UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
OR
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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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of July 31, 2020, the registrant had
SELECT INTERIOR CONCEPTS, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2020
Table of Contents
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Page No. |
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PART I. |
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Item 1. |
1 |
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1 |
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2 |
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3 |
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4 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
25 |
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Item 3. |
35 |
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Item 4. |
36 |
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PART II. |
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Item 1. |
37 |
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Item 1A. |
37 |
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Item 2. |
37 |
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Item 3. |
37 |
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Item 4. |
37 |
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Item 5. |
37 |
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Item 6. |
38 |
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39 |
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i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Select Interior Concepts, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
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(in thousands, except share data) |
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June 30, 2020 |
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December 31, 2019 |
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Assets |
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Current assets |
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Cash |
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$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $ June 30, 2020 and December 31, 2019, respectively |
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Inventories |
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Prepaid expenses and other current assets |
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Income taxes receivable |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ June 30, 2020 and December 31, 2019, respectively |
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Deferred tax assets, net |
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Goodwill |
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Customer relationships, net of accumulated amortization of $ June 30, 2020 and December 31, 2019, respectively |
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Other intangible assets, net of accumulated amortization of $ June 30, 2020 and December 31, 2019, respectively |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' equity |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Customer deposits |
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Current portion of long-term debt, net of financing fees of $ June 30, 2020 and December 31, 2019, respectively |
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Current portion of capital lease obligations |
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Total current liabilities |
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Line of credit |
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Long-term debt, net of current portion and financing fees of $ June 30, 2020 and December 31, 2019, respectively |
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Long-term capital lease obligations |
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Other long-term liabilities |
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Total liabilities |
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$ |
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$ |
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Commitments and contingencies (see Note 11) |
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Stockholders' equity |
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Class A common stock, par value $ |
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Treasury stock, December 31, 2019, at cost |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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Total stockholders' equity |
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$ |
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$ |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Select Interior Concepts, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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(in thousands, except share data) |
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2020 |
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2019 |
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2020 |
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2019 |
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Revenues, net |
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$ |
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$ |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Selling, general and administrative expenses |
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Income (loss) from operations |
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Other expense: |
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Interest expense |
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Other expense (income), net |
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Total other expense, net |
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Income (loss) before provision (benefit) for income taxes |
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( |
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Provision (benefit) for income taxes |
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( |
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( |
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Net income (loss) |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Earnings (loss) per share of common stock |
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Basic common stock |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Diluted common stock |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Weighted average shares outstanding |
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Basic common stock |
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Diluted common stock |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Select Interior Concepts, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended June 30, |
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(in thousands) |
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2020 |
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2019 |
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Cash flows provided by operating activities |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Change in fair value of earn-out liabilities |
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— |
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( |
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Equity-based compensation |
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Deferred expense from income taxes |
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— |
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Amortized interest on deferred debt issuance costs |
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Decrease in allowance for doubtful accounts |
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( |
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Gain on disposal of property and equipment, net |
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( |
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( |
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Other |
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( |
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— |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Other assets |
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( |
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( |
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Accounts payable |
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Accrued expenses and other current liabilities |
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( |
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Income taxes receivable |
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( |
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( |
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Customer deposit |
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( |
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Other long-term liabilities |
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— |
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Net cash provided by operating activities |
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Cash flows used in investing activities |
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Purchase of property and equipment |
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( |
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( |
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Proceeds from disposal of property and equipment |
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Acquisition of Intown Design, Inc. |
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— |
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( |
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Escrow release payment related to acquisition of Greencraft Holdings, LLC |
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— |
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( |
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Acquisition of Elegant Home Design, LLC (Indemnity payment in 2019) |
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— |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows provided by (used in) financing activities |
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Payment of Greencraft Holdings, LLC earn-out liability |
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— |
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( |
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Proceeds from ERP financing |
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— |
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Payments on line of credit, net |
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( |
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( |
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Proceeds from term loan |
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— |
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Term loan deferred issuance costs |
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( |
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— |
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Purchase of treasury stock |
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( |
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( |
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Payments on notes payable and capital leases |
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( |
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( |
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Principal payments on long-term debt |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Net decrease in cash |
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$ |
( |
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$ |
( |
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Cash (and restricted cash in 2019), beginning of period |
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Cash, end of period |
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$ |
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$ |
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Supplemental disclosures of cash flow information |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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Supplemental disclosures of non-cash investing activities |
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Acquisition of equipment and vehicles with long-term debt and capital leases |
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$ |
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$ |
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Earn-out estimate for Intown Design, Inc. |
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$ |
— |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Select Interior Concepts, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity (Unaudited)
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(in thousands, except share data) |
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Class A Common Stock Shares |
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Class A Common Stock |
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Treasury Stock, at Cost |
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Total Additional Paid-in Capital |
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Total Retained Earnings (Accumulated Deficit) |
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Total |
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Balance as of December 31, 2018 |
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— |
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( |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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Issuance of Class A common stock due to restricted stock vesting |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Balance as of March 31, 2019 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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Issuance of Class A common stock due to restricted stock vesting |
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— |
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— |
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— |
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Repurchase of Class A common stock |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Retirement of Class A common stock |
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( |
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( |
) |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Balance as of June 30, 2019 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Balance as of December 31, 2019 |
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( |
) |
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Equity-based compensation |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of Class A common stock awards |
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— |
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— |
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Issuance of Class A common stock due to restricted stock vesting |
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— |
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— |
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— |
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Repurchase of Class A common stock |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance as of March 31, 2020 |
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$ |
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$ |
( |
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$ |
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$ |
( |
) |
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$ |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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Issuance of Class A common stock due to restricted stock vesting |
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— |
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— |
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— |
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Repurchase of Class A common stock |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance as of June 30, 2020 |
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$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Select Interior Concepts, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Organization and Business Description
These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC” or the “Company”).
SIC is a Delaware corporation that was restructured in November 2017 to be a holding company through which to consolidate diversified building products and services companies. Through its two primary operating subsidiaries and segments, Residential Design Services (“RDS”) and Architectural Surfaces Group (“ASG”), the Company imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops, operates design centers that merchandise interior products, and provides installation services. RDS interior product offerings include flooring, cabinets, countertops and wall tile. RDS operates throughout the United States, including in California, Nevada, Arizona, Texas, Virginia, Maryland, North Carolina, and Georgia. ASG has operations in the Northeast, Southeast, Southwest, Midwest, Mountain West, and West Coast regions of the United States.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in these unaudited interim financial statements and condensed notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The condensed consolidated balance sheet as of December 31, 2019 included herein has been derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The condensed consolidated financial statements include the accounts of SIC, its wholly owned subsidiaries, RDS and ASG, and their respective wholly-owned subsidiaries, and are presented in accordance with GAAP. All significant intercompany accounts and transactions have been eliminated in combination. References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2020.
There have been no changes to our significant accounting policies described in our consolidated financial statements and related disclosures as of December 31, 2019 that have had a material impact on our condensed consolidated financial statements and related notes.
5
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share for the three and six months ended June 30, 2020 and 2019 are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share for common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of restricted stock-based awards using the treasury stock method.
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Three Months Ended |
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|
Three Months Ended |
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||
|
(in thousands, except share data) |
|
June 30, 2020 |
|
|
June 30, 2019 |
|
||
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
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|
|
Weighted average shares of common stock outstanding: |
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Basic common stock outstanding |
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Diluted common stock outstanding |
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Earnings (loss) per share of common stock: |
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|
|
|
|
Basic common stock outstanding |
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$ |
( |
) |
|
$ |
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Diluted common stock outstanding |
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$ |
( |
) |
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$ |
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Six Months Ended |
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Six Months Ended |
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||
|
(in thousands, except share data) |
|
June 30, 2020 |
|
|
June 30, 2019 |
|
||
|
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
|
Weighted average shares of common stock outstanding: |
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Basic common stock outstanding |
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Diluted common stock outstanding |
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Earnings (loss) per share of common stock: |
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|
|
|
Basic common stock outstanding |
|
$ |
( |
) |
|
$ |
|
|
|
Diluted common stock outstanding |
|
$ |
( |
) |
|
$ |
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|
All restricted stock awards outstanding consisting of
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingencies, and reported revenues and expenses as of and for periods ended on the date of the consolidated financial statements. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination of allowances for doubtful accounts, the lives and methods for recording depreciation and amortization on property and equipment, the fair value of reporting units and indefinite life intangible assets, deferred income taxes and the purchase price allocations used in the Company’s acquisitions.
Fair Value Measurement
ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
6
The three levels of the fair value hierarchy are as follows:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2—Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3—Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.
The Company records contingent consideration, or earn-outs, associated with certain acquisitions. These earn-outs are adjusted to fair value at each reporting period and any change to fair value based on a change in certain factors, such as the discount rate or estimates for the outcome of specified milestone goals, will result in an adjustment to the fair value of the liability. These adjustments will be recorded to (income) expense as a measurement period adjustment.
The earn-out liability associated with the acquisition of Summit Stoneworks, LLC (“Summit”) in August 2018 was reduced to
The earn-out liability associated with the acquisition of T.A.C. Ceramic Tile Co, LLC (“TAC”) in December 2018 was reduced to
The earn-out liability associated with the acquisition of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”) in March 2019 had a recorded fair value of
At June 30, 2020 and December 31, 2019, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term obligations approximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term loans, and notes payable approximate their fair values, as interest rates approximate market rates. There were
Intangible Assets
Intangible assets consist of customer relationships, trade names and non-compete agreements.
