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Stonemor Inc. - Quarter Report: 2022 June (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 June 30, 2022

or

 

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 August 10, 2022 was 118,752,924.

 

 


 

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

 

44

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

56

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

57

 

 

 

 

 

 

 

 

 

 

PART II

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

59

 

 

 

 

 

Item 1A.

 

Risk Factors

 

59

 

 

 

 

 

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

 

 

 

2


Table of Contents

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

STONEMOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents, excluding restricted cash

 

$

71,238

 

 

$

83,882

 

Restricted cash

 

 

12,021

 

 

 

16,415

 

Accounts receivable, net of allowance

 

 

65,106

 

 

 

62,220

 

Prepaid expenses

 

 

8,073

 

 

 

6,971

 

Other current assets

 

 

12,788

 

 

 

11,459

 

Total current assets

 

 

169,226

 

 

 

180,947

 

 

 

 

 

 

 

 

Long-term accounts receivable, net of allowance

 

 

76,769

 

 

 

72,309

 

Cemetery property

 

 

299,549

 

 

 

296,758

 

Property and equipment, net of accumulated depreciation

 

 

89,346

 

 

 

82,610

 

Merchandise trusts, restricted, at fair value

 

 

604,760

 

 

 

567,853

 

Perpetual care trusts, restricted, at fair value

 

 

349,150

 

 

 

339,138

 

Deferred selling and obtaining costs

 

 

127,927

 

 

 

124,023

 

Deferred tax assets

 

 

3

 

 

 

21

 

Goodwill

 

 

6,774

 

 

 

 

Intangible assets, net

 

 

51,902

 

 

 

54,023

 

Other assets

 

 

22,629

 

 

 

23,462

 

Total assets

 

$

1,798,035

 

 

$

1,741,144

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

55,953

 

 

$

44,704

 

Accrued interest

 

 

4,344

 

 

 

4,344

 

Current portion, long-term debt

 

 

2,576

 

 

 

762

 

Total current liabilities

 

 

62,873

 

 

 

49,810

 

 

 

 

 

 

 

 

Long-term debt, net of deferred financing costs

 

 

390,033

 

 

 

389,401

 

Deferred revenues

 

 

1,118,208

 

 

 

1,056,260

 

Deferred tax liabilities

 

 

11,093

 

 

 

10,878

 

Perpetual care trust corpus

 

 

349,150

 

 

 

339,138

 

Other long-term liabilities

 

 

41,343

 

 

 

41,399

 

Total liabilities

 

 

1,972,700

 

 

 

1,886,886

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, par value $0.01 per share, 200,000,000 shares authorized, 118,723,067
  and
118,290,600 shares issued and outstanding, respectively

 

 

1,187

 

 

 

1,182

 

Paid-in capital in excess of par value

 

 

(82,719

)

 

 

(83,286

)

Accumulated deficit

 

 

(93,133

)

 

 

(63,638

)

Total stockholders' equity

 

 

(174,665

)

 

 

(145,742

)

Total liabilities and stockholders' equity

 

$

1,798,035

 

 

$

1,741,144

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

3


Table of Contents

 

STONEMOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Cemetery:

 

 

 

 

 

 

 

 

 

 

 

 

Interments

 

$

22,136

 

 

$

22,906

 

 

$

43,291

 

 

$

43,425

 

Merchandise

 

 

19,744

 

 

 

17,787

 

 

 

34,600

 

 

 

34,069

 

Services

 

 

18,370

 

 

 

17,698

 

 

 

35,228

 

 

 

34,979

 

Investment and other

 

 

10,204

 

 

 

13,737

 

 

 

26,832

 

 

 

26,635

 

Funeral home:

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise

 

 

5,040

 

 

 

5,449

 

 

 

11,085

 

 

 

11,422

 

Services

 

 

4,553

 

 

 

5,404

 

 

 

9,988

 

 

 

10,764

 

Total revenues

 

 

80,047

 

 

 

82,981

 

 

 

161,024

 

 

 

161,294

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

12,519

 

 

 

12,435

 

 

 

24,058

 

 

 

23,619

 

Cemetery expense

 

 

21,634

 

 

 

18,090

 

 

 

43,813

 

 

 

36,251

 

Selling expense

 

 

17,289

 

 

 

14,776

 

 

 

32,862

 

 

 

