Stonemor Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2021


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

For the transition period from to .

Commission File Number: 001-39172

STONEMOR INC.

(Exact name of registrant as specified in its charter)

Delaware

80-0103152

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3331 Street Road, Suite 200

Bensalem, Pennsylvania

19020

(Address of principal executive offices)

(Zip Code)

(Registrant’s telephone number, including area code): (215) 826-2800

__________________________________

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	STON	New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

The number of shares of the registrant’s common stock outstanding at November 9, 2021 was 118,058,641.

FORM 10-Q OF STONEMOR INC.

TABLE OF CONTENTS



PART I	Financial Information

Item 1.	Financial Statements (Unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	54


PART II	Other Information

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults upon Senior Securities	59

Item 4.	Mine Safety Disclosures	59

Item 5.	Other Information	59

Item 6.	Exhibits	60

	Signatures	61

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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STONEMOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)


	September 30,			December 31,
	2021			2020
Assets
Current assets:
Cash and cash equivalents, excluding restricted cash	$	99,509		$	39,244
Restricted cash		16,415			20,846
Accounts receivable, net of allowance		60,066			57,869
Prepaid expenses		9,387			5,290
Assets held for sale		—			28,575
Other current assets		14,963			16,884
Total current assets		200,340			168,708

Long-term accounts receivable, net of allowance		76,051			75,301
Cemetery property		296,250			299,526
Property and equipment, net of accumulated depreciation		80,055			83,496
Merchandise trusts, restricted, at fair value		548,541			501,453
Perpetual care trusts, restricted, at fair value		335,076			312,228
Deferred selling and obtaining costs		122,488			116,900
Deferred tax assets		—			9
Intangible assets, net		54,291			55,094
Other assets		23,819			22,248
Total assets	$	1,736,911		$	1,634,963

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities	$	45,311		$	51,718
Liabilities held for sale		—			23,406
Accrued interest		13,222			95
Current portion, long-term debt		1,769			317
Total current liabilities		60,302			75,536

Long-term debt, net of deferred financing costs		389,672			320,715
Deferred revenues		1,027,565			949,164
Deferred tax liabilities		17,823			29,652
Perpetual care trust corpus		335,076			312,228
Other long-term liabilities		42,219			40,081
Total liabilities		1,872,657			1,727,376
Commitments and contingencies

Stockholders' equity:
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 118,011,766 and 117,871,141 shares issued and outstanding, respectively		1,180			1,178
Paid-in capital in excess of par value		(83,709	)		(85,232	)
Accumulated deficit		(53,217	)		(8,359	)
Total stockholders' equity		(135,746	)		(92,413	)
Total liabilities and stockholders' equity	$	1,736,911		$	1,634,963

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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STONEMOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenues:
Cemetery:
Interments	$	21,954		$	20,316		$	65,379		$	51,542
Merchandise		16,935			15,949			51,004			44,918
Services		17,240			16,078			52,219			47,656
Investment and other		14,685			9,677			41,320			29,564
Funeral home:
Merchandise		6,120			5,793			17,542			16,004
Services		5,361			4,900			16,125			14,732
Total revenues		82,295			72,713			243,589			204,416
Costs and Expenses:
Cost of goods sold		11,023			9,624			34,642			28,307
Cemetery expense		19,286			16,198			55,537			50,375
Selling expense		14,451			13,119			43,434			37,376
General and administrative expense		10,534			10,027			31,377			28,672
Corporate overhead		9,983			9,762			29,058			27,019
Depreciation and amortization		1,989			2,244			6,118			6,851
Funeral home expenses:
Merchandise		1,668			1,539			4,807			4,239
Services		4,874			4,775			14,012			13,594
Other		3,543			2,834			9,801			8,084
Total costs and expenses		77,351			70,122			228,786			204,517

Loss on sale of business and other impairments		(70	)		—			(2,290	)		—
Other losses, net		(605	)		—			(536	)		—
Operating income (loss)		4,269			2,591			11,977			(101	)
Interest expense		(9,256	)		(11,870	)		(29,706	)		(34,952	)
Loss on debt extinguishment		—			—			(40,128	)		—
Loss from continuing operations before income taxes		(4,987	)		(9,279	)		(57,857	)		(35,053	)
Income tax benefit		240			1,129			11,652			3,333
Net loss from continuing operations		(4,747	)		(8,150	)		(46,205	)		(31,720	)
Discontinued operations (Note 2):
(Loss) Income from operations of discontinued businesses		(102	)		293			1,347			28,952
Income tax expense		—			—			—			—
Net (loss) income from discontinued operations		(102	)		293			1,347			28,952
Net loss	$	(4,849	)	$	(7,857	)	$	(44,858	)	$	(2,768	)

Net loss from continuing operations per common share (basic)	$	(0.04	)	$	(0.07	)	$	(0.39	)	$	(0.31	)
Net (loss) income from discontinued operations per common share (basic)		(0.00	)		0.00			0.01			0.28
Net loss per common share (basic)	$	(0.04	)	$	(0.07	)	$	(0.38	)	$	(0.03	)

Net loss from continuing operations per common share (diluted)	$	(0.04	)	$	(0.07	)	$	(0.39	)	$	(0.31	)
Net (loss) income from discontinued operations per common share (diluted)		(0.00	)		0.00			0.01			0.28
Net loss per common share (diluted)	$	(0.04	)	$	(0.07	)	$	(0.38	)	$	(0.03	)
Weighted average number of common shares outstanding - basic		118,003			117,819			117,956			103,341
Weighted average number of common shares outstanding - diluted		118,003			117,819			117,956			103,341

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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STONEMOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except shares)


	Common Stock
	Number of Common Shares		Par Value of Common Shares		Paid-in Capital in Excess of Par Value			Accumulated Deficit			Total
Three Months Ended March 31, 2021
December 31, 2020		117,871,141	$	1,178	$	(85,232	)	$	(8,359	)	$	(92,413	)
Common stock awards under incentive plans		46,875		1		504			—			505
Net loss		—		—		—			(4,624	)		(4,624	)
March 31, 2021		117,918,016	$	1,179	$	(84,728	)	$	(12,983	)	$	(96,532	)

Three Months Ended June 30, 2021
March 31, 2021		117,918,016	$	1,179	$	(84,728	)	$	(12,983	)	$	(96,532	)
Common stock awards under incentive plans		46,875		1		507			—			508
Net loss		—		—		—			(35,385	)		(35,385	)
June 30, 2021		117,964,891	$	1,180	$	(84,221	)	$	(48,368	)	$	(131,409	)

Three Months Ended September 30, 2021
June 30, 2021		117,964,891	$	1,180	$	(84,221	)	$	(48,368	)	$	(131,409	)
Common stock awards under incentive plans		46,875		—		512			—			512
Net loss		—		—		—			(4,849	)		(4,849	)
September 30, 2021		118,011,766	$	1,180	$	(83,709	)	$	(53,217	)	$	(135,746	)


	Series A Preferred Stock					Common Stock
	Number of Series A Preferred Shares			Par Value of Series A Preferred Shares		Number of Common Shares		Par Value of Common Shares		Paid-in Capital in Excess of Par Value			Retained Earnings			Total
Three Months Ended March 31, 2020
December 31, 2019		—		$	—		94,447,356	$	944	$	(103,434	)	$	—		$	(102,490	)
Common stock awards under incentive plans		—			—		29,746		—		375			—			375
Net income		—			—		—		—		—			9,003			9,003
March 31, 2020		—		$	—		94,477,102	$	944	$	(103,059	)	$	9,003		$	(93,112	)

Three Months Ended June 30, 2020
March 31, 2020		—		$	—		94,477,102	$	944	$	(103,059	)	$	9,003		$	(93,112	)
Issuance of Series A Preferred Stock		176			—		—		—		8,800			—			8,800
Exchange of Series A Preferred Stock for Common Stock		(176	)		—		12,054,795		121		(121	)		—			—
Issuance of Common Stock		—			—		11,232,877		112		8,088			—			8,200
Common stock awards under incentive plans		—			—		29,746		—		317			—			317
Net loss		—			—		—		—		—			(3,914	)		(3,914	)
June 30, 2020		—		$	—		117,794,520	$	1,177	$	(85,975	)	$	5,089		$	(79,709	)

Three Months Ended September 30, 2020
June 30, 2020		—		$	—		117,794,520	$	1,177	$	(85,975	)	$	5,089		$	(79,709	)
Common stock awards under incentive plans		—			—		29,746		1		351			—			352
Net loss		—			—		—		—		—			(7,857	)		(7,857	)
September 30, 2020		—		$	—		117,824,266	$	1,178	$	(85,624	)	$	(2,768	)	$	(87,214	)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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STONEMOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended September 30,
	2021			2020
Cash Flows From Operating Activities:
Net loss	$	(44,858	)	$	(2,768	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cost of lots sold		5,146			4,346
Depreciation and amortization		6,158			7,078
Provision for bad debt		5,074			4,529
Non-cash compensation expense		1,525			1,080
Loss on debt extinguishment		40,128			—
Non-cash interest expense		3,740			16,159
Loss (gain) on sale of businesses		1,525			(31,120	)
Other losses, net		536			2,169
Changes in assets and liabilities:
Payment of paid-in-kind interest		(18,440	)		—
Accounts receivable, net of allowance		(16,205	)		(16,180	)
Merchandise trust fund		(37,542	)		(12,284	)
Other assets		(4,846	)		3,799
Deferred selling and obtaining costs		(6,486	)		(4,974	)
Deferred revenues		77,518			39,238
Deferred taxes, net		(11,821	)		(3,490	)
Payables and other liabilities		9,275			(3,797	)
Net cash provided by operating activities		10,427			3,785
Cash Flows From Investing Activities:
Cash paid for capital expenditures		(5,675	)		(4,784	)
Proceeds from divestitures		6,462			48,336
Net cash provided by investing activities		787			43,552
Cash Flows From Financing Activities:
Proceeds from issuance of Series A Preferred Stock		—			8,800
Proceeds from issuance of Common Stock		—			8,200
Proceeds from borrowings		406,235			3,672
Repayments of debt		(331,197	)		(54,782	)
Principal payment on finance leases		(1,097	)		(1,061	)
Early redemption premium		(18,478	)		—
Cost of financing activities		(10,843	)		(4,294	)
Shares repurchased related to share-based compensation		—			(35	)
Net cash provided by (used in) financing activities		44,620			(39,500	)
Net increase in cash, cash equivalents and restricted cash		55,834			7,837
Cash, cash equivalents and restricted cash—Beginning of period		60,090			56,767
Cash, cash equivalents and restricted cash—End of period	$	115,924		$	64,604
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	31,259		$	20,361
Cash paid during the period for income taxes		2,727			1,077
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,446		$	2,372
Operating cash flows from finance leases		253			328
Financing cash flows from finance leases		1,097			1,061
Non-cash investing and financing activities:
Accrued paid-in-kind interest on 2024 Notes	$	—		$	10,572

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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STONEMOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

GENERAL

As used in this Quarterly Report on Form 10-Q (the “Quarterly Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries.

Nature of Operations

The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. As of September 30, 2021, the Company operated 301 cemeteries in 24 states and Puerto Rico, of which 271 were owned and 30 were operated under lease, management or operating agreements. As of September 30, 2021, the Company also owned and operated 70 funeral homes, including 33 located on the grounds of cemetery properties that the Company owned, in 15 states and Puerto Rico.

The Company’s cemeteries provide cemetery property interment rights, such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery merchandise is comprised of burial vaults, caskets, grave markers and memorials. Cemetery services include the installation of this merchandise and other service items. The Company sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death, which is referred to as pre-need.

The Company’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home facilities for visitation and memorial services.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements, which are unaudited, have been prepared in accordance with the requirements of the Quarterly Report on Form 10-Q and Generally Accepted Accounting Principles (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Annual Reports on Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods disclosed have been made. The balance sheet at December 31, 2020 has been derived from the audited consolidated financial statement as of December 31, 2020, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with Securities and Exchange Commission ("SEC") on March 25, 2021 (the “Annual Report”). The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Annual Report. The results of operations for the nine months ended September 30, 2021 may not necessarily be indicative of the results of operations for the full year ending December 31, 2021.

The unaudited condensed consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 30 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.

The Company operates 14 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and interment rights and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.

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Axar Letter

On September 27, 2021, the Company announced that it had received a letter (the “Letter”) dated September 22, 2021 from Axar Capital Management, LP ("Axar") in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expects that any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors it engages. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions.

Refinancing

On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”). The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to an indenture (the “2029 Indenture”), dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes, StoneMor Partners L.P. (the “Partnership”) and Cornerstone Family Services of West Virginia Subsidiary, Inc. (collectively, the “2024 Issuers”) deposited from the net cash proceeds from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the outstanding 9.875%/11.500% Senior Secured PIK Toggle Notes due 2024 (the “2024 Notes”) with Wilmington Trust, National Association (the “2024 Trustee”) as trustee under the Indenture, dated as of June 27, 2019 (as amended, the “2024 Indenture”), among the 2024 Issuers, the guarantors party thereto and the 2024 Trustee governing the 2024 Notes. Upon deposit of such funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the guarantors of the 2024 Notes, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture. Refer to Note 8 Long-Term Debt for more detailed information.

COVID-19 Pandemic

In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it continues to satisfy their requirements for offering the Company’s essential services.

The Company’s top priority is the health and safety of its employees and the families it serves. Since the start of the outbreak in the U.S., the Company’s senior management team has taken actions to protect its employees and the families it serves, and to support its field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of the Company’s facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of the Company’s employees and their families, the Company provided all of its employees with detailed health and safety literature on COVID-19, such as the industry-specific guidelines from the Centers for Disease Control and Prevention (the “CDC”) for working with the deceased who were or may have been infected with COVID-19. In addition, the Company’s procurement and safety teams have consistently secured and distributed supplies to ensure that the Company’s locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide its essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the number of attendees. The Company also implemented additional safety and precautionary measures as it concerns the businesses’ day-to-day interaction with the families and communities it serves. The Company’s corporate office

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employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the field operations. The Company has not experienced any significant disruptions to its business as a result of the work from home policies in its corporate office. The Company monitors the CDC guidance on a regular basis, continually reviews and updates its processes and procedures and provides updates to its employees as needed to comply with regulatory guidelines.

The Company’s marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that the Company can continue to connect with and meet its customers’ needs in a safe, effective and productive manner. Some of the Company’s locations provide live video streaming of their funeral and burial services to its customers or provide other alternatives that respect social distancing, so that family and friends can connect during their time of grief.

Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. At the start of the COVID-19 Pandemic in early 2020, the Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, since May 2020, the Company experienced at-need sales growth, and since late 2020, it has experienced pre-need sales growth. The Company believes the implementation of its virtual meeting tools is one of several key steps that has mitigated this disruption. Throughout the COVID-19 Pandemic, the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the locations in which it operates to the extent permitted by local authorities and the Company expects that this will continue. The Company has leveraged the relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and increased pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more available, the Company has experienced record growth in its pre-need cemetery sales. However, the Company had experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. During the year ended December 31, 2020, the Company incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.

The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows depending on COVID-19 variants and increased case counts. However, the Company cannot presently predict the likely scope and severity of that impact. The Company may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic.

Sources and Uses of Liquidity

The Company’s primary sources of liquidity are cash generated from operations, proceeds from asset sales and the remaining proceeds from the sale of the 2029 Notes. The Company’s primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution related (see “Summary of Significant Accounting Policies” section below regarding revenue recognition), which will reduce the amount of additional borrowings or asset sales needed. Based on the Company's forecasted operating performance, the issuance of the 2029 Notes and the redemption of the 2024 Notes, the Company believes that it will be able to continue as a going concern for the next twelve-month period.