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Range of estimated useful lives |
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Weighted average useful life |
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Customer relationships |
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Trade names |
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Non-compete agreements |
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Life of agreement |
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7
Business Combinations
The Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities. Measurement period adjustments are reflected in the period in which they occur.
Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted cash flows of the related operations. If the aggregate of these cash flows is less than the carrying value of such assets, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. There were
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets, including intangible assets. Goodwill is tested annually for impairment on December 31. Impairment indicators existed as of March 31, 2020 surrounding the decrease in the Company’s stock price, significant adverse changes in the business climate and other macroeconomic conditions. The Company performed a goodwill impairment test as of March 31, 2020. The Company identified RDS and ASG as reporting units and determined each reporting unit’s fair value exceeded such reporting unit’s carrying value.
Revenue Recognition
The Company’s revenue derived from the sale of imported granite, marble, and related items, primarily in our ASG operating segment, is recognized at a point in time when control over a product is transferred to a customer. This transfer occurs primarily when goods are picked up by a customer at the branch or when goods are delivered to a customer location.
The Company’s contracts with its home builder customers within our RDS operating segment are usually short-term in nature and will generally range in length from several days to several weeks. The Company’s contracts related to multi-family and commercial projects are generally long-term in nature. We recognize revenue from both short-term and long-term contracts for each distinct performance obligation identified over time on a percentage-of-completion basis of accounting, utilizing the output method as a measure of progress, as we believe this represents the best measure of when goods and services are transferred to the customer.
Revenue is measured at the transaction price, which is based on the amount of consideration the Company expects to receive in exchange for transferring the promised goods or services to the customer. The transaction price includes estimates of variable consideration, such as any returns and sales incentives. Applicable customer sales taxes, when remitted, are recorded as a liability and excluded from revenue on a net basis.
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the modified retrospective method as of January 1, 2019. The results for the three and six months ended June 30, 2019 have not been adjusted to reflect the adoption of ASU 2014-09. (See Note 3).
Shipping and Handling Charges
Fees charged to customers for shipping and handling of product are included in revenues. The costs for shipping and handling of product are recorded as a component of cost of revenue. Additionally, we consider shipping and handling costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred.
Equity-based Compensation
The Company accounts for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service period, which is usually equivalent to the vesting period. See Note 12 for further discussion.
8
Segment Reporting
In accordance with ASC 280-10-50-1, an operating segment is a component of an entity that has all of the following characteristics:
|
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a. |
It engages in business activities from which it may earn revenues and incur expenses; |
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b. |
Its discrete financial information is available; and |
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|
c. |
Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. |
The Company has identified
Recently Issued and Adopted Accounting Pronouncements
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance, such as the real estate, construction, and software industries. The ASU core principal is to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During 2014-2016, the FASB issued various amendments to this topic and the amendments clarified certain positions and extended the implementation date until annual periods beginning after December 15, 2018. During the quarter ended December 31, 2019, the Company adopted this guidance on a modified retrospective basis. For contracts which were not completed as of January 1, 2019, revenue related to our short-term contracts with homebuilder customers, primarily in our RDS operating segment, are now recognized over time based on the extent of progress towards completion of the individual performance obligations, instead of under the completed contract method, because of continuous transfer of control to the customer. There was no material impact on our revenue recognition for our multi-family contracts that are currently recognized under the existing percentage-of-completion method of accounting, due to the comparable methodology of revenue recognition under the updated guidance. There was also no material impact from adoption related to our sales of imported granite, marble, and related items of our ASG operating segment, as the Company has concluded that it has substantially similar performance obligations and recognition timing under the amended guidance. We recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019 of approximately $
In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805)—Clarifying the Definition of a Business. This ASU provides additional guidance in regard to evaluating whether a transaction should be treated as an asset acquisition (or disposal) or a business combination. Particularly, the amendments to this ASU provide that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This clarification reduces the number of transactions that need further evaluation for business combination. The Company adopted this standard on January 1, 2019 in evaluating acquisitions.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework (ASU 2018-13). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU 2018-13 did not have a material impact on our consolidated financial statements.
9
Accounting Pronouncements Issued but Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous standards. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of asset not to recognize lease assets and lease liabilities. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates which delays the effective date of ASU 2016-02 until fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the provisions of ASU 2016-02 on the presentation of its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” (ASU 2016-03) which amends ASC 326 “Financial Instruments—Credit Losses.” Subsequent to the issuance of ASU 2016-13, ASC 326 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. The new guidance introduces the current expected credit loss (CECL) model, which will require an entity to record an allowance for credit losses for certain financial instruments and financial assets, including trade receivables, based on expected losses rather than incurred losses. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates which delays the effective date of ASU 2016-13 until fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of the provisions of ASU 2016-13 on the presentation of its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the goodwill impairment test by eliminating the step 2 requirement to determine the fair value of its assets and liabilities at the impairment testing date. ASU 2017-04 is effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for fiscal years beginning after December 15, 2020. Early adoption of the amendments in ASU 2018-15 is permitted, including adoption in any interim period, for all entities. The amendments in ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which amends ASC 740 “Income Taxes” (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
Note 3. Revenue
The Company’s revenue derived from the sale of imported granite, marble, and related items, primarily in our ASG operating segment, is recognized at a point in time when control over a product is transferred to a customer. This transfer occurs primarily when goods are picked up by a customer at the branch or when goods are delivered to a customer location.
The Company’s contracts with its home builder customers within our RDS operating segment are usually short-term in nature and will generally range in length from several days to several weeks. The Company’s contracts related to multi-family and commercial projects are generally long-term in nature. The Company recognizes revenue from both short-term and long-term contracts for each distinct performance obligation identified over time on a percentage-of-completion basis of accounting, utilizing the output method as a measure of progress, as the Company believes this represents the best measure of when goods and services are transferred to the customer.
10
In the fourth quarter of 2019, the Company adopted ASU 2014-09, the new accounting standard under ASC Topic 606, using the modified retrospective method as of January 1, 2019. The results for the three and six months ended June 30, 2019 have not been adjusted to reflect the adoption of ASU 2014-09. The impact of adoption of ASU 2014-09 was not material and was less than $
Contract Balances
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, revenue in excess of billings, customer deposits, and billings in excess of revenue recognized in the Company’s Consolidated Balance Sheets.
Contract assets
The Company’s contract assets consist of unbilled amounts typically resulting from sales under contracts when the revenue recognized exceeds the amount billed to the customer, generally in the RDS operating segment revenues derived from homebuilders and commercial and multifamily projects. Contract assets are recorded in other current assets in the Company’s Consolidated Balance Sheets. The Company had contract assets of $
Contract liabilities
The Company records contract liabilities when it receives payment prior to fulfilling a performance obligation or has billings in excess of revenue recognized. Contract liabilities related to revenues are recorded in customer deposits in the Company’s Consolidated Balance Sheets. The Company had total contract liabilities of $
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period, and relate primarily to multi-family or commercial revenue. For the six months ended June 30, 2020 and 2019, multi-family and commercial projects accounted for approximately
Revenue from contracts with customers is disaggregated differently for each reporting segment as this is how management evaluates the nature, amount, timing and uncertainty of revenue and cash flows as affected by economic factors. RDS operating segment revenues are disaggregated by geographic area within the United States. ASG operating segment revenues are disaggregated by product category.
The following table presents net revenue for the RDS operating segment disaggregated by geographical area for the three and six months ended June 30, 2020:
|
RDS |
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(in thousands) |
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For the Three Months Ended June 30, 2020 |
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% |
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|
For the Six Months Ended June 30, 2020 |
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% |
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||||
|
East |
|
$ |
|
|
|
|
|
% |
|
$ |
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% |
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Central |
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% |
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% |
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West |
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% |
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% |
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$ |
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% |
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$ |
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% |
The East consists of Virginia, Maryland, North Carolina and Georgia; the Central consists of Texas, and the West consists of California, Nevada and Arizona.
11
The following table presents net revenue for the ASG operating segment disaggregated by product category for the three and six months ended June 30, 2020:
|
ASG |
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(in thousands) |
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For the Three Months Ended June 30, 2020 |
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% |
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For the Six Months Ended June 30, 2020 |
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% |
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||||
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Quartz |
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$ |
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% |
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$ |
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% |
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Stone |
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% |
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% |
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Tile |
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% |
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% |
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Other |
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% |
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% |
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$ |
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% |
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$ |
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% |
Note 4. Concentrations, Risks and Uncertainties
The Company maintains cash balances primarily at one commercial bank. The accounts are insured by the Federal Deposit Insurance Corporation up to $
Credit is extended for some customers and is based on financial condition, and generally, collateral is not required. Credit losses are included in the consolidated financial statements and consistently have been within management’s expectations.