28,983

 

General and administrative expense

 

 

12,250

 

 

 

10,650

 

 

 

23,003

 

 

 

20,843

 

Corporate overhead

 

 

12,806

 

 

 

9,534

 

 

 

24,619

 

 

 

19,075

 

Depreciation and amortization

 

 

2,018

 

 

 

2,027

 

 

 

4,079

 

 

 

4,129

 

Funeral home expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Merchandise

 

 

1,389

 

 

 

1,478

 

 

 

3,021

 

 

 

3,139

 

Services

 

 

4,700

 

 

 

4,477

 

 

 

9,457

 

 

 

9,138

 

Other

 

 

3,185

 

 

 

3,239

 

 

 

6,571

 

 

 

6,258

 

Total costs and expenses

 

 

87,790

 

 

 

76,706

 

 

 

171,483

 

 

 

151,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of businesses and other impairments

 

 

(43

)

 

 

(2,220

)

 

 

(43

)

 

 

(2,220

)

Other (losses) gains

 

 

(15

)

 

 

69

 

 

 

(15

)

 

 

69

 

Operating (loss) income

 

 

(7,801

)

 

 

4,124

 

 

 

(10,517

)

 

 

7,708

 

Interest expense

 

 

(9,279

)

 

 

(9,977

)

 

 

(18,565

)

 

 

(20,450

)

Loss on debt extinguishment

 

 

 

 

 

(40,128

)

 

 

 

 

 

(40,128

)

Loss from continuing operations before income taxes

 

 

(17,080

)

 

 

(45,981

)

 

 

(29,082

)

 

 

(52,870

)

Income tax (expense) benefit

 

 

(181

)

 

 

9,736

 

 

 

(413

)

 

 

11,412

 

Net loss from continuing operations

 

 

(17,261

)

 

 

(36,245

)

 

 

(29,495

)

 

 

(41,458

)

Discontinued operations (Note 2):

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations of discontinued businesses

 

 

 

 

 

860

 

 

 

 

 

 

1,449

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

Net income from discontinued operations

 

 

 

 

 

860

 

 

 

 

 

 

1,449

 

Net loss

 

$

(17,261

)

 

$

(35,385

)

 

$

(29,495

)

 

$

(40,009

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per common
   share (basic)

 

$

(0.15

)

 

$

(0.31

)

 

$

(0.25

)

 

$

(0.35

)

Net income from discontinued operations per common
   share (basic)

 

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Net loss per common share (basic)

 

$

(0.15

)

 

$

(0.30

)

 

$

(0.25

)

 

$

(0.34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations per common share (diluted)

 

$

(0.15

)

 

$

(0.31

)

 

$

(0.25

)

 

$

(0.35

)

Net income from discontinued operations per common share (diluted)

 

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Net loss per common share (diluted)

 

$

(0.15

)

 

$

(0.30

)

 

$

(0.25

)

 

$

(0.34

)

Weighted average number of common shares
   outstanding - basic

 

 

118,476

 

 

 

117,956

 

 

 

118,402

 

 

 

117,933

 

Weighted average number of common shares
   outstanding - diluted

 

 

118,476

 

 

 

117,956

 

 

 

118,402

 

 

 

117,933

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

 

4


Table of Contents

 

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

118,290,600

 

 

$

1,182

 

 

$

(83,286

)

 

$

(63,638

)

 

$

(145,742

)

Common stock awards under incentive plans

 

 

46,875

 

 

 

1

 

 

 

498

 

 

 

 

 

 

499

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,234

)

 

 

(12,234

)

March 31, 2022

 

 

118,337,475

 

 

$

1,183

 

 

$

(82,788

)

 

$

(75,872

)

 

$

(157,477

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

118,337,475

 

 

$

1,183

 

 

$

(82,788

)

 

$

(75,872

)

 

$

(157,477

)

Common stock awards under incentive plans

 

 

859,038

 

 

 

9

 

 

 

499

 

 

 

 

 

 

508

 

Shares repurchased related to incentive plans

 

 

(473,446

)

 

 

(5

)

 

 

(430

)

 

 

 

 

 

(435

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(17,261

)

 

 

(17,261

)

June 30, 2022

 

 

118,723,067

 

 

$

1,187

 

 

$

(82,719

)

 

$

(93,133

)

 

$

(174,665

)