Summary of Significant Accounting Policies

Refer to Note 1 General to the Company’s audited consolidated financial statements included in Item 8 of its Annual Report for the complete summary of significant accounting policies.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in its Annual Report. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from those estimates.

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Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents was $99.5 million and $39.2 million as of September 30, 2021 and December 31, 2020, respectively.

Restricted Cash

Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted cash was $16.4 million and $20.8 million as of September 30, 2021 and December 31, 2020, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety bonds.

Revenue

The Company's revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the unaudited condensed consolidated statements of operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the agreements are signed.

Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company fulfills the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of origination plus 375 basis points in order to segregate the principal and interest component of the total contract value. The Company has elected to not adjust the transaction price for the effects of a significant financing component for contracts that have payment terms under one year.

At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and records such obligations within other long-term liabilities line item on its consolidated balance sheets.

In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue in the amount to which the Company expect to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company only recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed as incurred.

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In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a customer’s exercise of any cancellation rights.

Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Nature of Goods and Services

The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.

Cemetery Operations

The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling price estimates.

Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum contracts, the Company only recognizes revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of the property.

Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.

Service revenue is recognized when the services are performed, and the performance obligation is thereby satisfied.

The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the cost per lot.

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Funeral Home Operations

The Company generates revenues in its Funeral Home Operations segment principally from (1) sales of funeral home merchandise which includes caskets and other funeral related items and (2) service revenues, which includes services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home Operations segment is principally derived from at-need sales.

Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.

Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.

Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.

Deferred Revenues

Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on our merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s acquisition of those entities or the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the unaudited condensed consolidated statements of operations.

Accounts Receivable, Net of Allowance

The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income, unfulfilled performance obligations on cancellable contracts and any cash deposit paid. The Company recognizes an allowance for doubtful accounts by applying a cancellation rate to amounts included in accounts receivable, which is recorded as a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific location. Management evaluates customer receivables for impairment based upon historical experience, including the age of the receivables and customers’ payment histories.

Leases

The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases primarily consist of vehicles and certain IT equipment. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the

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Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months, the Company records the lease liability and Right of Use (“ROU”) asset at commencement date based upon the present value of the sum of the remaining minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.

Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. Where leases contain escalation clauses, rent abatements and/or concessions, the Company applies them in the determination of lease expense. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that the Company will exercise the additional options.

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.

The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably assured renewal options, fixed escalation provisions and residual value guarantees in its calculation. Leasehold improvements are amortized over the shorter of the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.

The Company’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of the ROU asset and lease liability.

Income Taxes

The Company is subject to U.S. federal income taxes and certain state income and franchise taxes in the states in which it operates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

Income tax expense during interim periods is based on the Company's forecasted annual effective tax rate plus any discrete items on an estimated basis, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.

For the three months ended September 30, 2021 and 2020, the Company had an income tax benefit of $0.2 million and $1.1 million, respectively, and for the nine months ended September 30, 2021 and 2020, the Company had an income tax benefit of $11.7 million and $3.3 million, respectively. The Company's effective tax rate before discrete items was 4.7% and 12.6% for the three months ended September 30, 2021 and 2020, respectively, and 20.6% and 54.6% for the nine months ended September 30, 2021 and 2020, respectively.

Stock-Based Compensation

The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the

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underlying common stock of the Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects actual stock-based compensation expense.

Tax deductions on the stock-based compensation awards are not realized until the related income is recognized, which is generally when the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated statements of cash flows.

The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation awards by the Company withholding stock equal to such income tax obligations. However, employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to have stock withheld to satisfy such income tax obligations unless the Company’s Compensation, Nominating and Governance Committee provides that the employee must pay cash in lieu of having stock withheld. Shares of stock acquired from employees in connection with the settlement of the employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested or exercised.

Net Income (Loss) per Common Share (Basic and Diluted)

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shares by the sum of the weighted-average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted under the Company’s long-term incentive plan.

The following table sets forth the reconciliation of the Company’s weighted-average number of outstanding common shares for the three and nine months ended September 30, 2021 and 2020 used to compute basic net income (loss) attributable to common shares to those used to compute diluted net income (loss) per common share (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Weighted average number of outstanding common shares—basic		118,003		117,819		117,956		103,341
Plus effect of dilutive incentive awards(1):
Restricted shares		—		—		—		—
Stock options		—		—		—		—
Weighted average number of outstanding common shares—diluted		118,003		117,819		117,956		103,341

(1)

For the three months ended September 30, 2021 and 2020, the diluted weighted-average number of outstanding common shares does not include 452,040 and 4,343,201 shares issuable upon the exercise of outstanding options, respectively, and 885,291 and 375,000 restricted common shares, respectively, as their effects would have been anti-dilutive. For the nine months ended September 30, 2021 and 2020, the diluted weighted-average number of outstanding common shares does not include 474,325 and 3,667,425 shares issuable upon the exercise of outstanding options, respectively, and 694,903 and 375,000 restricted common shares, respectively, as their effects would have been anti-dilutive.

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Recently Issued Accounting Standard Updates - Not Yet Effective

Credit Losses

In June 2016, FASB issued ASU No. 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. In November 2018, FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.

Reference Rate Reform

In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). In order to ease the potential burden in accounting for reference rate reform, ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendment was effective beginning on March 12, 2020 and may be applied prospectively through December 31, 2022. In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of the guidance. The Company does not have hedging relationships or contracts that reference LIBOR or another reference rate expected to be discontinued, and it does not expect to utilize the optional expedients and exceptions provided by ASU 2020-04.

ACQUISITIONS AND DIVESTITURES

On March 23, 2021, the Company signed a definitive agreement to acquire four cemeteries located within its east coast geographic footprint for a total purchase price of $5.4 million, subject to customary working capital adjustments. The transaction is expected to close in the fourth quarter of 2021, subject to customary due diligence and regulatory approval.

In the fourth quarter of 2019, the Company launched an asset sale program designed to divest assets at attractive multiples, reduce debt levels and improve cash flow and liquidity. The following divestitures have resulted from this program.

On January 3, 2020, the Company sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc. for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related assets. The Oakmont Sale resulted in a gain of $24.4 million for the Company, which is included in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020. Net proceeds from the sale were used to redeem an aggregate $30.3 million principal amount of the 2024 Notes.

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On April 7, 2020, the Company completed the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory pursuant to the terms of an asset sale agreement (the “Olivet Agreement”) with Cypress Lawn Cemetery Association for an aggregate cash purchase price of $25.0 million, subject to certain adjustments (the “Olivet Sale”), and the assumption of certain liabilities, including $17.1 million in land purchase obligations. The Olivet Sale resulted in a gain of $7.2 million for the Company, which is included in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2020. The Company used net proceeds of $20.5 million to redeem additional 2024 Notes as required by the 2024 Indenture.

On November 3, 2020, the Company completed the sale of substantially all of the Company’s remaining California properties, consisting of five cemeteries, six funeral establishments and four crematories (the “Remaining California Assets”) pursuant to the terms of an asset sale agreement (the “California Agreement”) with certain entities owned by John Yeatman and Guy Saxton for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining California Sale” and together with the Olivet Sale, the “Total California Sale”). The Company used net proceeds of $5.7 million to redeem $5.6 million in principal amount of additional 2024 Notes as required by the 2024 Indenture.

On April 2, 2021, the Company completed the sale of substantially all of the Company’s assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories (the “Clearstone Assets”) pursuant to the terms of an asset sale agreement entered into on November 6, 2020 (the “Clearstone Agreement”) with Clearstone Memorial Partners, LLC for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone Sale”). The Company redeemed $6.7 million in principal amount of additional 2024 Notes as required by the 2024 Indenture.

The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represented a strategic exit from the west coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheet at December 31, 2020.

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Cemetery revenues	$	—		$	2,057		$	1,142		$	7,395
Funeral home revenues		—			2,086			1,146			6,997
Cost of goods sold		—			(353	)		(191	)		(1,157	)
Cemetery expense		—			(505	)		(233	)		(2,083	)
Selling expense		—			(539	)		(231	)		(1,940	)
General and administrative expense		—			(464	)		(151	)		(1,930	)
Depreciation and amortization		—			(41	)		(40	)		(227	)
Funeral home expenses		—			(1,621	)		(694	)		(5,430	)
Interest expense		—			(327	)		(166	)		(1,624	)
Income from discontinued operations before income taxes		—			293			582			1
Net (loss) gain on sale of businesses		(102	)		—			765			28,951
Income tax expense		—			—			—			—
Net (loss) income from discontinued operations	$	(102	)	$	293		$	1,347		$	28,952

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The following table summarizes the major classes of assets and liabilities that have been classified as held for sale on the Company’s unaudited condensed consolidated balance sheets at December 31, 2020:


	December 31, 2020
	Clearstone		Other		Total
Assets
Current assets:
Accounts receivable, net of allowance	$	230	$	—	$	230
Prepaid expenses and other current assets		104		—		104
Total current assets held for sale		334		—		334

Long-term accounts receivable, net of allowance		193		—		193
Cemetery property		3,492		350		3,842
Property and equipment, net of accumulated depreciation		2,529		—		2,529
Merchandise trusts, restricted, at fair value		14,831		—		14,831
Perpetual care trusts, restricted, at fair value		4,518		—		4,518
Deferred selling and obtaining costs		1,865		—		1,865
Other assets		463		—		463
Total assets held for sale	$	28,225	$	350	$	28,575

Liabilities
Current liabilities:
Accounts payable and accrued liabilities	$	51	$	—	$	51
Other current liabilities		—		—		—
Total current liabilities held for sale		51		—		51

Deferred revenues		18,456		—		18,456
Perpetual care trust corpus		4,518		—		4,518
Other long-term liabilities		381		—		381
Total liabilities held for sale	$	23,406	$	—	$	23,406

The following table presents the depreciation and amortization, capital expenditures, sale proceeds and significant operating noncash items of the discontinued operations for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
	2021		2020
Cash flows from discontinued operating activities:
Depreciation and amortization	$	40	$	227
Gain on sales of discontinued operations businesses		765		28,951

Cash flows from discontinued investing activities:
Capital expenditures	$	10	$	40
Proceeds from sales of discontinued businesses		5,898		48,336

On May 24, 2021, the Company completed the sale of three cemetery properties located in Missouri for a total purchase price of $720,000 (the “Missouri Sale”), resulting in a loss on sale of $1.7 million, which is included in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2021.

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ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):


	September 30, 2021			December 31, 2020
Customer receivables	$	156,828		$	154,903
Unearned finance income		(14,964	)		(16,022	)
Allowance for doubtful accounts		(5,747	)		(5,711	)
Accounts receivable, net of allowance		136,117			133,170
Less: Current portion, net of allowance		60,066			57,869
Long-term portion, net of allowance	$	76,051		$	75,301

Activity in the allowance for doubtful accounts was as follows (in thousands):


	September 30, 2021			December 31, 2020
Balance, beginning of period	$	5,892		$	5,884
Provision for doubtful accounts		5,074			6,275
Charge-offs, net		(5,219	)		(6,267	)
Amounts related to assets held for sale		—			(181	)
Balance, end of period	$	5,747		$	5,711

Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’ payment histories.

CEMETERY PROPERTY

Cemetery property consisted of the following at the dates indicated (in thousands):


	September 30, 2021		December 31, 2020
Cemetery land	$	229,958	$	232,548
Mausoleum crypts and lawn crypts		66,292		66,978
Cemetery property	$	296,250	$	299,526

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at the dates indicated (in thousands):


	September 30, 2021			December 31, 2020
Buildings and improvements	$	113,554		$	112,345
Furniture and equipment		53,109			53,199
Funeral home land		11,005			11,005
Property and equipment, gross		177,668			176,549
Less: Accumulated depreciation		(97,613	)		(93,053	)
Property and equipment, net of accumulated depreciation	$	80,055		$	83,496

At September 30, 2021, property and equipment, net included $0.3 million of assets held for sale.

Depreciation expense was $1.7 million and $2.0 million for the three months ended September 30, 2021 and 2020, respectively, and $5.3 million and $6.0 million for the nine months ended September 30, 2021 and 2020, respectively.

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MERCHANDISE TRUSTS

At September 30, 2021 and December 31, 2020, the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprises 47.9% of the total merchandise trust as of September 30, 2021. The merchandise trusts are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Company may be required to fund this shortfall.

The Company included $10.3 million and $10.0 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at September 30, 2021 and December 31, 2020, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.

A reconciliation of the Company’s merchandise trust activities for the nine months ended September 30, 2021 and 2020 is presented below (in thousands):


	Nine months ended September 30,
	2021			2020
Balance—beginning of period	$	516,284		$	517,192
Contributions		47,107			37,178
Distributions		(71,041	)		(49,950	)
Interest and dividends		31,539			22,329
Capital gain distributions		12,008			292
Realized gains and losses, net		14,511			(1,229	)
Other than temporary impairment		(136	)		(1,655	)
Taxes		(303	)		(306	)
Fees		(4,825	)		(5,261	)
Unrealized change in fair value		3,397			(22,271	)
Total		548,541			496,319
Less: Assets held for sale		—			(11,799	)
Balance—end of period	$	548,541		$	484,520

During the nine months ended September 30, 2021 and 2020, purchases of available for sale securities were approximately $62.3 million and $99.8 million, respectively. During the nine months ended September 30, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $37.8 million and $318.1 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s unaudited condensed consolidated statements of cash flows.

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The cost and market value associated with the assets held in the merchandise trusts as of September 30, 2021 and December 31, 2020 were as follows (in thousands):


September 30, 2021	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	40,665	$	—	$	—		$	40,665
Fixed maturities:
U.S. governmental securities	2		1		—		—			1
Corporate debt securities	2		2,711		890		—			3,601
Other debt securities	2		—		—		—			—
Total fixed maturities			2,712		890		—			3,602
Mutual funds—debt securities	1		6,096		148		—			6,244
Mutual funds—equity securities	1		1,021		293		—			1,314
Other investment funds(1)			427,072		33,902		(4,752	)		456,222
Equity securities	1		23,155		4,840		(1,587	)		26,408
Other invested assets	2		3,733		88		—			3,821
Total investments			504,454		40,161		(6,339	)		538,276
West Virginia Trust Receivable			10,568		—		(303	)		10,265
Total		$	515,022	$	40,161	$	(6,642	)	$	548,541

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to fifteen years with three potential one year extensions at the discretion of the funds’ general partners. As of September 30, 2021, there were $110.8 million in unfunded investment commitments to the private credit funds, which are callable at any time.


December 31, 2020	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	41,039	$	12	$	—		$	41,051
Fixed maturities:
U.S. governmental securities	2		1		—		—			1
Corporate debt securities	2		2,818		638		—			3,456
Other debt securities	2		23,165		1,578		(1,332	)		23,411
Total fixed maturities			25,984		2,216		(1,332	)		26,868
Mutual funds—debt securities	1		6,097		306		—			6,403
Mutual funds—equity securities	1		26,356		43		(154	)		26,245
Other investment funds(1)			337,565		32,461		(8,812	)		361,214
Equity securities	1		35,055		5,544		(19	)		40,580
Other invested assets	2		3,875		79		—			3,954
Total investments			475,971		40,661		(10,317	)		506,315
West Virginia Trust Receivable			10,190		—		(221	)		9,969
Total		$	486,161	$	40,661	$	(10,538	)		516,284
Less: Assets held for sale										(14,831	)
Total									$	501,453

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to five years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020, there were $47.8 million in unfunded investment commitments to the private credit funds, which are callable at any time.