For the three and six months ended June 30, 2020 and 2019, there were
Note 5. Acquisitions
Intown Acquisition
On March 1, 2019, RDS acquired the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”), an installer of residential and light commercial countertops and cabinets, for total cash consideration of $
The upfront cash paid for the Intown acquisition was financed with additional borrowings from the Company’s third-party financing agreement described in Note 10. The Intown acquisition was accounted for under the acquisition method of accounting, and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on their respective fair values as of the acquisition date.
|
(in thousands) |
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Amount |
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|
Cash consideration |
|
$ |
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|
|
Fair value of earn-out |
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$ |
|
|
RDS acquired Intown to further diversify RDS’ geographic mix and channel strength. The goodwill recorded reflects the strategic value of the acquisition beyond the net value of its assets acquired less liabilities assumed. Goodwill of $
12
The Company incurred approximately $
|
(in thousands) |
|
Amount |
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|
|
Accounts receivable |
|
$ |
|
|
|
Inventory |
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|
Property and equipment |
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Goodwill |
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Other intangible assets |
|
|
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|
|
Total assets acquired |
|
$ |
|
|
|
Total liabilities |
|
|
|
|
|
Total consideration |
|
$ |
|
|
From the date of acquisition to June 30, 2019, Intown generated revenue of $
Pro Forma Results
The following unaudited pro forma information for the six months ended June 30, 2019 has been prepared to give effect to the acquisition of Intown as if the acquisition had occurred on January 1, 2019. The pro forma information takes into account the preliminary purchase price allocation. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the Intown acquisition occurred on such date, nor does it purport to predict the results of operations for future periods.
|
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Six Months Ended June 30, |
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2019 |
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(in thousands) |
|
(unaudited) |
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|
|
Pro Forma: |
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|
Total revenue |
|
$ |
|
|
|
Net income |
|
$ |
|
|
Our pro forma assumptions are as follows:
|
|
• |
Revenues and costs of sales were based on actual results for the six months ended June 30, 2019. |
|
|
• |
General and administrative expenses were based on actual results adjusted by $ |
|
|
• |
Actual interest expense was adjusted by $ |
|
|
• |
Income taxes were adjusted to impute the Company’s corporate rate during the period on the pro forma income before taxes. |
13
Note 6. Inventories
Inventories are valued at the lower of cost (using specific identification and first-in first-out methods) or net realizable value. The significant components of inventory were as follows:
|
(in thousands) |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Installations in process |
|
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$ |
|
|
|
$ |
|
|
Note 7. Property and Equipment
Property and equipment consisted of the following:
|
(in thousands) |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
Vehicles |
|
$ |
|
|
|
$ |
|
|
|
Machinery and equipment |
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Leasehold improvements |
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Furniture and fixtures |
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Computer equipment and internal-use software |
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Other |
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|
|
Less: accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation and amortization expense of property and equipment totaled $
Depreciation and amortization expense of property and equipment totaled $
Note 8. Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill by reportable segment is as follows as of June 30, 2020 and December 31, 2019:
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total |
|
|||
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
14
Intangible Assets
The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of June 30, 2020:
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Gross Carrying Amount |
|
|||
|
Gross Carrying Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Accumulated Amortization |
|
|||
|
Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Trade names |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Non-compete agreements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Net Book Value |
|
|||
|
Net Book Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
15
The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of December 31, 2019:
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Gross Carrying Amount |
|
|||
|
Gross Carrying Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Accumulated Amortization |
|
|||
|
Accumulated Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Trade names |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Non-compete agreements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
ASG |
|
|
RDS |
|
|
Total Net Book Value |
|
|||
|
Net Book Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Amortization expense on intangible assets totaled $
The estimated annual amortization expense for the next five years and thereafter is as follows:
|
(in thousands) |
|
|
|
|
|
2020 Remaining |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
Note 9. Lines of Credit
SIC Line of Credit
In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018, July 23, 2019 and August 19, 2019 (“SIC Credit Facility”), with a commercial bank, which amended and restated each of the RDS credit agreement and the ASG credit agreement in their entirety. The SIC Credit Facility will be used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings in an initial amount up to an aggregate of $
16
Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate stated amount of $
The revolving loans under the SIC Credit Facility bear interest at a floating rate, which the Company can elect between a
Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.
As of June 30, 2020 and December 31, 2019, $
The Company incurred debt issuance costs of $
Note 10. Long-Term Debt
Long-term debt consisted of the following:
|
(in thousands) |
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
RDS equipment and vehicle notes |
|
$ |
|
|
|
$ |
|
|
|
ASG term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt, net of financing fees |
|
$ |
|
|
|
$ |
|
|
|
Long-term debt, net of current portion and financing fees |
|
$ |
|
|
|
$ |
|
|
RDS Equipment and Vehicle Notes
RDS has financed the acquisition of certain vehicles, property, and equipment with notes payable that mature at various times through . As of June 30, 2020 and December 31, 2019, the outstanding balance on equipment and vehicle notes payable totaled $
17
ASG Term Loans
In December 2015, ASG entered into a loan agreement with a financial institution offering a term loan in the aggregate amount of $
On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (the “Term Loan Facility”), which initially provided for a $
On April 8, 2020, the Term Loan Facility was further amended, which amendment, among other things, (i) waived the requirement that the Company prepay the Term Loans with Excess Cash Flow (as defined in the Term Loan Facility) then due for payment in respect of the fiscal year ending December 31, 2019, (ii) amended the Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) covenant applicable to the fiscal year ending December 31, 2020 to be tested on a monthly basis and requires the Company and its subsidiaries to maintain a reduced Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) of not less than 1.00:1.00 for each month during such fiscal year, and (iii) does not require the Company to test the Total Leverage (as defined in the Term Loan Facility) covenant effective as of the execution date of April 8, 2020 through and including December 31, 2020 for any fiscal quarter end during such period, for so long as the Company and its subsidiaries maintain Financial Covenant Availability (as defined in the Term Loan Facility) of not less than $
Borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus
Substantially all of the Company’s assets, including accounts receivable and inventory, are collateral for the Term Loan Facility, except assets identified as collateral for the SIC Credit Facility which hold a senior position. The Company is also restricted from paying dividends to its stockholders. Additionally, substantially all of the Company’s subsidiaries are restricted by the Term Loan Facility from providing loans, advances and dividends to the SIC parent company. The Company is required to meet certain covenants pursuant to these term loans. The Company was in compliance with all financial covenants as of June 30, 2020 and December 31, 2019.
The Company incurred debt issuance costs in connection with its term loans. These costs are being amortized to non-cash interest expense over the terms of the related notes on a straight-line basis, which approximates the effective interest rate method. Non-cash interest expense related to these costs was $
Note 11. Commitments and Contingencies
Leases
The Company leases certain vehicles under leases classified as capital leases. The leased vehicles are included as property and equipment (“PP&E”) and amortized to accumulated amortization on a
18
RDS leases its corporate, administrative, fabrication and warehousing facilities under long-term non-cancelable operating lease agreements expiring at various dates through
RDS also leases certain office equipment under long-term lease agreements expiring at various dates through
ASG leases its facilities and equipment under long-term non-cancellable operating lease agreements expiring at various dates through
SIC leases its corporate facilities under a long-term non-cancelable operating lease through
The Company recognizes rent expense on a straight-line basis and records the difference between the recognized rent expense and amounts payable under the lease as deferred rent. Aggregate deferred rent at June 30, 2020 and December 31, 2019 was $
Litigation
The Company experiences routine litigation in the normal course of its business. Production residential builders in California are primarily sued for alleged construction defects. As a practice, residential builders name all subcontractors in the lawsuit whether or not the subcontractor has any connection, direct or indirect, with the alleged defect. The Company, as a subcontractor, is involved in these lawsuits as a result. The Company generally has no or minimal liability in the majority of these lawsuits. The Company’s insurance policies’ self-insured retention (“SIR”) or/deductible typically ranges from $
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications, including to lessors of office and warehouse space for certain actions arising during the Company’s tenancy and to the Company’s customers. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.
Exclusive Distributor Rights
A main quartz supplier of ASG’s Pental business has granted ASG exclusive distribution rights in
19
Using an estimated price per container based on the average price per container in 2019, the future minimum purchases to maintain the exclusive rights as of June 30, 2020 are as follows:
|
(in thousands) |
|
Amount |
|
|
|
Remaining in 2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
|
|
$ |
|
|
If ASG does not purchase at least eighty percent (
Purchase Commitments
The Company also has contracted to minimum purchase commitments with certain suppliers. RDS has committed to purchase $
In addition, ASG has committed to purchase approximately $
Note 12. Stock Compensation
On November 22, 2017, the Company adopted the Select Interior Concepts, Inc. 2017 Incentive Compensation Plan (the “2017 Plan”). Upon the adoption of the 2017 Plan, the maximum aggregate number of shares issuable thereunder was
On March 26, 2019, the board of directors adopted the Select Interior Concepts, Inc. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”), which was approved at the 2019 Annual Meeting of Stockholders on May 15, 2019. The 2019 Incentive Plan serves as the successor to the 2017 Plan; however, shares continued to be available for award grants under the 2017 Plan following the effectiveness of the 2019 Incentive Plan. The maximum aggregate number of shares issuable under the 2019 Incentive Plan is
The 2017 Plan and the 2019 Incentive Plan (collectively, “the Plans”), permit the grant of incentive stock options to employees and the grant of nonstatutory stock options, performance awards, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards to the Company’s employees, directors and consultants at the sole discretion of the Company’s Compensation Committee of the board of directors.