 

 

 

 

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

)

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

5


Table of Contents

 

STONEMOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Six Months Ended June 30,

 

 

2022

 

 

2021

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(29,495

)

 

$

(40,009

)

 

Adjustments to reconcile net loss to net cash provided by
   operating activities:

 

 

 

 

 

 

 

Cost of lots sold

 

 

3,179

 

 

 

3,651

 

 

Depreciation and amortization

 

 

4,079

 

 

 

4,169

 

 

Provision for bad debt

 

 

2,883

 

 

 

3,519

 

 

Non-cash compensation expense

 

 

1,007

 

 

 

1,013

 

 

Loss on debt extinguishment

 

 

 

 

 

40,128

 

 

Non-cash interest expense

 

 

1,208

 

 

 

3,160

 

 

Loss on sale of businesses

 

 

43

 

 

 

1,353

 

 

Other losses (gains)

 

 

15

 

 

 

(69

)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Payment of paid-in-kind interest

 

 

 

 

 

(18,440

)

 

Accounts receivable, net of allowance

 

 

(13,073

)

 

 

(11,522

)

 

Merchandise trust fund

 

 

(22,568

)

 

 

(17,378

)

 

Other assets

 

 

955

 

 

 

(2,942

)

 

Deferred selling and obtaining costs

 

 

(4,928

)

 

 

(4,229

)

 

Deferred revenues

 

 

51,761

 

 

 

45,652

 

 

Deferred taxes, net

 

 

233

 

 

 

(11,523

)

 

Payables and other liabilities

 

 

11,252

 

 

 

1,900

 

 

Net cash provided by (used in) operating activities

 

 

6,551

 

 

 

(1,567

)

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Cash paid for acquisitions

 

 

(18,295

)

 

 

 

 

Proceeds from divestitures

 

 

173

 

 

 

6,578

 

 

Cash paid for capital expenditures

 

 

(6,144

)

 

 

(3,361

)

 

Net cash (used in) provided by investing activities

 

 

(24,266

)

 

 

3,217

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

6,001

 

 

 

404,433

 

 

Repayments of debt

 

 

(3,897

)

 

 

(329,294

)

 

Principal payment on finance leases

 

 

(616

)

 

 

(796

)

 

Early redemption premium

 

 

 

 

 

(18,478

)

 

Cost of financing activities

 

 

(376

)

 

 

(10,632

)

 

Shares repurchased related to share-based compensation

 

 

(435

)

 

 

 

 

Net cash provided by financing activities

 

 

677

 

 

 

45,233

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(17,038

)

 

 

46,883

 

 

Cash, cash equivalents and restricted cash—Beginning of period

 

 

100,297

 

 

 

60,090

 

 

Cash, cash equivalents and restricted cash—End of period

 

$

83,259

 

 

$

106,973

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

17,206

 

 

$

31,141

 

 

Cash paid during the period for income taxes

 

 

2,498

 

 

 

1,989

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

836

 

 

$

961

 

 

Operating cash flows from finance leases

 

 

153

 

 

 

166

 

 

Financing cash flows from finance leases

 

 

616

 

 

 

796

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Right of use assets obtained in exchange for new operating lease liabilities

 

$

47

 

 

$

3,277

 

 

Right of use assets obtained in exchange for new finance lease liabilities

 

 

197

 

 

 

105

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

6


Table of Contents

 

STONEMOR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.
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 June 30, 2022, the Company operated 304 cemeteries in 24 states and Puerto Rico, of which 275 were owned and 29 were operated under lease, management or operating agreements. As of June 30, 2022, the Company also owned and operated 72 funeral homes, including 34 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 as of December 31, 2021 has been derived from the audited consolidated financial statement as of December 31, 2021, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with Securities and Exchange Commission (“SEC”) on March 31, 2022 (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 six months ended June 30, 2022 may not necessarily be indicative of the results of operations for the full year ending December 31, 2022.

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 29 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.

The Company operates 13 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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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 (including the effect of variants that have developed, 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.

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 early on in the COVID-19 Pandemic was one of several key steps that had 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 the increase in pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more widely available, the Company has experienced growth in its pre-need cemetery sales.

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 case counts. However, the Company cannot presently predict the likely scope and severity of that impact. 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. Alternatively, in the event that COVID-19 case counts continue to normalize and variants become less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-need turning to at-need.