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The contractual maturities of debt securities as of September 30, 2021 and December 31, 2020 were as follows (in thousands):


September 30, 2021	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	—	$	1	$	—	$	—
Corporate debt securities		—		3,601		—		—
Other debt securities		—		—		—		—
Total fixed maturities	$	—	$	3,602	$	—	$	—


December 31, 2020	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	—	$	1	$	—	$	—
Corporate debt securities		—		3,456		—		—
Other debt securities		18,392		5,019		—		—
Total fixed maturities	$	18,392	$	8,476	$	—	$	—

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of September 30, 2021 and December 31, 2020 is presented below (in thousands):


	Less than 12 months				12 months or more				Total
September 30, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	297	$	—	$	297	$	—
Corporate debt securities		—		—		620		—		620		—
Other debt securities		—		—		—		—		—		—
Total fixed maturities		—		—		917		—		917		—
Mutual funds—debt securities		7		—		—		—		7		—
Mutual funds—equity securities		—		—		—		—		—		—
Other investment funds		39,305		4,752		—		—		39,305		4,752
Equity securities		5,100		1,587		—		—		5,100		1,587
Total	$	44,412	$	6,339	$	917	$	—	$	45,329	$	6,339


	Less than 12 months				12 months or more				Total
December 31, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	—	$	—	$	—	$	—
Corporate debt securities		—		—		—		—		—		—
Other debt securities		18,392		1,332		—		—		18,392		1,332
Total fixed maturities		18,392		1,332		—		—		18,392		1,332
Mutual funds—debt securities		—		—		—		—		—		—
Mutual funds—equity securities		128		154		—		—		128		154
Other investment funds		75,799		8,812		—		—		75,799		8,812
Equity securities		82		19		—		—		82		19
Total	$	94,401	$	10,317	$	—	$	—	$	94,401	$	10,317

For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

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Other-Than-Temporary Impairment of Trust Assets

The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the nine months ended September 30, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $0.3 million and an aggregate fair value of approximately $0.2 million, resulting in an impairment of $0.1 million, with such impairment considered to be other than temporary due to credit indicators. During the nine months ended September 30, 2020, the Company determined, based on its review, that there were 2 securities with an aggregate costs basis of approximately $16.8 million and an aggregate fair value of approximately $15.1 million, resulting in an impairment of $1.7 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s unaudited condensed consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.

PERPETUAL CARE TRUSTS

At September 30, 2021 and December 31, 2020, the Company’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds. All of these investments are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Company is the primary beneficiary.

A reconciliation of the Company’s perpetual care trust activities for the nine months ended September 30, 2021 and 2020 is presented below (in thousands):


	Nine months ended September 30,
	2021			2020
Balance—beginning of period	$	316,746		$	343,619
Contributions		6,669			6,568
Distributions		(32,587	)		(32,147	)
Interest and dividends		28,844			16,071
Capital gain distributions		6,125			447
Realized gains and losses, net		7,265			(1,416	)
Other than temporary impairment		(55	)		(930	)
Taxes		(1,178	)		(610	)
Fees		(3,695	)		(1,817	)
Unrealized change in fair value		6,942			(22,109	)
Total		335,076			307,676
Less: Assets held for sale		—			(6,938	)
Balance—end of period	$	335,076		$	300,738

During the nine months ended September 30, 2021 and 2020, purchases of available for sale securities were approximately $27.1 million. During the nine months ended September 30, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $12.2 million and $108.9 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in Company’s unaudited condensed consolidated statements of cash flows.

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The cost and market value associated with the assets held in the perpetual care trusts as of September 30, 2021 and December 31, 2020 were as follows (in thousands):


September 30, 2021	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	22,981	$	—	$	—		$	22,981
Fixed maturities:
U.S. governmental securities	2		14		2		—			16
Corporate debt securities	2		363		108		(1	)		470
Other debt securities	2		—		—		—			—
Total fixed maturities			377		110		(1	)		486
Mutual funds—debt securities	1		2,306		37		(14	)		2,329
Mutual funds—equity securities	1		3,902		1,261		(31	)		5,132
Other investment funds(1)			274,979		23,113		(7,064	)		291,028
Equity securities	1		10,273		2,915		(79	)		13,109
Other invested assets	2		9		2		—			11
Total investments		$	314,827	$	27,438	$	(7,189	)	$	335,076

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to fifteen years with three potential one year extensions at the discretion of the funds’ general partners. As of September 30, 2021, there were $72.5 million in unfunded investment commitments to the private credit funds, which are callable at any time.


December 31, 2020	Fair Value Hierarchy Level	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments	1	$	21,217	$	—	$	—		$	21,217
Fixed maturities:
U.S. governmental securities	2		48		4		—			52
Corporate debt securities	2		505		92		(44	)		553
Other debt securities	2		433		—		(28	)		405
Total fixed maturities			986		96		(72	)		1,010
Mutual funds—debt securities	1		2,386		62		(9	)		2,439
Mutual funds—equity securities	1		9,240		1,244		(7	)		10,477
Other investment funds(1)			247,845		21,952		(10,813	)		258,984
Equity securities	1		21,748		873		(19	)		22,602
Other invested assets	2		16		1		—			17
Total investments		$	303,438	$	24,228	$	(10,920	)		316,746
Less: Assets held for sale										(4,518	)
Total									$	312,228

(1)

Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to six years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2020, there were $41.1 million in unfunded investment commitments to the private credit funds, which are callable at any time.

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The contractual maturities of debt securities as of September 30, 2021 and December 31, 2020 were as follows (in thousands):


September 30, 2021	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	—	$	1	$	—	$	15
Corporate debt securities		—		470		—		—
Other debt securities		—		—		—		—
Total fixed maturities	$	—	$	471	$	—	$	15


December 31, 2020	Less than 1 year		1 year through 5 years		6 years through 10 years		More than 10 years
U.S. governmental securities	$	25	$	6	$	—	$	21
Corporate debt securities		—		553		—		—
Other debt securities		405		—		—		—
Total fixed maturities	$	430	$	559	$	—	$	21

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in debt and equity securities within the perpetual care trusts as of September 30, 2021 and December 31, 2020 is presented below (in thousands):


	Less than 12 months				12 months or more				Total
September 30, 2021	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	990	$	—	$	990	$	—
Corporate debt securities		—		—		1,959		1		1,959		1
Other debt securities		—		—		—		—		—		—
Total fixed maturities		—		—		2,949		1		2,949		1
Mutual funds—debt securities		1,294		13		82		1		1,376		14
Mutual funds—equity securities		373		28		1		3		374		31
Other investment funds		43,262		7,064		—		—		43,262		7,064
Equity securities		807		79		—		—		807		79
Total	$	45,736	$	7,184	$	3,032	$	5	$	48,768	$	7,189


	Less than 12 months				12 months or more				Total
December 31, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Fixed maturities:
U.S. governmental securities	$	—	$	—	$	990	$	—	$	990	$	—
Corporate debt securities		—		—		1,959		44		1,959		44
Other debt securities		405		28		—		—		405		28
Total fixed maturities		405		28		2,949		44		3,354		72
Mutual funds—debt securities		600		9		—		—		600		9
Mutual funds—equity securities		288		7		—		—		288		7
Other investment funds		74,885		10,813		—		—		74,885		10,813
Equity securities		45		4		19		15		64		19
Total	$	76,223	$	10,861	$	2,968	$	59	$	79,191	$	10,920

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Other-Than-Temporary Impairment of Trust Assets

The Company assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the nine months ended September 30, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $84,000 and an aggregate fair value of approximately $30,000, resulting in an impairment of $54,000, with such impairment considered to be other than temporary due to credit indicators. During the nine months ended September 30, 2020, the Company determined, based on its review, that there were 2 securities with an aggregate cost basis of approximately $9.4 million and an aggregate fair value of approximately $8.5 million, resulting in an impairment of $0.9 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value with the offset going against the liability for perpetual care trust corpus.

LONG-TERM DEBT

Total debt consisted of the following at the dates indicated (in thousands):


	September 30, 2021			December 31, 2020
8.500% Senior Secured Notes due 2029	$	400,000		$	—
9.875%/11.500% Senior Secured PIK Toggle Notes due June 2024		—			335,328
Insurance and vehicle financing		1,769			361
Less deferred financing costs, net of accumulated amortization		(10,328	)		(14,657	)
Total debt		391,441			321,032
Less current maturities		(1,769	)		(317	)
Total long-term debt	$	389,672		$	320,715

2029 Notes

On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029. The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to the 2029 Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent (“Wilmington”). Capitalized terms that are used in this description of the 2029 Notes but not defined herein shall have the meaning assigned to such terms in the 2029 Indenture.

Proceeds from the sale of the 2029 Notes were used to fund the redemption in full of approximately $338.1 million aggregate principal amount of the 2024 Notes together with an approximately $18.5 million prepayment premium and pay fees and expenses incurred in connection with the offering. Any remaining proceeds will be used for general corporate purposes, which may include acquisitions. Upon deposit of the funds to redeem the 2024 Notes with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture.

Interest; Maturity; Issue Price

Interest on the 2029 Notes accrues at a rate of 8.5% per year, payable in cash semiannually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2021. The Notes mature on May 15, 2029. Subject to the covenants contained in the 2029 Indenture, the Company may, without the consent of the holders of the 2029 Notes, issue additional notes under the 2029 Indenture (“Additional Notes”) having the same terms in all respects as the 2029 Notes, which shall be treated with the 2029 Notes as a single class under the 2029 Indenture. The issue price of the 2029 Notes was 100%.

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Redemption

The 2029 Notes are redeemable at the Company’s option, in whole or in part, on and after May 15, 2024 at the redemption prices (expressed as percentages of principal amount) set forth below, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date.


On or after May 15, 2024 and prior to May 15, 2025		104.250%
On or after May 15, 2025 and prior to May 15, 2026		102.125%
On or after May 15, 2026		100.000%

In addition, prior to May 15, 2024, the Company may utilize the net proceeds of one or more equity offerings to redeem up to 40% of the aggregate principal amount of the 2029 Notes originally issued under the 2029 Indenture, including any Additional Notes, at a redemption price of 108.500% of the principal amount of the 2029 Notes redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date, provided that at least 50% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture remain outstanding following such redemption.

During each of the 12-month periods ending May 10, 2022, May 10, 2023 and May 10, 2024, respectively, the Company may redeem up to 10% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture at a redemption price equal to 103% of the principal amount of the 2029 Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

Prior to May 15, 2024, the 2029 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed plus an “applicable premium” (as defined in the 2029 Indenture) along with accrued and unpaid interest, if any, to, but excluding, the redemption date.

Upon the occurrence of a “change of control” (as defined in the 2029 Indenture), if the Company has not previously exercised its right to redeem all of the outstanding 2029 Notes pursuant to the optional redemption provisions as described above, the Company must offer to repurchase the 2029 Notes at a redemption price equal to 101% of the principal amount of the 2029 Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.

Upon certain asset sales where the excess proceeds from all applicable asset sales exceed $10 million since the issue date of the 2029 Notes, the Company may be required in certain circumstances to make an offer to purchase 2029 Notes with the excess proceeds from such an asset sale in excess of such $10 million threshold at a price in cash equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but excluding, the date of purchase.

Guarantees and Collateral

The Company’s obligations under the 2029 Notes and the 2029 Indenture are jointly and severally guaranteed (the “Note Guarantees”) by each of the Company’s existing and future direct and indirect domestic subsidiaries, with certain exceptions, and will be guaranteed by each of the Company’s foreign subsidiaries that guarantees any future credit facility (each applicable foreign and domestic subsidiary, a “2029 Guarantor” and collectively, the “2029 Guarantors”). In connection with the Note Guarantees, the Company, the 2029 Guarantors and Wilmington entered into a Security Agreement, dated May 11, 2021 (the “Security Agreement”). Pursuant to the 2029 Indenture and the Security Agreement, the Company’s obligations under the 2029 Indenture and the 2029 Notes are secured by a lien and security interest (subject to permitted liens and security interests) in substantially all of the Company’s and the 2029 Guarantors’ existing and future property and assets, excluding certain assets which include, among others: (a) trust and other fiduciary accounts and amounts required to be deposited or held therein, (b) assets that may not be pledged as a matter of law or without governmental approvals, until such time such assets may be pledged without legal prohibition and (c) owned and leased real property that (i) may not be pledged as a matter of law or without the prior approval of any governmental authority or third person, (ii) is not operated or intended to be operated as a cemetery, crematory or funeral home or (iii) has a fair market value of less than $3.0 million.

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The 2029 Notes are the Company’s senior secured obligations and the guarantees are the 2029 Guarantors’ senior secured obligations. The obligations of the Company and each 2029 Guarantor will:



rank equal in right of payment with all of the Company and each 2029 Guarantor’s existing and future senior indebtedness, including any borrowings under any future credit facility;



rank senior in right of payment to all of the Company’s and each 2029 Guarantor’s existing and future subordinated indebtedness;



be effectively senior to all of the Company’s and each 2029 Guarantor’s unsecured senior indebtedness to the extent of the value of the collateral securing the 2029 Notes and the Note Guarantees;



be contractually subordinated to the Company’s and each 2029 Guarantor’s obligations under any future credit facility permitted by the 2029 Indenture to the extent of the value of the collateral securing such credit facility and subject to the terms of any future intercreditor agreement; and



structurally subordinated to all indebtedness and other obligations of the Company’s existing and future subsidiaries that do not guarantee the 2029 Notes.

Covenants

The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with various affirmative covenants regarding, among other matters, delivery to Wilmington of financial statements and certain other information or reports filed with the Securities and Exchange Commission.

The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with certain covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and 2029 Guarantors’ ability to: (i) incur additional indebtedness or issue disqualified capital stock; (ii) pay dividends, redeem subordinated debt or make other restricted payments; (iii) make certain investments; (iv) create or incur certain liens; (v) issue stock of subsidiaries; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate or transfer substantially all of its respective assets; (viii) agree to dividend or other payment restrictions affecting the Restricted Subsidiaries; (ix) change the business it conducts; (x) withdraw any monies or other assets from, or make any investments of, its trust funds; and (xi) transfer or sell assets, including capital stock of a Restricted Subsidiary.

Events of Default

The 2029 Indenture contains customary events of default, which could, subject to certain conditions, cause the 2029 Notes to become immediately due and payable, including, but not limited to defaults by the Company in the payment of the principal of any 2029 Notes when the same becomes due and payable at maturity, upon acceleration or redemption, or otherwise (other than pursuant to an offer to purchase by the Company) or in the payment of interest on any 2029 Notes when the same becomes due and payable, and the default continues for a period of 30 days; failure to comply with certain repurchase obligations in the 2029 Indenture and certain other covenants the 2029 Indenture relating to mergers, consolidation or sales of assets; failure to comply with certain other covenants in the 2029 Indenture beyond the applicable cure period following notice by Wilmington or the holders of at least 30% in aggregate principal amount of the 2029 Notes then outstanding; failure to pay debt within any applicable grace period after the final maturity or acceleration of such debt by the holders thereof because of a default, if the total amount of such debt unpaid or accelerated exceeds $20.0 million; failure to pay final judgments entered by a court or courts of competent jurisdiction aggregating $20.0 million or more (excluding amounts covered by insurance), which judgments are not paid, discharged or stayed, for a period of 60 days; and certain events of bankruptcy or insolvency.

As of September 30, 2021, the Company was in compliance with the covenants of the 2029 Indenture.