Stock Options
The Company has
20
Restricted Stock and Restricted Stock Units
Restricted stock awards and restricted stock unit awards are grants of shares of the Company’s common stock or rights to receive shares of the Company’s common stock that are subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares prior to vesting, subject to such awards’ forfeiture provisions, unless the board of directors provides otherwise. Recipients of restricted stock unit awards generally will not have voting and dividend rights unless and until shares of common stock are issued with respect to such awards. Shares of restricted stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company.
For the six months ended June 30, 2020,
During the three months ended March 31, 2019, restricted stock units were granted to certain executives and include both a service and a performance condition.
In connection with the appointment of L. W. Varner, Jr. as the new Chief Executive Officer of the Company in June 2020, Mr. Varner received a one-time grant of
The Company estimated the fair value of all shares granted on the date the shares were granted and recognizes the resulting fair value over the requisite service period. The grant date fair value for the restricted stock units issued during the six months ended June 30, 2020 was determined using the closing share price on the date of grant. For shares issued with a market condition, the Monte Carlo simulation model was used to determine the fair value of the award. Inputs into the Monte Carlo simulation model for applicable awards during the six months ended June 30, 2020 included a dividend yield of
A summary of the Company’s restricted stock activity for the six months ended June 30, 2020 is as follows:
|
|
|
Nonvested Shares Outstanding |
|
|
Weighted Average Grant Date Fair Value |
|
||
|
Nonvested shares at January 1, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
Vested |
|
|
|
|
|
$ |
|
|
|
Nonvested shares at June 30, 2020 |
|
|
|
|
|
$ |
|
|
As of June 30, 2020, total remaining stock-based compensation expense for nonvested restricted stock units is $
Total stock-based compensation expense recognized for restricted stock units for the three and six months ended June 30, 2020 was $
21
Phantom Stock
Phantom stock awards are grants of phantom stock with respect to shares of the Company’s common stock that are settled in cash and subject to various restrictions, including restrictions on transferability, vesting and forfeiture provisions. Shares of phantom stock that do not vest for any reason will be forfeited by the recipient and will revert to the Company. Remaining shares of phantom stock outstanding at June 30, 2020 are held by a member of the board of directors and are subject to vesting over a period of
The Company recorded phantom stock-based compensation expense of less than $
As of June 30, 2020, total remaining stock-based compensation expense for phantom stock is less than $
Note 13. Provision for Income Taxes
The Company determines its periodic income tax benefit or expense based upon the current period income and the annual estimated tax rate for the Company adjusted for discrete items. The estimated tax rate is revised, if necessary, as of the end of each successive interim period during the fiscal year to the Company’s current annual estimated tax rate.
For the six months ended June 30, 2020, the effective tax rate of
In response to the global impacts of COVID-19 on U.S. companies and citizens, the federal government enacted the CARES Act on March 27, 2020. The CARES Act included several temporary tax relief provisions for companies, including modifications to the interest deduction limitation and a five-year net operating loss carryback. In response to these tax relief provisions, the Company has adjusted its deferred tax asset related to the interest limitation and anticipates carrying back any net operating loss generated in 2020 to prior tax periods.
Note 14. Related Party Transactions
Facility Rent
RDS leases
ASG leases office space from 521 Digiulian Boulevard, LLC, a company owned by a current employee. Rent expense under this lease was $
Subcontractors and Supplier
22
Design services were also provided to RDS by designers affiliated with current Greencraft employees. During the six months ended June 30, 2020, the Company incurred less than $
Other Consulting Services
A consulting firm affiliated with an officer of the Company has performed various consulting services for the Company related to human resources, accounting, and project management. During the three and six months ended June 30, 2020, the Company incurred $
Note 15. Segment Information
The Company’s operations are classified into
Inter-segment eliminations result, primarily, from the sale of ASG inventory to the RDS segment, including the related profit margin, as well as some intercompany borrowings recorded in the form of intercompany payables and receivables.
In addition, certain corporate-level costs incurred at a corporate level or at the reporting unit level that benefit the segments are not allocated. These costs include: corporate payroll costs, legal, professional service fees, interest expense, including amortization of deferred financing costs, and taxes and equity-based compensation.
Information for the periods presented is provided below:
|
|
|
For the Three Months Ended June 30, |
|
|||||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Elimination of intercompany sales |
|
|
( |
) |
|
|
( |
) |
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Elimination of intercompany activity |
|
|
( |
) |
|
|
|
|
|
Unallocated corporate operating loss |
|
|
( |
) |
|
|
( |
) |
|
Consolidated total |
|
$ |
( |
) |
|
$ |
|
|
23
|
|
|
Six Months Ended June 30, |
|
|||||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Net revenue: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Elimination of intercompany sales |
|
|
( |
) |
|
|
( |
) |
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
( |
) |
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Elimination of intercompany activity |
|
|
( |
) |
|
|
|
|
|
Unallocated corporate operating loss |
|
|
( |
) |
|
|
( |
) |
|
Consolidated total |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Unallocated corporate capital expenditures |
|
|
- |
|
|
|
|
|
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
|
|
|
As of June 30, |
|
|
As of December 31, |
|
||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Goodwill: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
RDS |
|
$ |
|
|
|
$ |
|
|
|
ASG |
|
|
|
|
|
|
|
|
|
Consolidation entries |
|
|
( |
) |
|
|
|
|
|
Unallocated assets, including corporate |
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
|
|
|
$ |
|
|
Note 16. Subsequent Events
Events occurring after June 30, 2020, have been evaluated for possible adjustment to the condensed consolidated financial statements or disclosure as of August 6, 2020, which is the date the condensed consolidated financial statements were available to be issued. The Company continues to evaluate the impact of COVID-19 on its operations, although the ultimate extent to which COVID-19 impacts our business, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (which we refer to as this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue,” and other forms of these words or similar words or expressions or the negatives thereof. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; the ongoing impact of the COVID-19 pandemic; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.
These forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties – many of which are beyond our control, dependent on the actions of third parties, or currently unknown to us – as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those described in Part II, Item 1A, "Risk Factors" and elsewhere in this Report and as also may be described from time to time in future reports we file with the SEC. You should read such information in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report. There also may be other factors that we cannot anticipate or that are not described in this Report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. You are advised, however, to review any further disclosures we make on related subjects in our periodic filings with the SEC.
Overview
Select Interior Concepts, Inc. (which we refer to collectively, with all of its subsidiaries, as “SIC,” the “Company,” “we,” “us” and “our”) is an installer and nationwide distributor of interior building products with market positions in residential interior design services.
Through our Residential Design Services (which we refer to as “RDS”) operating segment, we serve national and regional homebuilders by providing an integrated, outsourced solution for the design, consultation, sourcing, distribution and installation needs of their homebuyer customers. Through our design centers, our consultants work closely with homebuyers in the selection of a broad array of interior products and finishes, including flooring, cabinets, countertops, wall tile, finish carpentry, shower enclosures and mirrors, and related interior items, primarily for newly constructed homes. We then coordinate the ordering, fulfillment and installation of many of these interior products to provide a streamlined experience for the homebuyer. With our design centers and our product sourcing and installation capabilities, we enable our homebuilder customers to outsource critical aspects of their business to us, thereby increasing their sales, profitability, and return on capital.
We also have market positions in the selection and importation of natural and engineered stone slabs for kitchen and bathroom countertops and specialty tiles through our Architectural Surfaces Group (which we refer to as “ASG”) operating segment. ASG sources natural and engineered stone from a global supply base and markets these materials through a national network of distribution centers and showrooms at 23 different locations. In addition to serving the new residential and commercial construction markets with these materials, we also distribute them to the repair and remodel (which we refer to as “R&R”) market.
Corporate developments
Appointment of New Chief Executive Officer
On June 9, 2020, it was announced that L. W. (Bill) Varner, Jr. was named the new Chief Executive Officer of the Company. Mr. Varner was also appointed to the Company’s board of directors on June 30, 2020.
25
Recent developments relating to the outbreak of the coronavirus pandemic ("COVID-19")
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, the United States government declared the pandemic a national emergency; and most states imposed measures to reduce the spread of COVID-19, including orders to shelter in place, social distance, and close certain non-essential businesses. The pandemic has caused widespread adverse impacts to the economy and financial markets, and to our employees, customers, suppliers and other parties with whom we do business.
Our second quarter performance was adversely impacted by the COVID-19 pandemic, with sales volumes decreased across our markets. We continue to rationalize costs, tightly manage working capital, and leverage technology to generate additional efficiencies in our business, as well as to implement other cost-saving measures. However, we expect that the COVID-19 pandemic will continue to have an adverse effect on our revenues and financial results for the remainder of 2020, although the ultimate extent to which COVID-19 impacts our business, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, severity, and scope of the outbreak.
Operating Segments
We have defined each of our operating segments based on the nature of its operations, its management structure and its product offerings. Our management decisions are made by our Chief Executive Officer, whom we have determined to be our Chief Operating Decision Maker. Our management evaluates segment performance based on operating income. Our two reportable segments are described below.
Residential Design Services
RDS, our interior design and installation segment, is a service business that provides design center operation, interior design, product sourcing, and installation services to homebuilders, homeowners, general contractors and property managers. Products sold and installed include flooring, prefabricated countertops, cabinets, wall tile, interior trim (doors, moldings, door and window casing), shower enclosures and doors, mirrors, and window treatments. New single-family and multi-family construction are the primary end markets, although we intend to explore growth opportunities in other markets, such as the R&R market.
