2020. They have assumed by early 2021 operations would be approaching normal operating levels. Under each scenario, the Company will need an infusion of additional capital to meet debt service and operating cash flow requirements. The estimate of additional capital infusion is between $75-$100 million to meet debt service and operational needs. Based upon the projections, the Company will not meet covenant requirements under the new debt agreement starting at the end of the second quarter of 2020. The covenant violations are defaults under the loan agreement, and one of the lender’s remedies is they can call the loan.

Howard has had discussions with the lender regarding the projected covenant violations and the lender acknowledges the issue but has not yet agreed to provide any relief until more information about COVID-19 and its future impact is available. Howard has shared the cash flow projections, cash shortfalls, projected covenant violation, and lender discussions with BG and Ken. BG and Ken have similar responses and want to gain more information on COVID-19 and its future impact on the Company. Each hesitates to provide a written commitment on a specified dollar amount of support until they get more info. Howard believes the impact of COVID-19 will only be short-term, but without the commitments from the lender and the owners, there is substantial doubt about the Company’s ability to continue operations in the short term.

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act (the “Act”) was signed into law on March 27, 2020, which provides government assistance to US citizens and businesses to fight the COVID-19 pandemic and stimulate the US economy. The assistance includes tax relief and government loans, investments, and grants for entities in affected industries. Among the tax relief provisions, the Act permits employers to pay their share of Social Security payroll taxes that would otherwise be due from the date of enactment through December 31, 2020, over the following two years. Howard is having his in-house legal team look into any opportunities under the Act for additional relief options.

It's mid-May 2020 and the audit report due date will soon be upon him. Howard has called in his new audit firm to discuss options. Howard believes COVID-19 has created a potential going concern issue that he needs to deal with for the audit. He needs your help in determining what issues he needs to address:

1. What period does the Company need to look forward to in its analysis?