Deferred Financing Costs

In connection with the full redemption of the 2024 Notes, the Company wrote off unamortized deferred financing fees of $13.1 million and original issue discount of $8.5 million, which are included in Loss on debt extinguishment in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2021.

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For the three months ended September 30, 2021 and 2020, the Company recognized $0.3 million and $1.0 million, respectively, of amortization of deferred financing fees on its various debt facilities. For the nine months ended September 30, 2021 and 2020, the Company recognized $2.0 million and $1.8 million, respectively, of amortization of deferred financing fees on its various debt facilities.

STOCKHOLDERS’ EQUITY

Capital Stock

The Company is authorized to issue two classes of capital stock: common stock, $0.01 par value per share (“Common Stock”) and preferred stock, $0.01 par value per share (“Preferred Stock”).

At September 30, 2021, 118,011,766 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued or outstanding. At September 30, 2021, there were 81,988,234 shares of Common Stock available for issuance, including 842,139 shares available for issuance as stock-based incentive compensation under the Company’s Amended and Restated 2019 Long-Term Incentive Plan (as amended, the “Plan”), and 10,000,000 shares of Preferred Stock available for issuance.

Stock-based Compensation

The Plan permits the granting of awards covering a total of 9,875,000 common units of the Company. A “unit” under the Plan is defined as a common unit of the Company and such other securities as may be substituted or resubstituted for common units of the Company, including but not limited to shares of the Company’s Common Stock. The Plan is intended to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive compensation awards to encourage superior performance and enhance the Company’s ability to attract and retain the services of individuals who are essential for its growth and profitability and to encourage them to devote their best efforts to advancing the Company’s business.

Stock Options

During the three and nine months ended September 30, 2021, the Company did not grant any stock options and no options were exercised, forfeited or expired.

For the three months ended September 30, 2021 and 2020, non-cash compensation expense related to stock options was $0.2 million. For the nine months ended September 30, 2021 and 2020, non-cash compensation expense related to stock options was $0.5 million. As of September 30, 2021, total unrecognized compensation cost related to unvested stock options was $1.0 million, which the Company expects to recognize over the remaining weighted-average period of 1.5 years.

Restricted Stock and Restricted Phantom Stock

A rollforward of restricted stock and phantom stock awards as of September 30, 2021 is as follows:


	Number of Restricted Stock and Phantom Stock Awards			Weighted Average Grant Date Fair Value ($)
Total non-vested at December 31, 2020		1,277,907		$	2.17
Granted		38,224			2.35
Vested		(140,625	)		3.88
Total non-vested at September 30, 2021		1,175,506		$	1.97

For the three months ended September 30, 2021 and 2020, the Company recognized $0.3 million and $0.2 million, respectively, of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. For the nine months ended September 30, 2021 and 2020, the Company recognized $1.0 million and $0.6 million, respectively, of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. As of September 30, 2021, total unamortized compensation cost related to unvested restricted stock awards was $1.5 million, which the Company expects to recognize over the remaining weighted-average period of 1.7 years.

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10.

DEFERRED REVENUES AND COSTS

The Company defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Company recognizes deferred merchandise and service revenues as customer contract liabilities within long-term liabilities on its consolidated balance sheets. The Company recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheets. The Company also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in the customer contract liabilities. All other selling costs are expensed as incurred. Additionally, the Company has elected the practical expedient of not recognizing incremental costs to obtain a contract as incurred, as the associated amortization period is typically one year or less.

Deferred revenues and related costs consisted of the following (in thousands):


	September 30, 2021		December 31, 2020

Deferred contract revenues	$	866,845	$	832,373
Deferred merchandise trust revenue		150,815		87,218
Deferred merchandise trust unrealized gains (losses)		9,905		29,573
Deferred revenues	$	1,027,565	$	949,164
Deferred selling and obtaining costs	$	122,488	$	116,900

For the nine months ended September 30, 2021 and 2020, the Company recognized $56.3 million and $34.7 million, respectively, of the customer contract liabilities balance that existed at December 31, 2020 and 2019, respectively, as revenue.

The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at September 30, 2021 and December 31, 2020 were as follows (in thousands):


	September 30, 2021			December 31, 2020
Customer contract liabilities, gross	$	1,054,062		$	973,444
Amounts due from customers for unfulfilled performance obligations on cancellable pre-need contracts		(26,497	)		(24,280	)
Customer contract liabilities, net	$	1,027,565		$	949,164

The Company expects to service approximately 55% of its deferred revenue in the first 4-5 years and approximately 80% of its deferred revenue within 18 years. The Company cannot estimate the period when it expects its remaining performance obligations will be recognized, because certain performance obligations will only be satisfied at the time of death.

11.

COMMITMENTS AND CONTINGENCIES

Legal

The Company is subject to state law claims that certain of its officers and directors breached their fiduciary duties, as well as a claim under federal law that certain of the Company’s prior proxy disclosures were misleading. The Company could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has determined that, based on the status of the claims and legal proceedings described below, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.



Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that the officers and directors of StoneMor GP LLC, a Delaware limited liability company and general partner of the Partnership (“StoneMor GP”), aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in the Partnership’s public filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable distributions. The plaintiff also claims that these actions and misrepresentations give rise to causes of action for gross mismanagement, unjust enrichment, and (in connection with a

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purportedly misleading proxy statement filed in 2014) violations of Section 14(a) of the Exchange Act. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties, provided that either party may terminate the stay on 30 days’ notice.



Fried v. Axelrod, et al., C.A. No. 2020-1065-SG, pending in the Chancery Court of the State of Delaware and filed on December 16, 2020. The plaintiff in this case brought an action he seeks to have certified as a class action that asserts claims against Axar, Andrew M. Axelrod and the other individuals who were directors at the time of the transactions in question and against the Company as a nominal defendant. The complaint includes direct claims against all individual defendants and derivative claims against the individual defendants other than Mr. Axelrod for breach of fiduciary duty in approving certain transactions in connection with the Company’s sale of preferred and common stock to Axar and certain accounts managed by Axar (the “Axar Stock Purchase”). The complaint also includes derivative claims against Axar for breach of fiduciary duty and unjust enrichment in connection with those same transactions as well as direct claims against both Axar and Mr. Axelrod for breach of fiduciary duty with respect to those transactions. Finally, the complaint includes a derivative claim against all individual defendants for breach of fiduciary duty in connection with the approval of a related-party investment disclosed by the Company. The plaintiff seeks rescission of the transactions contemplated by the Axar Stock Purchase and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On January 6, 2021, a motion to dismiss the complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on January 11, 2021, a motion to dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On April 2, 2021, the plaintiff filed a First Amended Complaint, which included additional factual background regarding the plaintiff’s claims and alleged demand futility, but did not add additional defendants, claims or relief sought. The defendants filed a motion to dismiss the First Amended Complaint on April 16, 2021. Thereafter, the plaintiff and defendants filed a joint stipulation to stay the Fried litigation pending the resolution of a separate pending action described below, which the court granted on April 28, 2021.



Titterton v. StoneMor Inc., C.A. No.: 2021-0259-PAF, pending in the Court of Chancery of the State of Delaware and filed on March 25, 2021. The plaintiff in this case brought an action seeking expedited relief under Section 220 of the Delaware General Corporation Law. The plaintiff had previously made a demand for inspection of certain books and records of the Company allegedly related to potential corporate misconduct. The Company responded to the request by rejecting plaintiff’s demand as deficient under Delaware law for failure to state a proper purpose and being overbroad, but nonetheless provided certain of the requested materials. After the plaintiff made a further demand for inspection in March 2021, the Company again rejected the demand as deficient under Delaware law for failure to state a proper purpose and being overbroad. The plaintiff then brought this action seeking an order to compel additional books and records and reimbursement of attorney’s fees. On April 19, 2021, the Company filed its answer to the complaint. Trial was held on July 21, 2021, after which the Court issued an order permitting the requested inspection, in part, but denied the plaintiff’s request for attorneys’ fees. The Company has produced the requested materials.

The Company is party to other legal proceedings in the ordinary course of its business, but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows. The Company carries insurance with coverage and coverage limits that it believes to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies, Management believes that the insurance protection is reasonable in view of the nature and scope of the Company’s operations.

Moon Landscaping, Inc.

On April 2, 2020, the Company entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”). Under the terms of the MSAs, Moon provides all grounds and maintenance services at most of the funeral homes, cemeteries and other properties the Company owns or manages. The contractual annual amounts due to Moon as of June 30, 2021 by year and in total were as follows (in thousands):


2021	$	50,107
2022	$	51,109
2023	$	52,131
2024	$	53,174
Total	$	206,521

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Each party has the right to terminate the MSAs at any time on six months’ prior written notice, provided that if we terminate the MSAs without cause, we will be obligated to pay Moon an equipment credit fee in the amount of $1.0 million for each year remaining in the term, prorated for the portion of the year in which any such termination occurs. The MSAs also contain representations, covenants and indemnity provisions that are customary for agreements of this nature.

The Company also has the right under the MSAs to take back the responsibility for grounds and maintenance services at the locations outsourced to Moon. Due to certain liquidity constraints and performance issues experienced by Moon, the Company has exercised this right with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021 and an additional 111 locations effective August 9, 2021, representing in the aggregate approximately 61% of the locations the Company had originally outsourced to Moon. The Company is continuing to evaluate Moon’s performance under the MSAs.

In connection with these changes, the Company is now using its own equipment to service these locations and rehired the employees Moon had hired from the Company upon execution of the MSAs. These employees will continue to provide certain grounds services for the Company at these locations using the equipment previously leased to Moon. The Company is outsourcing substantially all of the landscaping and other maintenance services previously provided by Moon at these locations to other vendors who had previously been subcontractors to Moon. The Company does not anticipate that these changes will have any material impact on the cost of providing the services compared to the amounts paid to Moon under the MSAs.

From time to time, on the behalf of Moon, the Company incurred a higher level of expenses relating to services covered by the MSAs, including location materials and supplies, uniforms, repair of marker damage, customer refunds and payments to third party landscapers and repair shops. These additional payments, which were in addition to the payments specified in the MSAs, were recorded as cemetery operating expenses in the relevant periods and as of September 30, 2021 aggregated $6.0 million. The Company has the ability to seek reimbursement from Moon for these additional payments as outlined in the MSAs.

On August 12, 2021, Moon and certain of its affiliates filed a petition under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On October 7, 2021, Moon and the Company entered into a summary of terms (the “Term Sheet”) pursuant to which (a) Moon would file a motion with the Bankruptcy Court to assume the MSAs, (b) the aggregate amounts due to the Company from Moon under the MSAs for periods prior to the initial bankruptcy filing (the “Pre-Petition Cure Amount”) was at least $5.1 million, (c) the aggregate amount due to the Company from Moon under the MSAs for periods after such filing were at least $572,605 (the “Post-Petition Cure Amount”), (d) payment of the Pre-Petition Cure Amount would be deferred until a later date, but not later than the effective date of any approved reorganization plan, (e) the Company was permitted to set off $42,500 from each bi-weekly payment to Moon under the MSAs as payment against the Post-Petition Cure Amount, with any unpaid balance being paid when the Pre-Petition Cure Amount was paid, (f) upon Bankruptcy Court approval of Moon’s motion to assume the MSAs, the Company would exercise its right to modify the MSAs by taking back responsibility for ground and maintenance services at an additional 53 locations but would otherwise agree not to further exercise such right for a period of 60 days after such approval absent certain breaches by Moon. On October 14, 2021, Moon filed a motion with the Bankruptcy Court seeking approval to assume the MSAs subject to the terms and conditions of the Term Sheet. After a hearing before the Bankruptcy Court on November 4, 2021, the Bankruptcy Court granted Moon’s motion to assume the MSAs, which would normally include an obligation to repay in full both the Pre-Petition Cure Amount and the Post-Petition Cure Amount as a priority claim in the bankruptcy case. However, in its order, the Bankruptcy Court reserved decision on whether the Pre-Petition Cure Amount would be entitled to such priority treatment notwithstanding the assumption of the MSAs, and all interested parties, including the Company, reserved their respective rights with respect to that decision.

Management believes the impact on the Company of Moon's bankruptcy filing has been partially mitigated because the Company has taken back the responsibilities under the MSAs for the 214 locations noted above and will take back such responsibilities with respect to an additional 53 locations by early December 2021. However, given the uncertainty associated with the bankruptcy proceedings and the locations for which Moon will continue to be responsible under the MSAs, it is possible that the Company may continue to experience performance issues and other disruptions in operations at those locations, particularly if it becomes necessary for the Company to assume the responsibility for servicing those locations in the near future on relatively short notice. In addition, the Company expects that it will continue to incur additional expenses relating to services covered by the MSAs. If Moon is unable to obtain appropriate financing or reach an agreement to sell its assets and is unable to have a plan of reorganization confirmed by the Bankruptcy Court, the Company would likely not be able to obtain reimbursement of the Pre-Petition Cure Amount or the Post-Petition Cure Amount.

To date, the disruptions resulting from Moon’s bankruptcy filing have not had, and the Company does not expect that any additional disruptions it may experience in the future will have, a material adverse effect on the Company’s overall business given the number of locations for which it is now and will soon be responsible and the Company’s previous relationships, which were established before the transfer of responsibilities to Moon. The Company continues to closely monitor the overall situation.

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Archdiocese of Philadelphia

In May 2014, the Company entered into lease and management agreements with the Archdiocese of Philadelphia, pursuant to which the Company has committed to pay aggregate fixed rent of $36.0 million in the following amounts:


Lease Years 1-5 (May 28, 2014-May 31, 2019)		None
Lease Years 6-20 (June 1, 2019-May 31, 2034)		$1,000,000 per Lease Year
Lease Years 21-25 (June 1, 2034-May 31, 2039)		$1,200,000 per Lease Year
Lease Years 26-35 (June 1, 2039-May 31, 2049)		$1,500,000 per Lease Year
Lease Years 36-60 (June 1, 2049-May 31, 2074)		None

The fixed rent for lease years six through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements in accordance with their terms during lease year 11 or the Company terminates the agreements as a result of a default by the Archdiocese, the Company is entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.

12.

LEASES

The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. In addition the Company has a sale-leaseback related to one of its warehouses. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term of more than 12 months, the Company measures the lease liability at the present value of the sum of the remaining minimum rental payments, which exclude executory costs.

Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that it will exercise the renewal options. The Company does have residual value guarantees on the finance leases for its vehicles, but no residual guarantees on any of its operating leases.

Certain of the Company’s leases have variable payments with annual escalations based on the proportion by which the consumer price index (“CPI”) for all urban consumers increased over the CPI index for the prior comparative year.

The Company has the following balances recorded on its consolidated balance sheets related to leases:


	September 30, 2021		December 31, 2020
Assets:
Operating	$	6,169	$	5,171
Finance		3,527		4,296
Total ROU assets(1)	$	9,696	$	9,467
Liabilities:
Current
Operating	$	1,094	$	1,182
Finance		1,857		1,416
Long-term
Operating		5,190		3,441
Finance		1,287		2,592
Total lease liabilities(2)	$	9,428	$	8,631

(1)

The Company’s ROU operating assets and finance assets are presented within Other assets and Property and equipment, net of accumulated depreciation, respectively, in its consolidated balance sheets.

(2)

The Company’s current lease liabilities and long-term are presented within Accounts payable and accrued liabilities and Other long-term liabilities, respectively, in its consolidated balance sheets.

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As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. The weighted average borrowing rates for operating and finance leases were 10.0% and 8.7%, respectively, as of September 30, 2021.