Architectural Surfaces Group
ASG, our natural and engineered stone countertop distribution segment, distributes granite, marble and quartz slabs for countertop and other uses, ceramic and porcelain tile for flooring, backsplash and wall tile applications and other related products. Primary end markets are new residential and commercial construction and the R&R market.
Key Factors Affecting Operating Results
Our operating results are impacted by changes in the levels of new residential construction and the demand for products and services in the R&R market. These are in turn affected by a broad range of macroeconomic factors including the rate of economic growth, unemployment, job and wage growth, interest rates, multi-family housing project financing, and residential mortgage lending conditions. Other important underlying factors include demographic variables such as household formation, immigration and aging trends, housing stock and vacant inventory levels, changes in the labor force, raw materials prices, the legal environment, government tariffs, local and regional development, and construction regulation.
Key Components of Results of Operations
Net Revenue. In our RDS segment, net revenue consists of revenue net of our homebuilder customers’ participation, which is their share of revenue from our sales of upgrades. Revenue from both short-term and long-term contracts is recognized for each distinct performance obligation identified over time on a percentage-of-completion basis of accounting, utilizing the output method as a measure of progress. In our ASG segment, net revenue is derived from the sale of stone products and is recognized when such products have been accepted at the customer’s designated location.
26
Cost of Revenue. Cost of revenue consists of the direct costs associated with revenue earned by the sale and installation of our interior products in the case of our RDS segment, or by delivering product in the case of our ASG segment. In our RDS segment, cost of revenue includes direct material costs associated with each project, the direct labor costs associated with installation (including taxes, benefits and insurance), rent, utilities and other period costs associated with warehouses and fabrication shops, depreciation associated with warehouses, material handling, fabrication and delivery costs, and other costs directly associated with delivering and installing product in our customers’ projects, offset by vendor rebates. In our ASG segment, cost of revenue includes direct material costs, inbound and outbound freight costs, overhead (such as rent, utilities and other period costs associated with product warehouses), depreciation associated with fixed assets used in warehousing, material handling and warehousing activities, warehouse labor, taxes, benefits and other costs directly associated with receiving, storing, handling and delivering product to customers in revenue earning transactions.
Gross Profit and Gross Margin. Gross profit is revenue less the associated cost of revenue. Gross margin is gross profit divided by revenue.
Operating Expenses. Operating expenses include overhead costs such as general management, project management, purchasing, sales, customer service, accounting, human resources, depreciation and amortization, information technology, public company costs and all other forms of wage and salary cost associated with operating our businesses, and the taxes and benefits associated with those costs. We also include other general-purpose expenses, including, but not limited to, office supplies, office rents, legal, consulting, insurance, and non-cash stock compensation costs. Professional services expenses, including audit and legal, and transaction costs are also included in operating expenses.
Depreciation and Amortization. Depreciation and amortization expenses represent the estimated decline over time of the value of tangible assets such as vehicles, equipment and tenant improvements, and intangible assets such as customer lists and trade names. We recognize the expenses on a straight-line basis over the estimated economic life of the asset in question.
Interest Expense. Interest expense represents amounts paid to or which have become due during the period to lenders and lessors under credit agreements and capital leases, as well as the amortization of debt issuance costs.
Income Taxes. Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net Revenue. For the three months ended June 30, 2020, net revenue decreased $32.9 million, or 20.8%, to $125.4 million, from $158.3 million for the three months ended June 30, 2019. Net revenue for the three months ended June 30, 2020 and 2019 is adjusted for the elimination of intercompany sales of $0.5 million and $0.8 million, respectively. Net revenue in both segments was negatively affected by the COVID-19 pandemic. Volume and price/mix were both negative in the quarter.
In our RDS segment, net revenue decreased by $19.4 million, or 20.9%, to $73.4 million for the three months ended June 30, 2020, from $92.8 million for the three months ended June 30, 2019. The decrease was largely related to volume declines as a result of the COVID-19 pandemic. Stay at home orders heavily impacted our business in California and new safety measures and restrictions lowered productivity at RDS job sites. RDS design center activity was limited due to lockdowns and wariness of in-person interaction.
In our ASG segment, net revenue decreased by $13.9 million, or 20.9%, to $52.5 million for the three months ended June 30, 2020, from $66.3 million for the three months ended June 30, 2019. This decrease was due to lower natural stone, quartz, and tile sales volume primarily as a result of the COVID-19 pandemic. Stay at home orders heavily impacted our business in Washington. ASG showrooms were limited to appointment only showings and sales. Additionally, our fabricator customers were unable to execute in-residence installations due to stay at home orders at many of our locations combined with homeowner concerns about the pandemic.
Cost of Revenue. For the three months ended June 30, 2020, cost of revenue decreased $19.4 million, or 17.0%, to $94.7 million, from $114.2 million for the three months ended June 30, 2019.
27
In our RDS segment, cost of revenue decreased by $11.1 million, or 16.5%, to $55.9 million for the three months ended June 30, 2020, from $67.0 million for the three months ended June 30, 2019. This was primarily associated with the decrease in sales for the three months ended June 30, 2020.
In our ASG segment, cost of revenue decreased by $8.9 million, or 18.5%, to $39.1 million for the three months ended June 30, 2020, from $48.0 million for the three months ended June 30, 2019. This was primarily associated with the decrease in sales for the three months ended June 30, 2020.
Gross Profit and Margin. For the three months ended June 30, 2020, gross profit decreased $13.5 million, or 30.5%, to $30.7 million, from $44.2 million for the three months ended June 30, 2019. The decrease in gross profit was primarily due to lower revenues resulting from the COVID-19 pandemic. For the three months ended June 30, 2020, gross margin decreased 3.4 percentage points to 24.5%, from 27.9% for the three months ended June 30, 2019.
In our RDS segment, gross margin decreased 4.0 percentage points to 23.8% for the three months ended June 30, 2020, from 27.8% for the three months ended June 30, 2019, due to unabsorbed fixed costs and unfavorable product mix.
In our ASG segment, gross margin decreased 2.2 percentage points to 25.5% for the three months ended June 30, 2020, from 27.7% for the three months ended June 30, 2019. This decrease was primarily due to unabsorbed fixed costs and unfavorable changes in product and price mix.
Operating Expense. For the three months ended June 30, 2020, operating expenses decreased by $6.7 million, or 17.9%, to $30.7 million, from $37.4 million for the three months ended June 30, 2019.
In our RDS segment, operating expenses decreased by $3.9 million to $16.9 million for the three months ended June 30, 2020, from $20.8 million for the three months ended June 30, 2019. This decrease was primarily related to furloughs, exits, lower sales commissions and other COVID-19 austerity measures put in place during the three months ended June 30, 2020.
In our ASG segment, operating expenses decreased by $3.0 million to $8.3 million for the three months ended June 30, 2020, from $11.3 million for the three months ended June 30, 2019. This decrease was primarily related to furloughs, exits, lower sales commissions and other COVID-19 austerity measures in place during the three months ended June 30, 2020.
SIC corporate costs increased by $0.3 million to $5.6 million for the three months ended June 30, 2020, from $5.3 million for the three months ended June 30, 2019. This was primarily the result of compensation costs associated with the hiring of a new chief executive officer, including the severance costs granted to the former chief executive officer.
Depreciation and Amortization. For the three months ended June 30, 2020, depreciation and amortization expenses decreased by $0.7 million, or 11.0%, to $5.7 million, from $6.4 million for the three months ended June 30, 2019.
In our RDS segment, depreciation and amortization expenses decreased by $0.7 million, or 18.7%, to $2.9 million for the three months ended June 30, 2020, which was primarily due to certain RDS customer list intangibles that fully amortized during 2019, partially offset by additional assets in-service, including the new ERP system at RDS, that began depreciating in the first quarter of 2020.
In our ASG segment, depreciation and amortization expenses remained relatively consistent at $2.8 million for the three months ended June 30, 2020 and 2019.
Interest Expense. For the three months ended June 30, 2020, interest expense decreased by $0.8 million, or 18.9%, to $3.6 million, from $4.5 million for the three months ended June 30, 2019, primarily as a result of lower interest rates during the period despite overall higher outstanding borrowings.
Income Taxes. For the three months ended June 30, 2020, income tax expense decreased by $0.6 million from a $0.1 million expense for the three months ended June 30, 2019, to a $0.5 million benefit for the three months ended June 30, 2020. During the three months ended June 30, 2020, our effective tax rate is different from what would be expected if the federal statutory rate were applied to income from continuing operations, primarily because of the impact of discrete items related to a shortfall on equity-based compensation, changes in uncertain tax positions and permanent items.
Net Income (Loss). For the three months ended June 30, 2020, net income decreased by $4.3 million to a $3.2 million loss, from $1.2 million of income for the three months ended June 30, 2019.