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.

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 $71.2 million and $83.9 million as of June 30, 2022 and December 31, 2021, respectively.

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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 $12.0 million and $16.4 million as of June 30, 2022 and December 31, 2021, 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 expects 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.

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.

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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.

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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 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.

Business Combinations

Tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair value and goodwill or bargain gain is recognized for any difference between the purchase price of the acquisition and the Company's fair value estimation. To the extent that new information is obtained during the measurement period about facts and circumstances that existed at the closing date, the Company may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition. The measurement period is no longer than one year from the date of acquisition. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Goodwill

Goodwill resulting from the acquisitions completed during the six months ended June 30, 2022, which is preliminary and subject to change, represents the excess of purchase price over the fair market value of net assets acquired, based on their respective fair values at the date of acquisition.

The Company will test goodwill for impairment at least annually or if impairment indicators arise by comparing its reporting units’ estimated fair values to carrying values. Because quoted market prices for the reporting units are not available, the Company’s management must apply judgment in determining the estimated fair value of these reporting units. The Company’s management will use all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the Company’s assets and the available market data of the industry group.

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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 June 30, 2022 and 2021, the Company had income tax expense of $0.2 million and an income tax benefit of $9.7 million, respectively. For the six months ended June 30, 2022 and 2021, the Company had income tax expense of $0.4 million and an income tax benefit of $11.4 million, respectively. The Company’s effective tax rate before discrete items was 1.1% and 21.6% for the three months ended June 30, 2022 and 2021, respectively, and 1.4% and 22.2% for the six months ended June 30, 2022 and 2021, 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 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. 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.

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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 six months ended June 30, 2022 and 2021 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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Weighted average number of outstanding common shares—basic

 

 

118,476

 

 

 

117,956

 

 

 

118,402

 

 

 

117,933

 

Plus effect of dilutive incentive awards(1):

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of outstanding common shares—diluted

 

 

118,476

 

 

 

117,956

 

 

 

118,402

 

 

 

117,933

 

(1)
For the three months ended June 30, 2022 and 2021, the diluted weighted-average number of outstanding common shares does not include 874,182 and 366,641 shares issuable upon the exercise of outstanding options, respectively, and 248,470 and 414,412 restricted common shares, respectively, as their effects would have been anti-dilutive. For the six months ended June 30, 2022 and 2021, the diluted weighted-average number of outstanding common shares does not include 881,803 and 592,046 shares issuable upon the exercise of outstanding options, respectively, and 240,694 and 438,718 restricted common shares, respectively, as their effects would have been anti-dilutive.

Recently Issued Accounting Standard Updates - Not Yet Effective

Credit Losses

In June 2016, the 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.

 

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2.
ACQUISITIONS AND DIVESTITURES

Acquisitions

On January 31, 2022, the Company acquired two cemeteries in Virginia for cash consideration of $5.1 million and on May 10, 2022 the Company acquired two cemeteries in North Carolina for cash consideration of $0.3 million, pursuant to a definitive agreement signed on March 23, 2021 with Daly Seven, Inc. to acquire the four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments.

On March 1, 2022, the Company acquired one funeral home in Florida for cash consideration of $1.7 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on March 1, 2022 with MacDonald Funeral Home & Cremation, Inc.

On March 15, 2022, the Company acquired one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for cash consideration of $11.3 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on February 4, 2022 with Roselawn Acquisition Group LLC, Monte Vista Park LLC, CPJ LLC, and WV Memorial Properties LLC.

The Company accounted for these transactions under the acquisition method of accounting. Accordingly, the Company recorded the identifiable assets acquired and liabilities assumed at their respective acquisition date fair values. Costs associated with the acquisition of the assets noted were expensed as incurred. For the three and six months ended June 30, 2022, acquisition costs were $0.1 million and $0.9 million, respectively, and were included in corporate overhead on the condensed consolidated statement of operations. The following table summarizes the preliminary estimated fair values assigned to the assets acquired and liabilities assumed in the acquisitions at the respective acquisition dates (in thousands):

Assets:

 

 

 

Accounts receivable

 

$

1,250

 

Cemetery property

 

 

4,438

 

Property and equipment

 

 

6,857

 

Merchandise trusts, restricted

 

 

5,706

 

Perpetual care trusts, restricted

 

 