The components of lease expense were as follows:


		Nine months ended September 30,
		2021		2020
Lease cost	Classification
Operating lease costs(1)	General and administrative expense	$	1,553	$	2,366
Finance lease costs
Amortization of leased assets	Depreciation and Amortization		862		874
Interest on lease liabilities	Interest expense		253		328
Short-term lease costs(2)	General and administrative expense		—		—
Net lease costs		$	2,668	$	3,568

(1)

The Company includes its variable lease costs under operating lease costs as these variable lease costs are immaterial.

(2)

The Company does not have any short-term leases with lease terms greater than one month.

Maturities of the Company’s lease labilities as of September 30, 2021 were as follows:


Year ending December 31,	Operating			Finance
2021	$	459		$	402
2022		1,614			2,144
2023		1,420			719
2024		1,210			145
2025		1,111			84
Thereafter		2,584			39
Total	$	8,398		$	3,533
Less: Interest		(2,114	)		(390	)
Present value of lease liabilities	$	6,284		$	3,143

Maturities of the Company’s lease labilities as of December 31, 2020 were as follows:


Year ending December 31,	Operating			Finance
2020	$	1,615		$	1,791
2021		1,186			1,939
2022		881			643
2023		702			107
2024		595			33
Thereafter		1,092			—
Total	$	6,071		$	4,513
Less: Interest		(1,448	)		(505	)
Present value of lease liabilities	$	4,623		$	4,008

Operating and finance lease payments include $1.3 million related to options to extend lease terms that are reasonably certain of being exercised and $1.5 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 5.9 years and 1.7 years, respectively, as of September 30, 2021.

As of September 30, 2021, the Company had no additional operating leases that had not yet commenced, and did not have any lease transactions with its related parties. In addition, as of September 30, 2021, the Company had not entered into any new sale-leaseback arrangements.

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13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management has established a hierarchy to classify the inputs used to measure the Company’s financial instruments at fair value, pursuant to which the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:



Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.



Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.



Level 3 – Unobservable inputs based on the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

The carrying value of the Company’s current assets and current liabilities on its consolidated balance sheets approximated or equaled their estimated fair values due to their short-term nature or imputed interest rates.

Recurring Fair Value Measurement

At September 30, 2021 and December 31, 2020, the two financial instruments measured by the Company at fair value on a recurring basis were its merchandise and perpetual care trusts, which consist of investments in debt and equity marketable securities and cash equivalents that are carried at fair value and are classified as either Level 1 or Level 2 (see Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts).

Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy. Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy. Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.

Non-Recurring Fair Value Measurement

The Company may be required to measure certain assets and liabilities at fair value, such as its indefinite-lived assets and long-lived assets, on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges.

Other Financial Instruments

The Company’s other financial instruments at September 30, 2021 consisted of its 2029 Notes and at December 31, 2020 consisted of its 2024 Notes (see Note 8 Long-Term Debt). At September 30, 2021, the estimated fair value of the Company's 2029 Notes was $414.4 million, based on trades made on that date, compared with the carrying amount of $400.0 million. At December 31, 2020, the estimated fair value of the Company’s 2024 Notes was $350.2 million, based on trades made on that date, compared with the carrying amount of $344.8 million.

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14.

SEGMENT INFORMATION

Management operates the Company in two reportable operating segments: Cemetery Operations and Funeral Home Operations. These operating segments reflect the way the Company manages its operations and makes business decisions. Management evaluates the performance of these operating segments based on interments performed, interment rights sold, pre-need cemetery and at-need cemetery contracts written, revenue and segment profit (loss). As a percentage of revenue and assets, the Company’s major operations consist of its cemetery operations.

The following tables present financial information with respect to the Company’s segments (in thousands). Corporate costs represent those not directly associated with an operating segment, such as corporate overhead, interest expense and income taxes. Corporate assets primarily consist of cash and cash equivalents and restricted cash.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
STATEMENT OF OPERATIONS DATA:
Cemetery Operations:
Revenues	$	70,814		$	62,020		$	209,922		$	173,680
Operating costs and expenses		(55,294	)		(48,968	)		(164,990	)		(144,730	)
Depreciation and amortization		(1,471	)		(1,556	)		(4,552	)		(4,815	)
Segment operating profit	$	14,049		$	11,496		$	40,380		$	24,135
Funeral Home Operations:
Revenues	$	11,481		$	10,693		$	33,667		$	30,736
Operating costs and expenses		(10,085	)		(9,148	)		(28,620	)		(25,917	)
Depreciation and amortization		(419	)		(453	)		(1,273	)		(1,359	)
Segment operating profit	$	977		$	1,092		$	3,774		$	3,460
Reconciliation of segment operating profit to net loss from continuing operations:
Cemetery Operations	$	14,049		$	11,496		$	40,380		$	24,135
Funeral Home Operations		977			1,092			3,774			3,460
Total segment profit		15,026			12,588			44,154			27,595
Corporate overhead		(9,983	)		(9,762	)		(29,058	)		(27,019	)
Corporate depreciation and amortization		(99	)		(235	)		(293	)		(677	)
Loss on sale of business and other impairments		(70	)		—			(2,290	)		—
Other losses, net		(605	)		—			(536	)		—
Interest expense		(9,256	)		(11,870	)		(29,706	)		(34,952	)
Loss on debt extinguishment		—			—			(40,128	)		—
Income tax benefit		240			1,129			11,652			3,333
Net loss from continuing operations	$	(4,747	)	$	(8,150	)	$	(46,205	)	$	(31,720	)

CASH FLOW DATA:
Capital expenditures:
Cemetery Operations	$	2,135		$	806		$	5,193		$	3,351
Funeral Home Operations		71			78			167			95
Corporate		108			109			315			1,338
Total capital expenditures	$	2,314		$	993		$	5,675		$	4,784


	September 30, 2021		December 31, 2020
BALANCE SHEET DATA:
Assets:
Cemetery Operations	$	1,488,041	$	1,445,217
Funeral Home Operations		126,473		130,687
Corporate		122,397		59,059
Total assets	$	1,736,911	$	1,634,963
Assets held for sale:
Cemetery Operations	$	—	$	23,500
Funeral Home Operations		—		5,075
Total assets held for sale	$	—	$	28,575

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15.

SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION

The tables presented below provide supplemental information to the unaudited condensed consolidated statements of cash flows regarding contract origination and maturity activity included in the pertinent captions on the Company’s unaudited condensed consolidated statements of cash flows (in thousands):


	Nine months ended September 30,
	2021			2020
Accounts Receivable
Pre-need/at-need contract originations (sales on credit)	$	(100,915	)	$	(88,719	)
Cash receipts from sales on credit (post-origination)		84,710			72,539
Changes in accounts receivable, net of allowance	$	(16,205	)	$	(16,180	)
Customer Contract Liabilities
Deferrals:
Cash receipts from customer deposits at origination, net of refunds	$	136,668		$	115,824
Withdrawals of realized income from merchandise trusts during the period		10,460			7,406
Pre-need/at-need contract originations (sales on credit)		100,915			88,719
Undistributed merchandise trust investment earnings, net		28,787			5,377
Recognition:
Merchandise trust investment income, net withdrawn as of end of period		(9,593	)		(6,629	)
Recognized maturities of customer contracts collected as of end of period		(168,553	)		(151,016	)
Recognized maturities of customer contracts uncollected as of end of period		(21,166	)		(20,443	)
Changes in customer contract liabilities	$	77,518		$	39,238

16.

RELATED PARTIES

In January 2020, the Company’s trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by Payless Holdings LLC (“Payless”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Chairman of the Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at that time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30% of the equity of Payless, and Mr. Axelrod serves on Payless’ board of directors. The Company’s investment in Payless represented approximately 4% of the total fair market value of the Company’s trust assets when the investment was made.

Axar beneficially owns 75.1% of the Company’s outstanding Common Stock, which constitutes a majority of the Company’s outstanding Common Stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards. For discussion of certain risks and uncertainties attributable to the Company being a controlled company, see Part I, Item 1A. Risk Factors of the Company’s Annual Report. For discussion on the security ownership of certain beneficial owners, directors and executives of the Company, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of the Annual Report.

On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is Andrew M. Axelrod, who serves as the Chairman of the Company’s Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee (the “Trust Committee”) of the Company’s Board of Directors (the “Board”).

Pursuant to the charter of the Trust Committee, the retention of Axar as a subadvisor and the Agreement were first reviewed and approved by the Trust Committee, subject to the condition that the retention of Axar and the Agreement also be approved by a Board committee comprised exclusively of independent directors. Given the Axar relationship, the Board appointed a special committee to review the retention of Axar and the Agreement, which subsequently also approved the retention of Axar and the terms of the Agreement. Both the Trust Committee and the special committee concluded that Axar had the appropriate experience and performance record that would assist Cornerstone in performing its investment advisory obligations for the Company, that

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the retention of Axar would provide back-office operational efficiencies to Cornerstone and that the financial terms were at least as favorable to Cornerstone as the terms that would be available from other unaffiliated subadvisors, if not more favorable.

Under the terms of the Agreement, Axar agreed to provide the following services with respect to the assets held in the Company’s merchandise and perpetual care trust (the “Trusts”) and certain pooled investment vehicles administered by the trustee of the Trusts (the “Trustee”) in which certain of the Trusts participate or invest (collectively, the “Investment Assets”):



Advise Cornerstone with respect to the allocation and investment of the Investment Assets on a non-discretionary basis, including providing advice concerning portfolio allocation among investment strategies;



Oversee other subcontractors or external managers engaged by Cornerstone to provide advice with respect to the Investment Assets;



Provide quarterly investment performance reports to and meet on a quarterly basis with the Trust Committee;



As requested by Cornerstone from time to time, perform the tasks and responsibilities delegated by the Trust Committee to Cornerstone under the Company’s investment policy statement; and



As requested by Cornerstone, assist Cornerstone in performing its duties by providing general back office and administrative support to Cornerstone and, at Cornerstone’s reasonable request, the Trustee.

Under the Agreement, Axar is entitled to a quarterly fee equal to 0.0125% of the value of the Investment Assets through December 31, 2021 and, thereafter, a quarterly fee equal to 0.025% of the value of the Investment Assets. In each case, the value of the Investment Assets will be determined by the Trustee. During the three and nine months ended September 30, 2021, the Company incurred fees of $105,000 and $277,000, respectively, due to Axar.

The initial term of the Agreement is through December 31, 2021 and it automatically renews for an unlimited number of one-year terms thereafter, provided that either party may terminate the Agreement on 90 days’ prior written notice. The Agreement also includes customary confidentiality and indemnification provisions.

On April 13, 2021, the Company reimbursed American Infrastructure Funds LLC (“AIM”), an entity controlled by Robert B. Hellman, Jr., a former Chairman and member of the Company's Board of Directors, $0.6 million for certain expenses incurred by AIM in responding to a document production request from the SEC in connection with an SEC investigation of the Company and StoneMor GP that was settled in December 2019.

The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019, November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the Axar Entities, the ACII Entities and the Company entered into a letter agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market. The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions:



any such purchase be consummated on or before May 31, 2021;



the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period applicable to the Axar Entities will expire on December 31, 2023;



Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent (85%) (collectively, the “Supermajority Provisions”);” and

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

pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been approved by the Company’s Board of Directors and its Conflicts Committee.

As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023.

On September 27, 2021, the Company announced that it had received the Letter dated September 22, 2021 from Axar in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expects that any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors it engages. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions.

17.

SUBSEQUENT EVENTS

The Company operates certain of its cemeteries under long-term leases, operating agreements and management agreements. On October 1, 2021, the Company terminated one of the management agreements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis presented below provides information to assist in understanding the Company’s financial condition and results of operations and should be read in conjunction with the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 Financial Statements (Unaudited) of this Quarterly Report.

Certain statements contained in this Quarterly Report, including, but not limited to, information regarding our operating activities, the plans and objectives of our management and assumptions regarding our future performance and plans are forward-looking statements. When used in this Quarterly Report, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on management’s expectations and estimates. These statements are neither promises nor guarantees and are made subject to certain risks and uncertainties that could cause actual results to differ materially from the results stated or implied in this Quarterly Report. We believe the assumptions underlying the unaudited condensed consolidated financial statements are reasonable.

Our primary risks include uncertainties regarding current business and economic disruptions resulting from the COVID-19 Pandemic, our substantial indebtedness, our ability to identify and negotiate acceptable agreements with sellers and purchasers of additional properties, the cash flow from our pre-need and at-need sales, trusts and financings, which may impact our ability to meet our financial projections and service our debt, as well as with our ability to maintain an effective system of internal control over financial reporting including effective disclosure controls and procedures.

Our risks and uncertainties are more particularly described in Part I, Item 1A. Risk Factors of our Annual Report and in Part II, Item 1A of this Quarterly Report. Readers are cautioned not to place undue reliance on forward-looking statements included in this Quarterly Report, which speak only as of the date the statements were made. Except as required by applicable laws, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

BUSINESS OVERVIEW

We are one of the leading providers of funeral and cemetery products and services in the death care industry in the United States (“U.S.”). As of September 30, 2021, we operated 301 cemeteries in 24 states and Puerto Rico, of which 271 were owned and 30 were operated under leases, operating agreements or management agreements. We also owned, operated or managed 70 funeral homes in 15 states and Puerto Rico.

Our revenue is derived from our Cemetery Operations and Funeral Home Operations segments. Our Cemetery Operations segment principally generates revenue from sales of interment rights, cemetery merchandise, which includes markers, bases, vaults, caskets and cremation niches and our cemetery services, which include opening and closing services, cremation services and fees for the installation of cemetery merchandise. Our Funeral Home Operations segment principally generates revenue from sales of funeral home merchandise, which includes caskets and other funeral related items and service revenues, which include services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and prayer services. These sales occur both at the time of death, which we refer to as at-need and prior to the time of death, which we refer to as pre-need. Our Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which we earn a commission from the sales of these insurance policies.

The pre-need sales enhance our financial position by providing a backlog of future revenue from both trust and insurance-funded pre-need funeral and cemetery sales. We believe pre-need sales add to the stability and predictability of our revenues and cash flows. Pre-need sales are typically sold on an installment plan. While revenue on the majority of pre-need funeral sales is deferred until the time of need, sales of pre-need cemetery property interment rights provide opportunities for full current revenue recognition when the property is available for use by the customer.

We also earn investment income on certain payments received from customers on pre-need contracts, which are required by law to be deposited into our merchandise and service trusts. Amounts are withdrawn from our merchandise and service trusts when we fulfill the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in the total transaction price. For sales of interment rights, a portion of the cash proceeds received are required to be deposited into a perpetual care trust. While the principal balance of the perpetual care trust must remain in the trust in perpetuity, we recognize investment income on such assets as revenue, excluding realized gains and losses from the sale of trust assets. Pre-need contracts are subject to financing arrangements on an installment basis, with a contractual term not to

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exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate at the time of origination plus 150 basis points in order to segregate the principal and interest components of the total contract value.

Our revenue depends upon the demand for funeral and cemetery services and merchandise, which can be influenced by a variety of factors, some of which are beyond our control including demographic trends, such as population growth, average age, death rates and number of deaths. Our operating results and cash flows could also be influenced by our ability to remain relevant to the customers. We provide a variety of unique product and service offerings to meet the needs of our customers’ families. The mix of services could influence operating results, as it influences the average revenue per contract. Expense management, which includes controlling salaries, merchandise costs, corporate overhead and other expense categories, could also impact operating results and cash flows. Lastly, economic conditions, legislative and regulatory changes and tax law changes, all of which are beyond our control, could impact our operating results and cash flows.