28
Adjusted EBITDA. For the three months ended June 30, 2020, Adjusted EBITDA decreased to $10.4 million, from $16.6 million for the three months ended June 30, 2019.
|
|
|
For the Three Months Ended June 30, |
|
|||||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Consolidated net income (loss) |
|
$ |
(3,179 |
) |
|
$ |
1,162 |
|
|
Income tax expense (benefit) |
|
|
(456 |
) |
|
|
113 |
|
|
Interest expense |
|
|
3,632 |
|
|
|
4,480 |
|
|
Depreciation and amortization |
|
|
5,723 |
|
|
|
6,432 |
|
|
EBITDA |
|
|
5,720 |
|
|
|
12,187 |
|
|
Equity-based compensation |
|
|
1,223 |
|
|
|
1,426 |
|
|
Purchase accounting fair value adjustments |
|
|
- |
|
|
|
959 |
|
|
Acquisition and integration related costs |
|
|
(86 |
) |
|
|
751 |
|
|
Employee related reorganization costs |
|
|
1,274 |
|
|
|
247 |
|
|
Other non-recurring costs |
|
|
1,590 |
|
|
|
159 |
|
|
Strategic alternatives costs |
|
|
652 |
|
|
|
890 |
|
|
Adjusted EBITDA |
|
$ |
10,373 |
|
|
$ |
16,619 |
|
Adjusted EBITDA Margin. For the three months ended June 30, 2020, Adjusted EBITDA margin decreased to 8.3%, from 10.5% for the three months ended June 30, 2019.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures, please refer to “Non-GAAP Measures” below for a further discussion of these non-GAAP financial measures.
Six months ended June 30, 2020 Compared to Six months ended June 30, 2019
Net Revenue. For the six months ended June 30, 2020, net revenue decreased $35.4 million, or 12.0%, to $259.8 million, from $295.3 million for the six months ended June 30, 2019. Net revenue for the six months ended June 30, 2020 and 2019 is adjusted for the elimination of intercompany sales of $1.0 million and $1.4 million, respectively.
In our RDS segment, net revenue decreased by $20.0 million, or 11.6%, to $152.8 million for the six months ended June 30, 2020, from $172.8 million for the six months ended June 30, 2019. The decrease was largely due to volume declines in California and the Eastern Region. These declines are primarily attributable to the COVID-19 pandemic, as well as price/mix in certain markets. Stay at home orders heavily impacted our business in California and new safety measures and restrictions lowered productivity at RDS job sites. RDS design center activity was limited due to lockdowns and wariness of in-person interaction. The decline in organic volume was partially offset by increased sales from the acquisition of Intown in March 2019.
In our ASG segment, net revenue decreased by $15.8 million, or 12.8%, to $108.0 million for the six months ended June 30, 2020, from $123.9 million for the six months ended June 30, 2019. This decrease was due to a decrease in volume of all products sold other than Pental quartz, which increased slightly. The decrease in overall volume was primarily due to the COVID-19 pandemic. Stay at home orders heavily impacted our business in Washington. ASG showrooms were limited to appointment only showings and sales. Additionally, our fabricator customers were unable to execute in-residence installations due to stay at home orders at many of our locations combined with homeowner concerns about the pandemic. Volume and price/mix were both negative for the first half of 2020 compared to the first half of 2019.
Cost of Revenue. For the six months ended June 30, 2020, cost of revenue decreased $13.9 million, or 6.6%, to $198.4 million, from $212.4 million for the six months ended June 30, 2019.
In our RDS segment, cost of revenue decreased by $6.5 million, or 5.2%, to $117.8 million for the six months ended June 30, 2020, from $124.4 million for the six months ended June 30, 2019. This was primarily associated with the decrease in sales for the six months ended June 30, 2020.
In our ASG segment, cost of revenue decreased by $8.0 million, or 9.0%, to $81.4 million for the six months ended June 30, 2020, from $89.5 million for the six months ended June 30, 2019. This was primarily associated with the decrease in sales for the six months ended June 30, 2020.
Gross Profit and Margin. For the six months ended June 30, 2020, gross profit decreased $21.5 million, or 25.9%, to $61.4 million, from $82.9 million for the six months ended June 30, 2019. For the six months ended June 30, 2020, gross margin decreased 4.5 percentage points to 23.6%, from 28.1% for the six months ended June 30, 2019.
29
In our RDS segment, gross margin decreased 5.1 percentage points to 22.9% for the six months ended June 30, 2020, from 28.0% for the six months ended June 30, 2019. This decrease is due to unabsorbed fixed costs and an unfavorable product mix.
In our ASG segment, gross margin decreased 3.1 percentage points to 24.6% for the six months ended June 30, 2020, from 27.8% for the six months ended June 30, 2019. The decrease was primarily due to an unfavorable product and price mix, unabsorbed fixed costs, and an increase in other non-product costs.
Operating Expense. For the six months ended June 30, 2020, operating expenses decreased by $9.5 million, or 13.0%, to $63.4 million from $72.9 million for the six months ended June 30, 2019.
In our RDS segment, operating expenses decreased by $5.0 million to $36.0 million for the six months ended June 30, 2020, from $41.0 million for the six months ended June 30, 2019. This decrease was related to furloughs, exits, lower sales commissions and other COVID-19 austerity measures put in place during the six months ended June 30, 2020.
In our ASG segment, operating expenses decreased by $3.6 million to $18.9 million for the six months ended June 30, 2020, from $22.6 million for the six months ended June 30, 2019. This decrease was related to furloughs, exits, lower sales commissions and other COVID-19 austerity measures put in place during the six months ended June 30, 2020.
The remaining $0.8 million of the decrease in operating expenses was primarily the result of a reversal of stock compensation expense for performance-based non-vested shares for which the performance condition was no longer probable, offset by compensation costs associated with the hiring of a new chief executive officer, including the severance costs granted to the former chief executive officer.
Depreciation and Amortization. For the six months ended June 30, 2020, depreciation and amortization expenses decreased by $1.3 million, or 10.4%, to $11.4 million, from $12.7 million for the six months ended June 30, 2019.
In our RDS segment, depreciation and amortization expenses decreased by $1.2 million, or 17.7%, to $5.8 million for the six months ended June 30, 2020, which was primarily due to certain RDS customer list intangibles that fully amortized during 2019, partially offset by additional assets in-service, including the new ERP system at RDS.
In our ASG segment, depreciation and amortization expenses remained relatively consistent, decreasing by only $0.1 million, or 1.3%, to $5.5 million for the six months ended June 30, 2020.
Interest Expense. For the six months ended June 30, 2020, interest expense decreased by $1.3 million, or 14.6%, to $7.5 million, from $8.8 million for the six months ended June 30, 2019. Interest expense decreased primarily due to decreased interest rates during the period despite higher borrowings.
Income Taxes. For the six months ended June 30, 2020, we recognized income tax benefit of $3.7 million, a decrease of $4.3 million from income tax expense of $0.6 million for the six months ended June 30, 2019. This decrease is related to our decrease in profitability during the six months ended June 30, 2020. For the six months ended June 30, 2020, the effective tax rate of 34.00% increased compared to the effective tax rate of 33.10% for the six months ended June 30, 2019, primarily because of the impact of discrete items related to equity-based compensation and uncertain tax positions.
Net Income (Loss). For the six months ended June 30, 2020, net income decreased by $8.5 million to a $7.2 million loss, from $1.3 million net income for the six months ended June 30, 2019.
30
Adjusted EBITDA. For the six months ended June 30, 2020, Adjusted EBITDA decreased to $14.9 million, from $29.1 million for the six months ended June 30, 2019.
|
|
|
For the Six Months Ended June 30, |
|
|||||
|
(in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Consolidated net income (loss) |
|
$ |
(7,181 |
) |
|
$ |
1,289 |
|
|
Income tax expense (benefit) |
|
|
(3,699 |
) |
|
|
638 |
|
|
Interest expense |
|
|
7,527 |
|
|
|
8,809 |
|
|
Depreciation and amortization |
|
|
11,367 |
|
|
|
12,681 |
|
|
EBITDA |
|
|
8,014 |
|
|
|
23,417 |
|
|
Equity-based compensation |
|
|
554 |
|
|
|
1,988 |
|
|
Purchase accounting fair value adjustments |
|
|
- |
|
|
|
(563 |
) |
|
Acquisition and integration related costs |
|
|
1,366 |
|
|
|
2,205 |
|
|
Employee related reorganization costs |
|
|
1,481 |
|
|
|
686 |
|
|
Other non-recurring costs |
|
|
2,269 |
|
|
|
507 |
|
|
Strategic alternatives costs |
|
|
1,227 |
|
|
|
890 |
|
|
Adjusted EBITDA |
|
$ |
14,911 |
|
|
$ |
29,130 |
|
Adjusted EBITDA Margin. For the six months ended June 30, 2020, Adjusted EBITDA margin decreased to 5.7% from 9.9% for the six months ended June 30, 2019.
Non-GAAP Measures
In addition to the results reported in accordance with United States generally accepted accounting principles (which we refer to as “GAAP”), we have provided information in this Report relating to EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. We have provided definitions below for these non-GAAP financial measures and have provided the tables above reconciling these non-GAAP financial measures to the comparable GAAP financial measures.
We believe that these non-GAAP financial measures provide valuable information regarding our earnings and business trends by excluding specific items that we believe are not indicative of the ongoing operating results of our businesses, providing a useful way for investors to make a comparison of our performance over time and against other companies in our industry.