5,013

 

Trade names

 

 

165

 

Total assets

 

 

23,429

 

Liabilities:

 

 

 

Deferred revenues

 

 

6,795

 

Perpetual care trust corpus

 

 

5,013

 

Total liabilities

 

 

11,808

 

Fair value of net assets acquired

 

 

11,621

 

Cash consideration paid

 

 

18,295

 

Deferred cash consideration

 

 

100

 

Total consideration

 

 

18,395

 

Goodwill from purchase

 

$

6,774

 

The Company recorded goodwill of $5.5 million and $1.3 million in the Cemetery Operations reporting segment and the Funeral Home Operations reporting segment, respectively, for the properties acquired, which is deductible for tax purposes. The goodwill recorded for the acquisitions mainly reflects the strategic fit and synergies expected from the acquisitions.

The estimated fair values of assets acquired and liabilities assumed presented above are provisional and are based on the information that was available as of the acquisition dates to estimate the fair value of assets acquired and liabilities assumed, including property and building values and deferred revenues. The Company believes the information provides a reasonable basis for estimating the fair values but the Company is waiting for additional information necessary to finalize those amounts. Therefore, the provisional measurements of fair value reflected are preliminary and subject to change, and such change could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the respective acquisition dates.

Revenue related to the assets acquired was $0.9 million and $1.2 million for the three and six months ended June 30, 2022, respectively, and net income related to the assets acquired was not considered material.

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Divestitures

On April 22, 2022, the Company completed the sale of two cemetery properties located in Rhode Island (the “Rhode Island Sale”) for a total cash price of $0.2 million, resulting in a loss on sale of $43,000 for the three and six months ended June 30, 2022.

On May 24, 2021, the Company completed the sale of three cemetery properties located in Missouri (the “Missouri Sale”) for a total cash price of $0.7 million, resulting in a loss on sale of $1.7 million for the three and six months ended June 30, 2021.

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 Clearstone Agreement to sell the Clearstone Assets, together with other divestitures completed in 2020, represented a strategic exit from the west coast. Therefore, the results of operations of the Clearstone Assets have been presented as discontinued operations on the accompanying consolidated statement of operations for the six months ended June 30, 2021.

The following table summarizes the results of discontinued operations (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2021

 

Cemetery revenues

 

$

 

 

$

1,142

 

Funeral home revenues

 

 

 

 

 

1,146

 

Cost of goods sold

 

 

 

 

 

(191

)

Cemetery expense

 

 

 

 

 

(233

)

Selling expense

 

 

 

 

 

(231

)

General and administrative expense

 

 

 

 

 

(151

)

Depreciation and amortization

 

 

 

 

 

(40

)

Funeral home expenses

 

 

 

 

 

(694

)

Interest expense

 

 

 

 

 

(166

)

Income from discontinued operations before income taxes

 

 

 

 

 

582

 

Net gain on sale of businesses

 

 

860

 

 

 

867

 

Income tax expense

 

 

 

 

 

 

Net income from discontinued operations

 

$

860

 

 

$

1,449

 

The following table presents the depreciation and amortization, capital expenditures, sale proceeds and operating noncash items of the discontinued operations (in thousands):

 

 

Six Months Ended June 30,

 

 

 

2021

 

Cash flows from discontinued operating activities:

 

 

 

Depreciation and amortization

 

$

40

 

Gain on sales of discontinued operations businesses

 

 

867

 

 

 

 

 

Cash flows from discontinued investing activities:

 

 

 

Capital expenditures

 

$

10

 

Proceeds from sales of discontinued businesses

 

 

5,898

 

 

 

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3.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Customer receivables

 

$

162,870

 

 

$

154,664

 

Unearned finance income

 

 

(15,215

)

 

 

(14,319

)

Allowance for doubtful accounts

 

 

(5,780

)

 

 

(5,816

)

Accounts receivable, net of allowance

 

 

141,875

 

 

 

134,529

 

Less: Current portion, net of allowance

 

 

65,106

 

 

 

62,220

 

Long-term portion, net of allowance

 

$

76,769

 

 

$

72,309

 

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Balance, beginning of period

 

$

5,816

 

 

$

5,711

 

Provision for doubtful accounts

 

 

2,883

 

 

 

6,354

 

Charge-offs, net

 

 

(2,919

)

 

 

(6,249

)