For further discussion of our key operating metrics, see our Results of Operations and Liquidity and Capital Resources sections below.

RECENT EVENTS

The following are key events and transactions that have occurred during 2021 that were material to us and/or facilitate an understanding of our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q:



Axar Letter. On September 27, 2021, we announced that we had received the Letter dated September 22, 2021 from Axar in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to us and our various stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expects that any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors it engages. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions.



Refinancing. On May 11, 2021, we issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”). The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to the 2029 Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes, the 2024 Issuers deposited from the net cash proceeds from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the outstanding 2024 Notes with the 2024 Trustee as trustee under the 2024 Indenture, among the 2024 Issuers, the guarantors party thereto and the 2024 Trustee governing the 2024 Notes. Upon deposit of such funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture.

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

COVID-19 Pandemic. In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of our employees, customers and vendors. Our operations are deemed essential by the state and local governments in which we operate, with the exception of Puerto Rico, and we have been working with federal, state and local government officials to ensure that we continue to satisfy their requirements for offering our essential services.

Our top priority is the health and safety of our employees and the families we serve. Since the start of the outbreak in the U.S., our Company’s senior management team has taken actions to protect our employees and the families served, and to support our field locations as they adapt and adjust to the circumstances resulting from the COVID-19 Pandemic. The operation of all of our facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of our employees and their families, we provided all of our employees with detailed health and safety literature on COVID-19, such as the CDC’s industry-specific guidelines for working with the deceased who were or may have been infected with COVID-19. In addition, our procurement and safety teams have consistently secured and distributed supplies to ensure that our locations have appropriate PPE and cleaning supplies to provide our essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the number of attendees. We also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the families and communities we serve. Our corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting our field operations. We have not experienced any significant disruptions to our business as a result of the work from home policies in our corporate office. We monitor the CDC guidance on a regular basis, continually review and update our processes and procedures and provide updates to our employees as needed to comply with regulatory guidelines.

Our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and productive manner. Some of our locations provide live video streaming of their funeral and burial services to our customers or providing other alternatives that respect social distancing, so that family and friends can connect during their time of grief.

Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially. At the start of the COVID-19 Pandemic in early 2020, we saw our pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, since May 2020, we experienced at-need sales growth and, since late 2020, we have experienced pre-need sales growth. We believe the implementation of our virtual meeting tools is one of several key steps to mitigate this disruption. Throughout the COVID-19 Pandemic, our cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by local authorities and we expect that this will continue. The Company has leveraged the relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and increased pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more available, the Company has experienced record growth in its pre-need cemetery sales. However, we had experienced limited location closures due to COVID-19 cases, required quarantines and cleanings. During the year ended December 31, 2020, we incurred costs of approximately $1.0 million related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic.

We expect the COVID-19 Pandemic could have an adverse effect on our future results of operations and cash flows depending on COVID-19 variants and increased case counts. However we cannot presently predict the likely scope and severity of that impact. We may incur additional costs related to the implementation of prescribed safety protocols related to the COVID-19 Pandemic. In the event there are confirmed diagnoses of COVID-19 within a significant number of our facilities, we may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic.



Moon. In April 2020, we had outsourced all of the grounds and maintenance services at most of the funeral homes and cemeteries we own or manage to Moon. We also have the right under the MSAs to take back the responsibility for grounds and maintenance services at the locations outsourced to Moon. Due to certain liquidity constraints and performance issues experienced by Moon, we have exercised this right with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021 and an additional 111 locations effective August 9, 2021, representing in the aggregate approximately 61% of the locations we had originally outsourced to Moon. We are continuing to evaluate Moon’s performance under the MSAs.

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In connection with these changes, we are now using our own equipment to service these locations and rehired the employees Moon had hired from us upon execution of the MSAs. These employees will continue to provide certain grounds services for us at these locations using the equipment previously leased to Moon. We are outsourcing substantially all of the landscaping and other maintenance services previously provided by Moon at these locations to other vendors who had previously been subcontractors to Moon. We do not anticipate that these changes will have any material impact on the cost of providing the services compared to the amounts due to Moon under the MSAs.

From time to time, on the behalf of Moon, we incurred a higher level of expenses relating to services covered by the MSAs, including location materials and supplies, uniforms, repair of marker damage, customer refunds and payments to third party landscapers and repair shops. These additional payments, which were in addition to the payments specified in the MSAs, were recorded as cemetery operating expenses in the relevant periods and as of September 30, 2021 aggregated $6.0 million. We have the ability to seek reimbursement from Moon for these additional payments as outlined in the MSAs.

Management believes the impact on the Company of Moon’s bankruptcy filing has been partially mitigated because we have taken back the responsibilities under the MSAs for the 214 locations noted above and will take back such responsibilities with respect to an additional 53 locations by early December 2021. However, given the uncertainty associated with the bankruptcy proceedings and the locations for which Moon will continue to be responsible under the MSAs, it is possible that we may continue to experience performance issues and other disruptions in operations at those locations, particularly if it becomes necessary for us to assume the responsibility for servicing those locations in the near future on relatively short notice. In addition, we expect that we will continue to incur additional expenses relating to services covered by the MSAs. If Moon is unable to obtain appropriate financing or reach an agreement to sell its assets and is unable to have a plan of reorganization confirmed by the Bankruptcy Court, we would likely not be able to obtain reimbursement of the Pre-Petition Cure Amount or the Post-Petition Cure Amount.

To date, the disruptions resulting from Moon’s bankruptcy filing have not had, and we do not expect that any additional disruptions it may experience in the future will have, a material adverse effect on our overall business given the number of locations for which we are now and will soon be responsible and our previous relationships, which were established before the transfer of responsibilities to Moon. We continue to closely monitor the overall situation.

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

Divestitures. On May 24, 2021, we completed the Missouri Sale for a total cash purchase price of $720,000, resulting in a loss on sale of $1.7 million for the nine months ended September 30, 2021.

On April 2, 2021, we completed the Clearstone Sale for a net cash purchase price of $6.2 million, subject to certain adjustments. We redeemed an additional $6.7 million of principal amount of the 2024 Notes in accordance with the terms of the 2024 Indenture. The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020, represented a strategic exit from the West Coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as discontinued operations on the accompanying consolidated statements of operations for the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020. Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance sheet at December 31, 2020.

GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in the death care industry, based upon assumptions made by us and information currently available. Death care industry factors affecting our financial position and results of operations include, but are not limited to, death rates, per capita disposable income, demographic trends in terms of number of adults aged 65 and older, cremation rates and trends and e-commerce sales. In addition, we are subject to fluctuations in the fair value of equity and fixed-maturity debt securities held in our trusts. These values can be negatively impacted by contractions in the credit market and overall downturns in economic activity. Our ability to make payments on our debt depends on our success at managing operations with respect to these industry trends. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

Business Strategies

Our management identified key areas of strategic improvement as part of its turnaround strategy in 2018, which has allowed us to realize upside in our operational and financial performance. The key pillars of the turnaround strategy included:



Strategic Evaluation of Asset Base. We performed a full asset review to align resources on targeted facilities while divesting select non-core assets.



Decentralized Operating Structure. We restructured our operating model with divisional presidents and general managers to increase responsibility of property-level employees and help execute on operational and financial strategies.



Sales Productivity and Profitable Sales Growth. We established key performance indicators, implemented client relationship management analytics, realigned incentives and created new onboarding program to improve the productivity of our sales force.



Significant Expense Reductions. We optimized our expense structure by integrating new expense systems, downsizing headcount and identifying other inefficient uses of resources.



Financial Reporting Efficiencies. We upgraded our internal accounting and financial practices and senior accounting personnel to generate increased transparency and financial integrity.

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We are poised to execute on a targeted, long-term growth strategy to reduce leverage and increase the sustainability of our operations. We have identified the following pathway to additional growth:



Continued Execution of Organic Growth

Continue to recognize the benefits of expanding margins created through the realization of our turnaround strategy and sustainable operational performance;

Focus on sales growth and EBITDA at each property location, driving both at-need and pre-need sales for additional cash flow today and into the future;

Explore new product offerings to cater to evolving customer demands; and

Deploy capital expenditure projects to capitalize on new sales, performance or efficiency opportunities.



Inorganic Growth and Acquisition Opportunities

Target core markets for accretive, strategic growth that complements our existing portfolio, while leveraging our scale and management capabilities; and

Focus on existing synergies to add value to new acquisitions, including trust management capabilities and a robust pre-need sales program.



Naturally De-Lever and Grow Our Platform

Use excess cash flow to acquire new properties to create additional EBITDA;

Grow at a sustainable pace and integrate assets to take advantage of our existing platform and management expertise; and

Continue to build upon our strong backlog of assets and trust appreciation through existing operations, organic growth opportunities and future acquisitions.

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RESULTS OF OPERATIONS

We have two distinct reportable segments, Cemetery Operations and Funeral Home Operations, which are supported by corporate costs and expenses.

Cemetery Operations

Overview

We are currently the one of the largest owners and operators of cemeteries in the U.S. As of September 30, 2021, we operated 301 cemeteries in 24 states and Puerto Rico. We owned 271 of these cemeteries, and we managed or operated the remaining 30 under leases, operating agreements or management agreements. Revenues from our Cemetery Operations segment accounted for approximately 86% of our total revenues for the three and nine months ended September 30, 2021.

Operating Results

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following tables present operating results for our Cemetery Operations segment for the three months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,
					Variance
	2021		2020		$			%
Interments	$	21,954	$	20,316	$	1,638			8	%
Merchandise		16,935		15,949		986			6	%
Services		17,240		16,078		1,162			7	%
Interest income		2,092		2,071		21			1	%
Investment and other		12,593		7,606		4,987			66	%
Total revenues		70,814		62,020		8,794			14	%
Cost of goods sold		11,023		9,624		1,399			15	%
Cemetery expense		19,286		16,198		3,088			19	%
Selling expense		14,451		13,119		1,332			10	%
General and administrative expense		10,534		10,027		507			5	%
Depreciation and amortization		1,471		1,556		(85	)		(5	%)
Total costs and expenses		56,765		50,524		6,241			12	%
Segment operating profit	$	14,049	$	11,496	$	2,553			22	%

Cemetery interments revenues were $22.0 million for the three months ended September 30, 2021, an increase of $1.6 million and 8% from $20.3 million for the three months ended September 30, 2020. The increase resulted primarily from an increase in pre-need revenues of $1.4 million due to improved productivity of the salesforce. At-need revenues increased $0.8 million or 15% versus the prior year. Additionally, there was a decrease of $0.5 million associated with increased cancellations and promotional discounts.

Cemetery merchandise revenues were $16.9 million for the three months ended September 30, 2021, an increase of $1.0 million and 6% from $15.9 million for the three months ended September 30, 2020. The increase resulted primarily from a $1.0 million increase in at-need revenues and a $0.2 million increase in pre-need turned at-need revenues. These increases were primarily associated with delivery of markers and bases, including those deliveries previously delayed due to the COVID-19 Pandemic. Additionally, there was a decrease of $0.2 million associated with increased cancellations and promotional discounts.

Cemetery service revenues were $17.2 million for the three months ended September 30, 2021, an increase of $1.2 million and 7% from $16.1 million for the three months ended September 30, 2020. The increase resulted from a $0.7 million increase in pre-need turned at-need revenues and a $0.7 million increase in at-need revenues. These increases were primarily associated with the installation of markers, including those previously delayed due to the COVID-19 Pandemic. Additionally, there was a decrease of $0.2 million associated with increased cancellations and promotional discounts.

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Investment and other income was $12.6 million for the three months ended September 30, 2021, an increase of $5.0 million and 66% from $7.6 million for the three months ended September 30, 2020. The increase was driven by increases in investment income associated with the merchandise trust and the perpetual care trust of $2.7 million and $1.8 million, respectively. Additionally, there was an increase of $0.2 million in RIA fees earned and a $0.3 million increase in other revenues.

Cost of goods sold was $11.0 million for the three months ended September 30, 2021, an increase of $1.4 million and 15% from $9.6 million for the three months ended September 30, 2020. The increase was primarily the result of increased revenue recognized. As a percentage of cemetery revenue, cost of goods sold was essentially flat at 15.6% for the three months ended September 30, 2021, compared to 15.5% for the three months ended September 31, 2020.

Cemetery expenses were $19.3 million for the three months ended September 30, 2021, an increase of $3.1 million and 19% from $16.2 million for the three months ended September 30, 2020. The increase was due to approximately $2.2 million in general expenditures, including ancillary and other costs associated with the transition of cemetery maintenance back from Moon, coupled with a $0.9 million increase in repairs and maintenance expense.

Selling expenses were $14.5 million for the three months ended September 30, 2021, an increase of $1.3 million and 10% from $13.1 million for the three months ended September 30, 2020. As a percentage of cemetery revenue, selling expenses decreased to 20.4% from 21.2%, notwithstanding a $0.5 million increase in marketing and advertising expense. In 2020, marketing and advertising expense was curtailed in response to the on-going COVID-19 Pandemic. The decrease in selling expenses as a percentage of cemetery revenue was driven by improved efficiencies in our salesforce.

General and administrative expenses were $10.5 million for the three months ended September 30, 2021, an increase of $0.5 million and 5% from $10.0 million for the three months ended September 30, 2020. The increase was primarily the result of a $0.2 million increase in professional fees, including legal fees and settlement costs, a $0.2 million increase in insurance expense, a $0.1 million increase in credit card processing fees associated with increased revenues and $0.3 million increase in other miscellaneous expenses. These increases were offset in part by a $0.3 million decrease in spend associated with one-time purchases of personal protective equipment in the third quarter of 2020.

Depreciation and amortization expenses were $1.5 million for the three months ended September 30, 2021, a decrease of $0.1 million and 5% from $1.6 million for the three months ended September 30, 2020. The decrease was due to routine depreciation and amortization of the associated asset base.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The following tables present operating results for our Cemetery Operations segment for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
					Variance
	2021		2020		$			%
Interments	$	65,379	$	51,542	$	13,837			27	%
Merchandise		51,004		44,918		6,086			14	%
Services		52,219		47,656		4,563			10	%
Interest income		6,568		5,723		845			15	%
Investment and other		34,752		23,841		10,911			46	%
Total revenues		209,922		173,680		36,242			21	%
Cost of goods sold		34,642		28,307		6,335			22	%
Cemetery expense		55,537		50,375		5,162			10	%
Selling expense		43,434		37,376		6,058			16	%
General and administrative expense		31,377		28,672		2,705			9	%
Depreciation and amortization		4,552		4,815		(263	)		(5	%)
Total costs and expenses		169,542		149,545		19,997			13	%
Segment operating profit	$	40,380	$	24,135	$	16,245			67	%

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Cemetery interments revenues were $65.4 million for the nine months ended September 30, 2021, an increase of $13.8 million and 27% from $51.5 million for the nine months ended September 30, 2020. The increase resulted from an increase in pre-need revenues of $12.8 million due to improved productivity of the salesforce and an increase in at-need revenues of $2.0 million primarily related to increases in death rates associated with the COVID-19 Pandemic, offset by an increase in cancellations and promotional discounts of $1.0 million.

Cemetery merchandise revenues were $51.0 million for the nine months ended September 30, 2021, an increase of $6.1 million and 14% from $44.9 million for the nine months ended September 30, 2020. The increase resulted from an increase of $5.3 million in at-need revenues and an increase in pre-need turning at-need revenues of $1.0 million, both of which were positively impacted by increased burial rates associated with the COVID-19 Pandemic, offset by an increase in cancellations and promotional discounts of $0.2 million.