We have provided these non-GAAP financial measures as supplemental information to our GAAP financial measures and believe these non-GAAP measures provide investors with additional meaningful financial information regarding our operating performance and cash flows. Our management and board of directors also use these non-GAAP measures as supplemental measures to evaluate our businesses and the performance of management, including the determination of performance-based compensation, to make operating and strategic decisions, and to allocate financial resources. We believe that these non-GAAP measures also provide meaningful information for investors and securities analysts to evaluate our historical and prospective financial performance. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Furthermore, the non-GAAP measures presented by us may not be comparable to similarly titled measures of other companies.
EBITDA is defined as consolidated net income before interest, taxes, and depreciation and amortization. Adjusted EBITDA is defined as consolidated net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization expense, (iv) stock compensation expense, and (v) adjustments for costs that are deemed to be transitional in nature or not related to our core operations, such as severance and employee related reorganization costs, purchase accounting fair value adjustments, strategic alternatives costs, facility closure costs, and professional, financing and legal fees related to business acquisitions, or similar transitional costs and expenses related to business investments, greenfield investments, and integrating acquired businesses into our Company. Adjusted EBITDA margin is calculated as a percentage of our net revenue. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are non-GAAP financial measures used by us as supplemental measures in evaluating our operating performance.
Liquidity and Capital Resources
Working capital is the largest element of our capital needs, as inventory and receivables are our most significant investments. We also require funding for acquisitions, to cover ongoing operating expenses, and to meet required obligations related to financing, such as lease payments and principal and interest payments.
31
Our capital resources primarily consist of cash from operations and borrowings under our long-term revolving credit facility, capital equipment leases, and operating leases. As our revenue and profitability have improved during the recovery of the housing market, we have used increased borrowing capacity under our revolving credit facility to fund working capital needs. We have utilized capital leases and secured equipment loans to finance our vehicles and equipment needed for both replacement and expansion purposes.
As of June 30, 2020, we had liquidity of $62.6 million, comprised of $2.9 million of cash and $59.7 million of available borrowing capacity under our revolving credit facility.
Financing Sources; Debt
SIC Credit Facility
In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018 (which we refer to as the “SIC Credit Facility”), with a commercial bank. The SIC Credit Facility is used by the Company, including both RDS and ASG, for operational purposes. Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings in an initial amount of up to an aggregate of $90 million (after it was increased by $10 million through the amendment in December 2018), and which may be further increased to an aggregate amount not to exceed $130 million upon the satisfaction of certain conditions.
Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate stated amount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a dollar-for-dollar basis by the aggregate stated amount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries.
The revolving loans under the SIC Credit Facility bear interest at a floating rate, which the Company can elect between a LIBOR based rate plus an applicable margin varying from one hundred twenty five basis points (1.25%) to one hundred seventy five basis points (1.75%) based on the borrowers’ average daily availability determined quarterly, or a base rate (determined as the greatest of the Prime rate, the Federal Funds rate plus a fifty basis point (0.50%) margin, or the LIBOR rate with a 30 day interest period plus a two hundred basis point (2.00%) margin) plus an applicable margin varying from twenty five basis points (0.25%) to seventy five basis points (0.75%) based on the borrowers’ average daily availability determined quarterly. Upon the occurrence of certain events of default under the SIC Credit Facility, the interest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%). All revolving loans under the SIC Credit Facility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions. Letter of credit obligations under the SIC Credit Facility are due and payable on the date set forth in the respective loan documents or upon demand by the lender.
Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.
The SIC Credit Facility is subject to certain financial covenants. At June 30, 2020, the Company was in compliance with the financial and non-financial covenants.
As of June 30, 2020, $9.6 million was outstanding under the SIC Credit Facility. The Company also had $0.4 million of outstanding letters of credit under the SIC Credit Facility at June 30, 2020.
Term Loan Facility
On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, was further amended in August 2018 to adjust the borrowing capacity to $101.4 million, and was further amended in December 2018 to increase the borrowing capacity to $174.2 million. On February 7, 2020, the Term Loan Facility was amended to revise certain leverage ratio covenant requirements. The required leverage ratio measured as of the end of each fiscal quarter ending on March 31, 2020 and each fiscal quarter thereafter to (and including) the fiscal quarter ending December 31, 2020 was increased to 3.90:1.00, after which it reduces to 3.75:1.00 for the fiscal quarter ending March 31, 2021 and each fiscal quarter ending thereafter.
32
Borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus 4.75% for a base rate loan, or (ii) the LIBOR rate plus 6.75% for a LIBOR loan in the event the leverage ratio is greater than 2.40:1.00. In the event the leverage ratio is less than 2.40:1.00, the rates decrease to either (i) the base rate plus 4.25% for a base rate loan or (ii) the LIBOR rate plus 6.25% for a LIBOR loan. The base rate is the greatest of the publicly announced interest rate by the reference bank as its reference rate, the base commercial lending rate or prime rate, and 3.5% per annum. During an insolvency proceeding or during any other event of default (if elected by the required lenders), the borrowings under the Term Loan Facility bear interest at the default rate, which is 2% per annum plus the interest rate otherwise applicable to such indebtedness. The borrowings under the Term Loan Facility are secured by substantially all of the assets of, and the performance and payment by borrowers thereunder are guaranteed by, the Company and certain of its subsidiaries.
Following the delivery of audited annual financial statements for each fiscal year, the Term Loan Facility requires the Company to prepay amounts outstanding under the Term Loan Facility with (i) 75% of the excess cash flow of the Company minus the aggregate principal amount of all optional prepayments made in such preceding fiscal year, if the leverage ratio is greater than 3.25:1.00, or (ii) 50% of the excess cash flow of the Company minus the aggregate principal amount of all optional prepayments made in such preceding fiscal year, if the leverage ratio is less than or equal to 3.25:1.00.
In addition, the Term Loan Facility also requires the Company to prepay amounts outstanding, subject to certain exceptions (and, with respect to clauses (i) and (ii) below, certain limited reinvestment rights), with: (i) 100% of the net proceeds of any asset disposition in excess of $0.75 million in any fiscal year, (ii) 100% of any insurance or condemnation awards that are greater than $2.5 million, (iii) 100% of the net proceeds of any equity issuances, (iv) 100% of the net proceeds of any issuance of indebtedness (other than certain permitted indebtedness), and (v) 100% of any net cash proceeds received outside the ordinary course of business.
All term loans under the Term Loan Facility are due and payable in full on February 28, 2023, subject to earlier acceleration upon certain conditions.
Under the Term Loan Facility, the Company is required to comply with certain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company to (i) incur additional indebtedness and liens, (ii) make certain capital expenditures, (iii) pay dividends and make certain other distributions, (iv) sell or dispose of property or assets, (v) make loans, (vi) make payment of certain debt, (vii) make fundamental changes, (viii) enter into transactions with affiliates, and (ix) engage in any new businesses. The Term Loan Facility also contains certain customary representations and warranties, affirmative covenants, and reporting obligations.
On April 8, 2020, the Term Loan Facility was further amended, which amendment, among other things, (i) waived the requirement that the Company prepay the Term Loans with Excess Cash Flow (as defined in the Term Loan Facility) due for payment during the year ending December 31, 2020, (ii) amended the Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) covenant applicable to the fiscal year ending December 31, 2020 to be tested on a monthly basis and requires the Company and its subsidiaries to maintain a reduced Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) of not less than 1.00:1.00 for each month during such fiscal year, and (iii) does not require the Company to test the Total Leverage (as defined in the Term Loan Facility) covenant effective as of the execution date of April 8, 2020 through and including December 31, 2020 for any fiscal quarter end during such period, for so long as the Company and its subsidiaries maintain Financial Covenant Availability (as defined in the Term Loan Facility) of not less than $35 million at all times during such fiscal quarter.
Substantially all of the Company’s assets are collateral for the Term Loan Facility, including accounts receivable and inventory, except assets identified as collateral for the SIC Credit Facility which hold a senior position. The Company is also restricted from paying dividends to its stockholders. Additionally, substantially all of the Company’s subsidiaries are restricted by the Term Loan Facility from providing loans, advances and dividends to the SIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to the Term Loan Facility. The Company was in compliance with all financial and nonfinancial covenants as of June 30, 2020 and December 31, 2019.
As of June 30, 2020, approximately $153.3 million of indebtedness was outstanding under the Term Loan Facility.
Vehicle and Equipment Financing
We have used various secured loans and leases to finance our acquisition of vehicles. As of June 30, 2020, approximately $9.2 million of indebtedness was outstanding under vehicle and equipment loans and capital leases.
Historical Cash Flow Information
Working Capital
Inventory and accounts receivable represent approximately 72% of our tangible assets, and accordingly, management of working capital is important to our businesses. Working capital (defined as current assets less current liabilities, excluding debt and cash) totaled $102.6 million at June 30, 2020, compared to $113.4 million at December 31, 2019, for a net decrease of $10.8 million, primarily due to a decrease in accounts receivable resulting mainly from decreasing sales and an increase in accounts payable due to working capital management as of June 30, 2020.
33
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $17.6 million and $8.8 million for the six months ended June 30, 2020 and 2019, respectively. Net loss was $7.2 million for the six months ended June 30, 2020, and net income was $1.3 million for the six months ended June 30, 2019.