Balance, end of period

 

$

5,780

 

 

$

5,816

 

 

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

4.
CEMETERY PROPERTY

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Cemetery land

 

$

232,211

 

 

$

229,736

 

Mausoleum crypts and lawn crypts

 

 

67,338

 

 

 

67,022

 

Cemetery property

 

$

299,549

 

 

$

296,758

 

 

5.
PROPERTY AND EQUIPMENT

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Buildings and improvements

 

$

122,789

 

 

$

115,141

 

Furniture and equipment

 

 

54,836

 

 

 

54,099

 

Funeral home land

 

 

11,745

 

 

 

10,932

 

Property and equipment, gross

 

 

189,370

 

 

 

180,172

 

Less: Accumulated depreciation

 

 

(100,024

)

 

 

(97,562

)

Property and equipment, net of accumulated depreciation

 

$

89,346

 

 

$

82,610

 

Depreciation expense was $1.8 million and $1.7 million for the three months ended June 30, 2022 and 2021, respectively, and $3.6 million and $3.6 million for the six months ended June 30, 2022 and 2021, respectively.

 

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6.
MERCHANDISE TRUSTS

At June 30, 2022 and December 31, 2021, 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 comprised 47.6% of the total merchandise trust as of June 30, 2022. 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 $9.4 million and $10.3 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and 2021 is presented below (in thousands):

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

Balance—beginning of period

 

$

567,853

 

 

$

516,284

 

Contributions

 

 

39,038

 

 

 

28,574

 

Distributions

 

 

(36,629

)

 

 

(53,020

)

Interest and dividends

 

 

23,259

 

 

 

20,429

 

Capital gain distributions

 

 

2,181

 

 

 

1,650

 

Realized gains and losses, net

 

 

675

 

 

 

3,031

 

Other than temporary impairment

 

 

 

 

 

(136

)

Taxes

 

 

(581

)

 

 

(14

)

Fees

 

 

(4,121

)

 

 

(3,062

)

Unrealized change in fair value

 

 

13,085

 

 

 

30,532

 

Balance—end of period

 

$

604,760

 

 

$

544,268

 

 

During the six months ended June 30, 2022 and 2021, purchases of available for sale securities were approximately $39.8 million and $36.6 million, respectively. During the six months ended June 30, 2022 and 2021, sales, maturities and paydowns of available for sale securities were approximately $14.0 million and $32.6 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 June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022

 

Fair Value
Hierarchy
Level

 

Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Short-term investments

 

1

 

$

33,580

 

 

$

 

 

$

 

 

$

33,580

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Corporate debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Mutual funds—debt securities

 

1

 

 

6,097

 

 

 

 

 

 

(647

)

 

 

5,450

 

Mutual funds—equity securities

 

1

 

 

1,022

 

 

 

31

 

 

 

(7

)

 

 

1,046

 

Other investment funds(1)

 

 

 

 

496,349

 

 

 

42,859

 

 

 

(4,530

)

 

 

534,678

 

Equity securities

 

1

 

 

14,687

 

 

 

3,863

 

 

 

(2,040

)

 

 

16,510

 

Other invested assets

 

2

 

 

4,053

 

 

 

68

 

 

 

 

 

 

4,121

 

Total investments

 

 

 

 

555,789

 

 

 

46,821

 

 

 

(7,224

)

 

 

595,386

 

West Virginia Trust Receivable

 

 

 

 

10,284

 

 

 

 

 

 

(910

)

 

 

9,374

 

Total

 

 

 

$

566,073

 

 

$

46,821

 

 

$

(8,134

)

 

$

604,760

 

(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 fourteen years with three potential one year extensions at the discretion of the funds’ general partners. As of June 30, 2022, there were $160.8 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $127.2 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.