Cemetery service revenues were $52.2 million for the nine months ended September 30, 2021, an increase of $4.6 million and 10% from $47.7 million for the nine months ended September 30, 2020. The increase resulted from an increase of $2.1 million in at-need revenues and an increase in pre-need turning at-need revenues of $2.7 million, both of which were positively impacted by the increased burial rates associated with the COVID-19 Pandemic. Additionally, there was a decrease of $0.2 million associated with increased cancellations and promotional discounts.

Investment and other income was $34.8 million for the nine months ended September 30, 2021, an increase of $10.9 million and 46% from $23.8 million for the nine months ended September 30, 2020. The increase was driven by increases in investment income associated with the merchandise trust and the perpetual care trust of $2.5 million and $6.2 million, respectively. Additionally, there was an increase of $1.4 million in RIA fees earned and a $0.8 million increase in other revenues.

Cost of goods sold was $34.6 million for the nine months ended September 30, 2021, an increase of $6.3 million and 22% from $28.3 million for the nine months ended September 30, 2020. The increase was primarily the result of increased revenue recognized. As a percentage of cemetery revenue, cost of goods sold increased slightly to 16.5% for the nine months ended September 30, 2021, compared to 16.3% for the nine months ended September 30, 2020.

Cemetery expenses were $55.5 million for the nine months ended September 30, 2021, an increase of $5.2 million and 10% from $50.4 million for the nine months ended September 30, 2020. The increase was due to approximately $3.5 million in general expenditures, including ancillary and other costs associated with the transition of cemetery maintenance back from Moon, coupled with a $1.5 million increase in repairs and maintenance expense and $0.2 million increase in real estate taxes.

Selling expenses were $43.4 million for the nine months ended September 30, 2021, an increase of $6.1 million and 16% from $37.4 million for the nine months ended September 30, 2020. As a percentage of cemetery revenue, selling expenses decreased to 20.6% from 21.5%, notwithstanding a $1.2 million increase in marketing and advertising expense. In 2020, marketing and advertising expense was curtailed in response to the on-going COVID-19 pandemic. The decrease in selling expenses as a percentage of cemetery revenue was driven by improved efficiencies in our salesforce.

General and administrative expenses were $31.4 million for the nine months ended September 30, 2021, an increase of $2.7 million and 9% from $28.7 million for the nine months ended September 30, 2020. The increase was primarily the result of a $1.4 million increase in insurance costs, a $0.4 million increase in credit card processing fees associated with increased revenues, a $0.3 million increase in payroll and payroll related costs primarily associated with enhanced bonus program for general managers and regional administration, and a $1.2 million increase in other miscellaneous expenses. Those increases were offset by a $0.6 million decrease in spend associated with one-time purchases of personal protective equipment in the third quarter of 2020.

Depreciation and amortization expenses were $4.6 million for the nine months ended September 30, 2021, a decrease of $0.3 million and 5% from $4.8 million for the nine months ended September 30, 2020. The decrease was due to routine depreciation and amortization of the associated asset base.

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Funeral Home Operations

Overview

As of September 30, 2021, we owned, operated or managed 70 funeral homes. These properties were located in 15 states and Puerto Rico. Revenues from Funeral Home Operations accounted for approximately 14% of our total revenues for the three and nine months ended September 30, 2021.

Operating Results

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following tables present operating results for our Funeral Home Operations for the three months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,
					Variance
	2021		2020		$			%
Merchandise	$	6,120	$	5,793	$	327			6	%
Services		5,361		4,900		461			9	%
Total revenues		11,481		10,693		788			7	%
Merchandise		1,668		1,539		129			8	%
Services		4,874		4,775		99			2	%
Depreciation and amortization		419		453		(34	)		(8	%)
Other		3,543		2,834		709			25	%
Total expenses		10,504		9,601		903			9	%
Segment operating profit	$	977	$	1,092	$	(115	)		(11	%)

Funeral home merchandise revenues were $6.1 million for the three months ended September 30, 2021, an increase of $0.3 million and 6% from $5.8 million for the three months ended September 30, 2020. The increase resulted from a $0.4 million increase in at-need revenues partially offset by a $0.1 million decrease in pre-need turned at-need revenue.

Funeral home services revenues were $5.4 million for the three months ended September 30, 2021, an increase of $0.5 million and 9% from $4.9 million for the three months ended September 30, 2020. The increase was primarily associated with a $0.6 million increase in at-need revenues, partially offset by a $0.1 million decrease in trust and RIA fees recognized.

Funeral home total expenses were $10.5 million for the three months ended September 30, 2021, an increase of $0.9 million and 9% from $9.6 million for the three months ended September 30, 2020. Funeral home merchandise costs increased $0.1 million or 8%. Funeral home services costs increased $0.1 million or 2%. Other funeral home expenses increased $0.7 million, primarily driven by increases in costs associated with insurance and repairs and maintenance.

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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The following tables present operating results for our Funeral Home Operations for the nine months ended September 30, 2021 and 2020 (in thousands):


	Nine Months Ended September 30,
					Variance
	2021		2020		$			%
Merchandise	$	17,542	$	16,004	$	1,538			10	%
Services		16,125		14,732		1,393			9	%
Total revenues		33,667		30,736		2,931			10	%
Merchandise		4,807		4,239		568			13	%
Services		14,012		13,594		418			3	%
Depreciation and amortization		1,273		1,359		(86	)		(6	%)
Other		9,801		8,084		1,717			21	%
Total expenses		29,893		27,276		2,617			10	%
Segment operating profit	$	3,774	$	3,460	$	314			9	%

Funeral home merchandise revenues were $17.5 million for the nine months ended September 30, 2021, an increase of $1.5 million and 10% from $16.0 million for the nine months ended September 30, 2020. The increase resulted from a $1.4 million increase in at-need revenues and a $0.1 million increase in pre-need turned at-need revenue.

Funeral home services revenues were $16.1 million for the nine months ended September 30, 2021, an increase of $1.4 million and 9% from $14.7 million for the nine months ended September 30, 2020. The increase was associated primarily with a $0.6 million increase in at-need revenues, a $0.5 million increase in income recognized on merchandise trust, a $0.1 million increase in pre-need turned at-need revenues and a $0.2 million increase in other funeral home revenues.

Funeral home expenses were $29.9 million for the nine months ended September 30, 2021, an increase of $2.6 million and 10% from $27.3 million for the nine months ended September 30, 2020. Funeral home merchandise costs increased $0.6 million or 13%. Funeral home services costs increased $0.4 million or 3%. Other funeral home expenses increased $1.6 million, primarily driven by increases in costs associated with insurance and repairs and maintenance.

Corporate

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Corporate Overhead

Corporate overhead expense was $10.0 million for the three months ended September 30, 2021, an increase of $0.2 million and 2% from $9.8 million for the three months ended September 30, 2020. The increase was primarily related to a $0.2 million increase in stock compensation expense, a $0.2 million increase in telecommunications related expenses, a $0.2 million increase in miscellaneous taxes, a $0.1 million increase in corporate insurance and a $0.1 million increase in professional fees. These increases were partially offset by a $0.3 million decrease in corporate payroll and a $0.3 million decrease in miscellaneous expenses.

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Loss on Sale of Business and Other Impairments

For the three months ended September 30, 2021, we recorded a loss of $0.1 million in connection with the Missouri Sale in May 2021. For the three months ended September 30, 2020, there were no such losses.

Other Losses, net

Other losses, net were $0.6 million for the three months ended September 30, 2021and consisted of an impairment charge related to one funeral home. For the three months ended September 30, 2020, there were no such losses.

Interest Expense

Interest expense was $9.3 million for the three months ended September 30, 2021, a decrease of $2.6 million and 22% from $11.9 million for the three months ended September 30, 2020. The change was due to a decrease of $1.9 million related to a lower interest rate on the 2029 Notes and a decrease of $0.7 million due to lower amortization of deferred financing fees.

Income Tax Benefit

Income tax benefit was $0.2 million for the three months ended September 30, 2021, compared to $1.1 million for the three months ended September 30, 2020. The income tax benefit for the three months ended September 30, 2021 was primarily due to the loss from continuing operations. The income tax benefit for the three months ended September 30, 2020 was primarily related to the reduction of deferred tax liabilities due to losses incurred.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Corporate Overhead

Corporate overhead expense was $29.1 million for the nine months ended September 30, 2021, an increase of $2.0 million and 8% from $27.0 million for the nine months ended September 30, 2020. The increase was primarily related to a $0.6 million increase in corporate payroll, which included bonus accruals, a $0.6 million increase in corporate insurance, a $0.4 million increase in stock compensation expense, a $0.3 million increase in miscellaneous taxes, and a $0.2 million increase in telecommunications related expenses. Additionally, there was an increase of $0.5 million related to lower vendor rebates that offset the expense. These increases were offset by a $0.3 million decrease in legal and professional fees and a $0.3 million decrease in corporate office rent.

Loss on Sale of Business and Other Impairments

For the nine months ended September 30, 2021, we recorded a loss of $2.3 million which consisted of a loss of $1.8 million in connection with the Missouri Sale in May 2021 and an impairment of $0.5 million related to property and equipment held for sale. For the nine months ended September 30, 2020, there were no such transactions.

Other Losses, net

Other losses, net were $0.5 million for the nine months ended September 30, 2021 and primarily consisted of an impairment charge related to one funeral home. For the nine months ended September 30, 2020, there were no such losses.

Interest Expense

Interest expense was $29.7 million for the nine months ended September 30, 2021, a decrease of $5.2 million and 15% from $35.0 million for the nine months ended September 30, 2020. The change was due to a decrease of $4.4 million related to a lower interest rate on the 2029 Notes and a decrease of $0.8 million due to lower amortization of deferred financing fees.

Loss on Debt Extinguishment

For the nine months ended September 30, 2021, we recorded a loss of $40.1 million related to the full redemption of the 2024 Notes, which was comprised of an early redemption fee of $18.5 million and the write-off of deferred financing fees and original issue discount of $21.6 million. For the nine months ended September 30, 2020 there was no loss on debt extinguishment.

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Income Tax Benefit

Income tax benefit was $11.7 million for the nine months ended September 30, 2021, compared to $3.3 million for the nine months ended September 30, 2020. The income tax benefit for the nine months ended September 30, 2021 was primarily due to the loss from continuing operations. The income tax benefit for the nine months ended September 30, 2020 was primarily related to changes in projected state deferred tax savings related to consolidated state filings as well as the reduction of deferred tax liabilities due to losses incurred.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are cash generated from operations, proceeds from asset sales and the remaining proceeds from the sale of the 2029 Notes. Our primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds and debt service. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold to which the contribution related, which will reduce the amount of additional borrowings or asset sales needed.

While we rely heavily on our available cash and cash flows from operating activities to execute our operational strategy and meet our financial commitments and other short-term financial needs, we cannot be certain that sufficient capital will be generated through operations or be available to us to the extent required and on acceptable terms. Based on our forecasted operating performance and the issuance of the 2029 Notes and the redemption of the 2024 Notes, we believe that we will be able to continue as a going concern for the next twelve-month period.

Cash Flows

The following table summarizes our unaudited condensed consolidated statements of cash flows by class of activities in thousands:


	Nine Months Ended September 30,
	2021		2020
Net cash provided by operating activities	$	10,427	$	3,785
Net cash provided by investing activities		787		43,552
Net cash provided by (used in) financing activities		44,620		(39,500	)

Significant Sources and Uses of Cash During the Nine Months Ended September 30, 2021 and 2020

Operating Activities

Net cash provided by operating activities was $10.4 million for the nine months ended September 30, 2021 as compared to $3.8 million during the nine months ended September 30, 2020. The $6.6 million increase in operating cash flows was primarily due to an increase of $17.5 million resulting from a reduction in the net loss excluding non-cash items due to improved operating performance and expense management efforts, offset in part by the change in working capital items which resulted in a net decrease in operating cash flows of $10.9 million.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2021 was $0.8 million as compared to $43.6 million for the nine months ended September 30, 2020. The cash provided by investing activities for the nine months ended September 30, 2021 was attributable to proceeds from divestitures of $6.5 million, partially offset by capital expenditures for purchases and maintenance of property, plant and equipment of $5.7 million. Net cash provided by investing activities during the nine months ended September 30, 2020 consisted of proceeds from divestitures of $48.3 million, offset in part by cash used for capital expenditures for purchases and maintenance of property, plant and equipment of $4.8 million.

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Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2021 was $44.6 million as compared to $39.5 million of net cash used in financing activities for the nine months ended September 30, 2020. The cash provided by financing activities for the nine months ended September 30, 2021 was primarily due to proceeds from the issuance of the 2029 Notes offset partially by the full redemption of the 2024 Notes and the related early redemption fee and costs of financing. Net cash used in financing activities during the nine months ended September 30, 2020 was primarily due to the redemption of $51.7 million of the 2024 Notes, using proceeds from the Oakmont Sale, the Olivet Sale and other immaterial dispositions, offset in part by $17.0 million of proceeds from the issuance of equity.

The following table summarizes maintenance and expansion capital expenditures for the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Maintenance capital expenditures	$	1,199	$	353	$	2,241	$	2,030
Expansion capital expenditures		1,115		640		3,434		2,754
Total capital expenditures	$	2,314	$	993	$	5,675	$	4,784

Long-Term Debt

On May 11, 2021, we issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 and used a substantial portion of the proceeds to fund the redemption of all of our outstanding 2024 Notes. For further details on our 2029 Notes, see Note 8 Long-Term Debt of Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report.

Surety Bonds

We have entered into arrangements with certain surety companies, whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our pre-need sales activities.

When selling pre-need contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. If we were not able to renew or replace any such surety bond, we would be required to fund the trust only for the portion of the applicable pre-need contracts for which we have received payments from the customers, less any applicable retainage, in accordance with state law. We have provided cash collateral to secure these surety bond obligations and may be required to provide additional cash collateral in the future under certain circumstances.

For the nine months ended September 30, 2021 and 2020, we had $100.5 million and $97.0 million, respectively, of cash receipts from sales attributable to related bond contracts. These amounts do not consider reductions associated with taxes, obtaining costs or other costs.

Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying pre-need contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. We do not expect that we will be required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our unaudited condensed consolidated financial statements and related notes included within Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities that arose during the reporting period and through the date our financial statements are filed with the SEC. Although we base our estimates on historical experience and various other assumptions we believe to be reasonable, actual results may differ from these estimates.

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A critical accounting estimate or policy is one that requires a high level of subjective judgement by management and could have a material impact to our financial position, results of operations or cash flows if actuals vary significantly from our estimates.

There have been no significant changes to the critical accounting policies and estimates identified in the Annual Report, as described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term "market" risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes other than trading.

The trusts are invested in assets with the primary objective of maximizing income and distributable cash flow for trust distributions, while maintaining an acceptable level of risk. Certain asset classes in which we invest for the purpose of maximizing yield are subject to an increased market risk. This increased market risk will create volatility in the unrealized gains and losses of the trust assets from period to period.

INTEREST-BEARING INVESTMENTS

The interest-bearing investments in our merchandise trusts and perpetual care trusts that are subject to interest rate sensitivity consist of fixed-income securities, money market investments and other short-term investments. As of September 30, 2021, the accumulated fair value of the interest-bearing investments in our merchandise trusts and perpetual care trusts was $44.3 million and $23.5 million, respectively, or 8.1% and 7.0% of the fair value of our total trust assets, respectively.