Adjustments for noncash expenses included in the calculation of net cash provided by operating activities, including amortization and depreciation, changes in deferred income taxes and other noncash items, totaled $12.4 million for the six months ended June 30, 2020, and $14.2 million for the six months ended June 30, 2019.
Changes in operating assets and liabilities resulted in net cash provided of $12.4 million for the six months ended June 30, 2020. Changes in operating assets and liabilities resulted in net cash used of $6.7 million for the six months ended June 30, 2019.
Cash Flows Used in Investing Activities
For the six months ended June 30, 2020, cash flow used in investing activities was $2.4 million for capital expenditures for property and equipment, net of proceeds from disposals. For the six months ended June 30, 2019, cash flow used in investing activities was $19.0 million, with $1.0 million for the indemnity payment related to the Bedrock acquisition, $11.5 million for the acquisition of Intown, and $3.0 million for the escrow payment related to the Greencraft acquisition. Capital expenditures for property and equipment, net of proceeds from disposals, totaled $3.5 million.
Cash Flows Provided by / (Used in) Financing Activities
Net cash provided by / (used in) financing activities was $(17.2) million and $2.7 million for the six months ended June 30, 2020 and 2019, respectively.
For the six months ended June 30, 2020, we made principal payments of $0.5 million on term debt. As of June 30, 2020, aggregate net payments on the SIC Credit Facility were $12.6 million and payments on notes payable were $1.5 million. During the six months ended June 30, 2020, we also purchased $0.7 million of treasury stock and received proceeds from our ERP system financing of $0.4 million. For the six months ended June 30, 2019, we borrowed an additional $11.5 million in term debt, and made principal payments of $1.3 million, for a net increase in term debt of $10.2 million. As of June 30, 2019, aggregate net payments on the SIC Credit Facility were $0.8 million and payments on notes payable were $0.8 million. We also classified $5.8 million of the total $8.0 million Greencraft earnout payment as a financing activity, as this was the fair value of the contingent liability accrued at purchase.
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations as of June 30, 2020. Some of the amounts included in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table.
|
|
|
Payments due by period |
|
|||||||||||||||||
|
(in thousands) |
|
Total |
|
|
Remaining in 2020 |
|
|
1 to 3 years |
|
|
3 - 5 years |
|
|
More than 5 years |
|
|||||
|
Long-term debt obligations(1) |
|
$ |
153,810 |
|
|
$ |
813 |
|
|
$ |
2,314 |
|
|
$ |
150,683 |
|
|
$ |
- |
|
|
Capital lease obligations(2) |
|
|
9,447 |
|
|
|
1,514 |
|
|
|
5,424 |
|
|
|
2,124 |
|
|
|
385 |
|
|
Operating lease obligations(3) |
|
|
49,614 |
|
|
|
7,879 |
|
|
|
26,479 |
|
|
|
10,157 |
|
|
|
5,099 |
|
|
Purchase obligations(4) |
|
|
704,187 |
|
|
|
37,417 |
|
|
|
199,477 |
|
|
|
282,704 |
|
|
|
184,589 |
|
|
Total |
|
$ |
917,058 |
|
|
$ |
47,623 |
|
|
$ |
233,694 |
|
|
$ |
445,668 |
|
|
$ |
190,073 |
|
|
(1) |
Long-term debt obligations include principal payments on our term loans as well as our notes payable. Long-term debt obligations do not include interest or fees on the unused portion of our revolving letters of credit or financing fees associated with the issuance of debt. |
|
(2) |
Capital lease obligations include payments, including interest, on capital leases for vehicles and equipment purchased. |
|
(3) |
We lease certain locations, including, but not limited to, corporate offices, warehouses, fabrication shops, and design centers. For additional information, see Note 11—Commitments and Contingencies to our condensed consolidated financial statements included in this Report. |
34
|
(4) |
These amounts take into account a contract with a supplier of engineered stone on an exclusive basis in certain states within the United States. As part of the terms of the exclusive right to distribute the products provided under the contract, we are obligated to take delivery of a certain minimum amount of product from this supplier. If we fall short of these minimum purchase requirements in any given calendar year, we have agreed to negotiate with the supplier to arrive at a mutually acceptable resolution. There are no financial penalties to us if such commitments are not met; however, in such a case, the supplier has reserved the right, under the contract, to withdraw the exclusive distribution rights granted to us. The amount of the payment is estimated by multiplying the minimum quantity required under the contract by the average price paid in 2019. See Note 11—Commitments and Contingencies to our condensed consolidated financial statements included in this Report for a further discussion of these minimum purchase requirements. |
In addition to the contractual obligations set forth above, as of June 30, 2020, we had an aggregate of approximately $9.6 million of indebtedness outstanding under the SIC Credit Facility.
Off-Balance Sheet Arrangements
As of June 30, 2020, with the exception of operating leases that we typically use in the ordinary course of business, we were not party to any material off-balance sheet financial arrangements that are reasonably likely to have a current or future effect on our financial condition or operating results. We do not have any relationship with unconsolidated entities or financial partnerships for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
There have been no material changes for the six months ended June 30, 2020 from the critical accounting policies and estimates as previously disclosed in our financial statements included in our 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 12, 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We borrow from lenders using financial instruments such as revolving lines of credit, term loans, and notes payable. In many cases, the interest costs we incur under these agreements are calculated using a variable rate that will fluctuate with changes in a published short-term market interest rate index, such as LIBOR. Accordingly, there is no guarantee as to what our interest payments and expense will be in the future. In an economic environment where short term rates (under one year) may increase or continue to increase at any time, there can be no assurance that interest rates will not be higher in the future and have an adverse effect on our financial soundness. At June 30, 2020, we had outstanding variable rate borrowings of approximately $162.9 million. Assuming the current level of borrowing under the variable rate debt facility, a hypothetical one-percentage point increase (decrease) in interest rates on our variable rate debt would increase (decrease) our annual interest expense by $1.6 million.
For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments during the years ended December 31, 2019 and 2018 or during the six months ended June 30, 2020. We have not entered into and currently do not hold derivatives for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
We purchase materials from both domestic and foreign suppliers. While all of the suppliers receive payments in U.S. dollars and, as such, we are not currently exposed to any foreign currency exchange rate risk, there can be no assurance that the payments to suppliers in the future will not be affected by exchange fluctuations between the U.S. dollar and the local currencies of these foreign suppliers.
35
Item 4. Controls and Procedures.
Limitations on the Effectiveness of Controls
We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation
The evaluation of our disclosure controls and procedures included a review of their objectives and design, and the effect of the controls and procedures on the information generated for use in this quarterly report. In the course of our evaluation, we sought to identify whether we had any incorrect data, control issues or instances of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken as needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q. Many of the components of our disclosure controls and procedures are also evaluated by our third-party internal auditors and by personnel in our finance and legal departments. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them while addressing any changes necessary in a dynamic environment.
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer (which we refer to as, together, the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures, as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation of our disclosure controls and procedures, our Certifying Officers concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain of its subsidiaries are from time to time subject to various claims, complaints and other legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed under Item 1A, "Risk Factors" and elsewhere in the Company’s 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and also the COVID-19 related risk factor contained in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020. These risks and uncertainties could materially and adversely affect the Company’s business, consolidated financial condition, results of operations, or cash flows. The Company’s operations could also be affected by additional factors that are not presently known to us or by factors that we currently do not consider material to our business. There have been no material changes in the risk factors discussed in the Company’s 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding the repurchase of our common stock for the three months ended June 30, 2020:
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs |
|
||||
|
April 1, 2020 - April 30, 2020 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
May 1, 2020 - May 31, 2020 |
|
|
2,967 |
|
|
|
2.48 |
|
|
|
- |
|
|
|
- |
|
|
June 1, 2020 - June 30, 2020 |
|
|
13,098 |
|
|
|
3.15 |
|
|
|
- |
|
|
|
- |
|
|
Total |
|
|
16,065 |
|
|
$ |
3.03 |
|
|
|
- |
|
|
|
- |
|
|
(1) |
Represents shares surrendered to the Company by employees to satisfy tax withholding obligations arising in connection with the vesting of 75,641 shares of restricted stock awarded under our 2017 Plan. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
37
Item 6. Exhibits.
The following exhibits are filed, furnished or incorporated by reference as part of this Report.
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
|
3.1 |
|
||
|
|
|
|
|
|
3.2 |
|
||
|
|
|
|
|
|
10.1†* |
|
Employment Agreement, dated as of June 8, 2020, by and between the Company and L.W. Varner, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
31.1* |
|
||
|
|
|
|
|
|
31.2* |
|
||
|
|
|
|
|
|
32.1* |
|
||
|
|
|
|
|
|
32.2* |
|
||
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance 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) |
|
|
* |
Filed or furnished herewith. |
|
† |
Management contract or compensatory plan or arrangement. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
Select Interior Concepts, Inc. |
|
|
|
|
|
|
|
Date: August 6, 2020 |
|
By: |
/s/ L.W. Varner, Jr. |
|
|
|
|
L.W. Varner, Jr. |
|
|
|
|
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
Date: August 6, 2020 |
|
By: |
/s/ Nadeem Moiz |
|
|
|
|
Nadeem Moiz |
|
|
|
|
Chief Financial Officer (Principal Financial Officer) |
39