 

December 31, 2021

 

Fair Value
Hierarchy
Level

 

Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Short-term investments

 

1

 

$

51,243

 

 

$

 

 

$

 

 

$

51,243

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Corporate debt securities

 

2

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Other debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

2

 

Mutual funds—debt securities

 

1

 

 

6,097

 

 

 

81

 

 

 

(15

)

 

 

6,163

 

Mutual funds—equity securities

 

1

 

 

1,021

 

 

 

245

 

 

 

 

 

 

1,266

 

Other investment funds(1)

 

 

 

 

457,447

 

 

 

26,008

 

 

 

(4,398

)

 

 

479,057

 

Equity securities

 

1

 

 

14,696

 

 

 

3,316

 

 

 

(2,051

)

 

 

15,961

 

Other invested assets

 

2

 

 

3,766

 

 

 

103

 

 

 

 

 

 

3,869

 

Total investments

 

 

 

 

534,271

 

 

 

29,754

 

 

 

(6,464

)

 

 

557,561

 

West Virginia Trust Receivable

 

 

 

 

9,992

 

 

 

300

 

 

 

 

 

 

10,292

 

Total

 

 

 

$

544,263

 

 

$

30,054

 

 

$

(6,464

)

 

$

567,853

 

(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 15 years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $112.4 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $125.4 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.

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The contractual maturities of debt securities as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

 

June 30, 2022

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

$

 

 

$

1

 

 

$

 

 

$

 

 

December 31, 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

 

 

 

 

 

1

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

$

 

 

$

2

 

 

$

 

 

$

 

 

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 June 30, 2022 and December 31, 2021 is presented below (in thousands):

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

June 30, 2022

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds—debt securities

 

 

5,448

 

 

 

646

 

 

 

2

 

 

 

1

 

 

 

5,450

 

 

 

647

 

Mutual funds—equity securities

 

 

55

 

 

 

7

 

 

 

 

 

 

 

 

 

55

 

 

 

7

 

Other investment funds

 

 

44,033

 

 

 

4,530

 

 

 

 

 

 

 

 

 

44,033

 

 

 

4,530

 

Equity securities

 

 

382

 

 

 

35

 

 

 

1,891

 

 

 

2,005

 

 

 

2,273

 

 

 

2,040

 

Total

 

$

49,918

 

 

$

5,218

 

 

$

1,893

 

 

$

2,006

 

 

$

51,811

 

 

$

7,224

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 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

 

 

890

 

 

 

15

 

 

 

 

 

 

 

 

 

890

 

 

 

15

 

Mutual funds—equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investment funds

 

 

42,645

 

 

 

4,398

 

 

 

 

 

 

 

 

 

42,645

 

 

 

4,398

 

Equity securities

 

 

3,108

 

 

 

2,050

 

 

 

1

 

 

 

1

 

 

 

3,109

 

 

 

2,051

 

Total

 

$

46,643

 

 

$

6,463

 

 

$

918

 

 

$

1

 

 

$

47,561

 

 

$

6,464

 

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 six months ended June 30, 2022, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the six months ended June 30, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate costs 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. 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.

Impairment of Direct Loans

On a quarterly basis, the merchandise trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual, the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.

When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.

The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts consider, among other things, the following credit quality indicators:

business characteristics and financial conditions of obligors;
current economic conditions and trends;
actual charge-off experience;
current delinquency levels;
value of underlying collateral and guarantees;
regulatory environment; and
any other relevant factors predicting investment recovery.

There were no such impairments during the three and six months ended June 30, 2022 and 2021.

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7.
PERPETUAL CARE TRUSTS

At June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and 2021 is presented below (in thousands):

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

Balance—beginning of period

 

$

339,138

 

 

$

316,746

 

Contributions

 

 

9,569

 

 

 

4,420

 

Distributions

 

 

(21,177

)

 

 

(24,966

)

Interest and dividends

 

 

16,108

 

 

 

19,615

 

Capital gain distributions

 

 

1,483

 

 

 

1,077

 

Realized gains and losses, net

 

 

475

 

 

 

2,994

 

Other than temporary impairment

 

 

 

 

 

(55

)

Taxes

 

 

(1,530

)

 

 

(890

)

Fees

 

 

(1,697

)

 

 

(2,734

)

Unrealized change in fair value

 

 

6,781

 

 

 

10,391

 

Balance—end of period

 

$

349,150

 

 

$

326,598

 

During the six months ended June 30, 2022 and 2021, purchases of available for sale securities were approximately $11.2 million and $19.0 million, respectively. During the six months ended June 30, 2022 and 2021, sales, maturities and paydowns of available for sale securities were approximately $0.8 million and $11.1 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.