MARKETABLE EQUITY SECURITIES

The marketable equity securities in our merchandise trusts and perpetual care trusts that are subject to market price sensitivity consist of individual equity securities as well as closed and open-ended mutual funds. As of September 30, 2021, the accumulated fair value of the marketable equity securities in our merchandise trusts and perpetual care trusts was $26.4 million and $13.1 million, respectively, or 4.8% and 3.9% of the fair value of our total trust assets, respectively.

OTHER INVESTMENT FUNDS

Other investment funds are measured at fair value using the net asset value per share practical expedient. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to fifteen years with three potential one year extensions at the discretion of the funds’ general partners. This asset class has an inherent valuation risk as the values provided by investment fund managers may not represent the liquidation values obtained by the trusts upon redemption or liquidation of the fund assets. As of September 30, 2021, the fair value of other investment funds in our merchandise trusts and perpetual care trusts represented 83.2% and 86.9%, respectively, of the fair value of total trust assets. The fair market value of the holdings in these funds was $456.2 million and $291.0 million in our merchandise trusts and perpetual care trusts, respectively, as of September 30, 2021, based on net asset value quotes.

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ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, including the CEO and CFO, evaluated the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2021. Based on such evaluation, our CEO and CFO concluded the disclosure controls and procedures were not effective due to the on-going remediation associated with the material weaknesses in internal control over financial reporting described below.

Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Material Weaknesses in Internal Control over Financial Reporting

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.

Management previously identified and reported material weaknesses in its Annual Report on Form 10-K for the Year Ended December 31, 2019. We conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, we concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2020 as a result of the material weaknesses described below:

A. Control environment, control activities and monitoring:

The Company did not design and maintain effective internal controls over financial reporting related to control environment, control activities and monitoring based on the criteria established in the Committee of Sponsoring Organization Internal Control Integrated Framework including more specifically:



Management did not implement effective oversight to support deployment of control activities due to (a) failure to establish clear accountability for the performance of internal control over financial reporting responsibilities in certain areas important to financial reporting and (b) failure to prioritize and implement related corrective actions in a timely manner.



Management did not have a Delegation of Authority matrix outside of the procurement process or effective monitoring controls over the review of segregation of duties within relevant financial applications.

B. Establishment and review of certain accounting policies:

The Company’s controls applicable to establishment, periodic review for ongoing relevance and consistent application of material accounting policies in conformity with GAAP relating to revenue recognition were not designed appropriately and thus failed to operate effectively. More specifically:



Management did not maintain effective controls over sales contract origination occurring at its site locations. Specifically, there was no subsequent review of contract entry at site locations or corporate, as well as the lack of an approved standard price list and approvals for pricing deviations.



Management did not have effective review and monitoring controls over revenue recognition with respect to the Accounting Standards Codification 606, Revenues from Contracts with Customers, to timely detect misstatements

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in income statement and balance sheet accounts. There was no oversight monitoring at corporate for contract cancellations and the timely and accurate servicing of contracts for proper revenue recognition.

C. Reconciliation of certain general ledger accounts to supporting details:

The Company’s controls over the reconciliation of amounts recorded in the general ledger for "Cemetery property" and "Deferred revenues" on the consolidated balance sheets were not designed appropriately and thus failed to operate effectively. More specifically:



Management did not have effective segregation of duties over the preparation and subsequent review of its deferred revenue reconciliation process at a sufficient level of precision to timely detect potential misstatements of the related income statement and balance sheet accounts.



Management did not consistently reconcile these general ledger account balances to supporting documentation.

D. Accurate and timely relief of deferred revenues and corresponding recognition of income statement impacts:

The Company’s internal controls designed to prevent a material misstatement in the recognized amount of "Deferred revenues" as of the balance sheet date were not designed appropriately. Specifically, the Company concluded that it did not design effective controls that would lead to a timely identification of a material error in "Deferred revenues" due to failure to accurately and timely relieve the liability when the service was performed, or merchandise was delivered. Further, the Company’s review controls designed to detect such errors did not operate at the appropriate level of precision to identify such error. More specifically:



Management did not have effective review and monitoring controls over the revenue, cost of goods sold and deferred balances of pre-acquisition contracts at a sufficient level of precision to timely detect potential misstatements of the related income statement and balance sheet accounts.



Management did not have effective review and monitoring controls over the results of ongoing deferred revenue testing at a sufficient level of precision to detect potential misstatements of the related balance sheet accounts.

Our management communicated the results of its assessment to the Audit Committee of the Board of Directors.

STATUS OF REMEDIATION OF MATERIAL WEAKNESSES

While we continue to make improvements to our internal control over financial reporting related to the material weaknesses described above, material weaknesses continue to exist, and we believe that the material weaknesses referenced above accurately reflect the material weaknesses in our internal control over financial reporting as of September 30, 2021. Management, with oversight from our Audit Committee, identified and planned actions during the first quarter of 2021 that we believe will remediate these material weaknesses. Management has developed multiple workstreams which correlate to these material weaknesses that include various levels of cross functional management and detail relevant work steps that are assigned, project managed and have defined due dates for completion. Management’s corrective actions are multi-faceted to address each aspect of the respective material weaknesses. Management began to implement the resulting corrective actions during the second quarter of 2021 and progress continued through the third quarter of 2021 and remains on-going. While management’s corrective actions have remediated certain aspects of each material weakness, additional work is necessary to fully remediate the material weaknesses. Once all corrective actions are fully implemented and the controls operate effectively for a sufficient period of time, and are adequately tested through audit procedures, we believe the material weaknesses will be remediated. We will continue to devote significant time and attention, including internal and external resources, to these remedial efforts. For a more comprehensive discussion of Management’s remediation action plans refer to Item 9A., Disclosure Controls and Procedures, of our 2020 Annual Report on Form 10-K.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended September 30, 2021, despite the remote work environment due to the ongoing issues surrounding the COVID-19 Pandemic we continued to make improvements to our internal control over financial reporting with respect to material weaknesses that had been present at that time, and those remediation efforts remain ongoing. Other than as described above and in greater detail in the Item 9A., Disclosure Controls and Procedures, of our 2020 Annual Report on Form 10-K, there were no changes in our internal control over financial reporting as defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the three months ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information regarding our significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Part 1. Item 1. Financial Statements (Unaudited)—Notes to the Unaudited Condensed Consolidated Financial Statements—Note 11 Commitments and Contingencies of this Quarterly Report.

We and certain of our subsidiaries are parties to legal proceedings that have arisen in the ordinary course of business. We do not expect such matters to have a material adverse effect on our unaudited condensed consolidated financial position, results of operations or cash flows. We carry insurance with coverage and coverage limits that we believe to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect us against such contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below. The ongoing coronavirus (COVID-19) pandemic may also have the effect of heightening many of the risks we face, such as those relating to our substantial level of indebtedness, our future capital needs, our need to generate sufficient cash to service our indebtedness and our ability to comply with the covenants contained in the 2029 Indenture. The risks and uncertainties described below and in our Annual Report are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations would suffer. Please see the risk factors set forth below as well as those risks described in Part I, Item 1A. Risk Factors of our Annual Report.

RISKS RELATED TO OUR INDEBTEDNESS

Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.

As of September 30, 2021, we had $401.8 million of total debt (not including debt issuance costs or capital lease obligations), consisting of $400.0 million of the 2029 Notes and $1.8 million of financed insurance and vehicles. Our indebtedness requires significant interest and principal payments. Subject to certain limitations and the satisfaction of certain conditions contained in the 2029 Indenture, we may also be permitted to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase.

Our level of indebtedness could have important consequences to us, including:



continuing to require us to dedicate a substantial portion of our cash flow from operations to the payment of the principal of and interest on our indebtedness, thereby reducing the funds available for operations and any future business opportunities;



limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;



placing us at a competitive disadvantage compared to our competitors that have proportionately less indebtedness;



making us more susceptible to changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such financing;



increasing our vulnerability to adverse general economic or industry conditions; and



limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.

In addition, the 2029 Indenture prevents us from incurring additional debt or liens for working capital expenditures, acquisitions or other purposes (subject to very limited exceptions). Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to repay our indebtedness and comply with the restrictive covenants will be dependent on, among other things, the successful execution of our strategic plans. If we require additional capacity under the restrictive covenants to successfully execute our strategic plans, we will need to seek the required consent from a majority of the holders of the 2029 Notes. No assurances can be given that we will be successful in obtaining such consent, and any failure to do so will have a material adverse effect on our business operations and our financial results.

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Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. The trustee or the holders of the 2029 Notes could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our debt.

In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired, and our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged, as these competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.

Despite our current indebtedness level, we and any of our existing or future subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.

We and any of our existing and future subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the 2029 Indenture contains limitations on our ability to incur additional indebtedness, these restrictions will be subject to a number of qualifications and exceptions, and we have the ability under the 2029 Indenture to incur up to $40 million of additional senior secured debt. If new debt is added to our or any of our existing and future subsidiaries’ current debt levels, the related risks that we now face could be exacerbated.

We may not be able to generate sufficient cash to service all of our indebtedness or repay such indebtedness when due, including the 2029 Notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations, including the 2029 Notes, depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control, including the effects of the COVID-19 Pandemic. We cannot assure you that our business will generate sufficient cash flows from operating activities, or that future borrowings will be available in an amount sufficient to enable us to pay the principal of, and premium, if any, and interest on, our indebtedness, including the 2029 Notes, or any portion of any of the foregoing, or to fund our other liquidity needs.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the 2029 Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of the 2029 Indenture restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The 2029 Indenture restricts our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

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The 2029 Indenture imposes significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.

The 2029 Indenture contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:



incur additional indebtedness or issue certain preferred shares;



pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;



make certain investments;



transfer or sell certain assets, including capital stock of our restricted subsidiaries;



create or incur liens;



consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;



agree to dividend or other payment restrictions affecting our restricted subsidiaries;



change the business we conduct;



withdraw any monies or other assets from, or make any investments of, our trust funds; and



enter into certain transactions with our affiliates.

Our ability to comply with these covenants can be affected by events beyond our control, and we may not be able to satisfy them.

We depend on third party vendors to provide a substantial portion of our grounds and maintenance services.

In April 2020, we had outsourced all of the grounds and maintenance services at most of the funeral homes and cemeteries we own or manage to Moon. Because we are dependent on Moon to provide these services, disruptions in the supply of these services may be beyond our control. Due to certain liquidity constraints and performance issues experienced by Moon, we have exercised our right under the MSAs to take back the responsibility for the grounds and maintenance services at approximately 61% of the locations we had outsourced to Moon. While we have retained responsibility for certain grounds services at these locations, we have outsourced responsibility for landscaping and other maintenance services to many of the same vendors who had been providing such services as subcontractors to Moon. We are continuing to evaluate Moon’s performance under the MSAs. On August 12, 2021, Moon and certain of its affiliates filed a petition under Chapter 11 of Title 11 of the United States Code in the Bankruptcy Court. On October 7, 2021, Moon and the Company entered into a summary of terms (the “Term Sheet”) pursuant to which (a) Moon would file a motion with the Bankruptcy Court to assume the MSAs, (b) the aggregate amounts due to the Company from Moon under the MSAs for periods prior to the initial bankruptcy filing (the “Pre-Petition Cure Amount”) was at least $5.1 million, (c) the aggregate amount due to the Company from Moon under the MSAs for periods after such filing were at least $572,605 (the “Post-Petition Cure Amount”), (d) payment of the Pre-Petition Cure Amount would be deferred until a later date, but not later than the effective date of any approved reorganization plan, (e) the Company was permitted to set off $42,500 from each bi-weekly payment to Moon under the MSAs as payment against the Post-Petition Cure Amount, with any unpaid balance being paid when the Pre-Petition Cure Amount was paid, (f) upon Bankruptcy Court approval of Moon’s motion to assume the MSAs, the Company would exercise its right to modify the MSAs by taking back responsibility for ground and maintenance services at an additional 53 locations but would otherwise agree not to further exercise such right for a period of 60 days after such approval absent certain breaches by Moon. On October 14, 2021, Moon filed a motion with the Bankruptcy Court seeking approval to assume the MSAs subject to the terms and conditions of the Term Sheet. After a hearing before the Bankruptcy Court on November 4, 2021, the Bankruptcy Court granted Moon’s motion to assume the MSAs, which would normally include an obligation to repay in full both the Pre-Petition Cure Amount and the Post-Petition Cure Amount as a priority claim in the bankruptcy case. However, in its order, the Bankruptcy Court reserved decision on whether the Pre-Petition Cure Amount would be entitled to such priority treatment notwithstanding the assumption of the MSAs, and all interested parties, including the Company, reserved their respective rights with respect to that decision. Even if we obtain Bankruptcy Court approval, or if any of our recently engaged third party vendors is unable to provide adequate services, there is no assurance that we will be able to make alternative arrangements in a timely manner. Given the uncertainty associated with the bankruptcy proceedings and the locations for which Moon will continue to be responsible under the MSAs, it is at least reasonably possible that we may continue to experience performance issues and other disruptions in operations at those locations, particularly if it becomes necessary for the Company to assume the responsibility for servicing those locations in the near future. Under any of these circumstances, our ability to serve our customers and to operate our business may be adversely affected. Moreover, if Moon is unable to obtain appropriate financing or reach an agreement to sell its assets and is unable to have a plan of reorganization confirmed by the Bankruptcy Court, we would likely not be able to obtain reimbursement of the additional payments we have made or may hereafter make on Moon’s behalf under the MSAs.

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Newly enacted federal regulations related to the COVID-19 Pandemic will require us to incur additional costs and may have an adverse effect on our operations.

On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) issued an Emergency Temporary Standard (the “ETS”) to minimize the risk of COVID-19 transmission in the workplace which generally mandates that all private employers with 100 or more employees, such as StoneMor, require their employees to either get vaccinated by January 4, 2022, or undergo weekly COVID-19 testing. The ETS also requires us to provide paid-time off for our employees to get vaccinated, provide sick leave if needed to recover from any side effects and require face masks for all unvaccinated workers. Even though many of our employees are already vaccinated and our current policies require unvaccinated employees to wear masks, complying with the ETS could be difficult and will require us to incur additional costs. The ETS does not require us to pay for any costs associated with testing; however, depending on state law, we may be required to reimburse our employees who are unvaccinated for the cost of and pay them for time related to weekly COVID-19 testing. In addition, the ETS requires us to determine the vaccination status of each employee, obtain acceptable proof of vaccination, maintain records of each employee’s vaccination status and maintain a roster of each employee’s vaccination status. Further, it is possible that some employees may choose to leave employment over the vaccine or testing requirement. Any such workforce implications may impact our ability to serve our customers and have an adverse effect on our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBIT INDEX

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).


		Incorporated by Reference
Exhibit Number	Description	Form	Exhibit	Filing Date

31.1	Certification pursuant to Exchange Act Rule 13a-14(a) of Joseph M. Redling, President and Chief Executive Officer

31.2	Certification pursuant to Exchange Act Rule 13a-14(a) of Jeffrey DiGiovanni, Chief Financial Officer and Senior Vice President

32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Joseph M. Redling, President and Chief Executive Officer

32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Jeffrey DiGiovanni, Chief Financial Officer and Senior Vice President

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

101.SCH	Inline XBRL Taxonomy Extension Schema Documents.

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)

* Incorporated by reference, as indicated

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	STONEMOR INC.


Date: November 12, 2021		By:	/s/ Joseph M. Redling
			Joseph M. Redling
			President and Chief Executive Officer


Date: November 12, 2021		By:	/s/ Jeffrey DiGiovanni
			Jeffrey DiGiovanni
			Senior Vice President and Chief Financial Officer