The cost and market value associated with the assets held in the perpetual care trusts as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022

 

Fair Value
Hierarchy
Level

 

Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Short-term investments

 

1

 

$

13,422

 

 

$

 

 

$

 

 

$

13,422

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

10

 

 

 

1

 

 

 

 

 

 

11

 

Corporate debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

10

 

 

 

1

 

 

 

 

 

 

11

 

Mutual funds—debt securities

 

1

 

 

1,904

 

 

 

6

 

 

 

(317

)

 

 

1,593

 

Mutual funds—equity securities

 

1

 

 

4,078

 

 

 

584

 

 

 

(297

)

 

 

4,365

 

Other investment funds(1)

 

 

 

 

300,218

 

 

 

22,585

 

 

 

(2,393

)

 

 

320,410

 

Equity securities

 

1

 

 

7,026

 

 

 

2,443

 

 

 

(130

)

 

 

9,339

 

Other invested assets

 

2

 

 

9

 

 

 

1

 

 

 

 

 

 

10

 

Total investments

 

 

 

$

326,667

 

 

$

25,620

 

 

$

(3,137

)

 

$

349,150

 

(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 fourteen years with four potential one year extensions at the discretion of the funds’ general partners. As of June 30, 2022, there were $98.4 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $81.3 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.

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December 31, 2021

 

Fair Value
Hierarchy
Level

 

Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Value

 

Short-term investments

 

1

 

$

25,674

 

 

$

 

 

$

 

 

$

25,674

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

2

 

 

12

 

 

 

2

 

 

 

 

 

 

14

 

Corporate debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

12

 

 

 

2

 

 

 

 

 

 

14

 

Mutual funds—debt securities

 

1

 

 

2,306

 

 

 

28

 

 

 

(35

)

 

 

2,299

 

Mutual funds—equity securities

 

1

 

 

3,894

 

 

 

1,341

 

 

 

(63

)

 

 

5,172

 

Other investment funds(1)

 

 

 

 

285,826

 

 

 

14,554

 

 

 

(2,776

)

 

 

297,604

 

Equity securities

 

1

 

 

6,817

 

 

 

1,661

 

 

 

(113

)

 

 

8,365

 

Other invested assets

 

2

 

 

9

 

 

 

1

 

 

 

 

 

 

10

 

Total investments

 

 

 

$

324,538

 

 

$

17,587

 

 

$

(2,987

)

 

$

339,138

 

(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 15 years with four potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $67.3 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $79.7 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.

The contractual maturities of debt securities as of June 30, 2022 and December 31, 2021 were as follows (in thousands):

June 30, 2022

 

Less than
1 year

 

 

1 year through
5 years

 

 

6 years through
10 years

 

 

More than
10 years

 

U.S. governmental securities

 

$

 

 

$

1

 

 

$

 

 

$

10

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

$

 

 

$

1

 

 

$

 

 

$

10

 

 

December 31, 2021

 

Less than
1 year

 

 

1 year through
5 years

 

 

6 years through
10 years

 

 

More than
10 years

 

U.S. governmental securities

 

$

 

 

$

1

 

 

$

 

 

$

13

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

$

 

 

$

1

 

 

$

 

 

$

13

 

 

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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 June 30, 2022 and December 31, 2021 is presented below (in thousands):

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

June 30, 2022

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

Unrealized
Losses

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. governmental securities

 

$

1

 

 

$

 

 

$

 

 

$

 

 

$

1

 

 

$

 

Corporate debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

Mutual funds—debt securities

 

 

823

 

 

 

201

 

 

 

364

 

 

 

116

 

 

 

1,187

 

 

 

317

 

Mutual funds—equity securities

 

 

1,540

 

 

 

219

 

 

 

392

 

 

 

78

 

 

 

1,932

 

 

 

297

 

Other investment funds

 

 

24,535

 

 

 

2,393

 

 

 

 

 

 

 

 

 

24,535

 

 

 

2,393

 

Equity securities

 

 

317

 

 

 

50

 

 

 

76

 

 

 

80

 

 

 

393

 

 

 

130

 

Total

 

$

27,216

 

 

$

2,863

 

 

$

832

 

 

$

274

 

 

$

28,048

 

 

$

3,137

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 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

 

 

 

 

 

 

1,959

 

 

 

 

Other debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities

 

 

 

 

 

 

 

 

2,949

 

 

 

 

 

 

2,949

 

 

 

 

Mutual funds—debt securities

 

 

863

 

 

 

25

 

 

 

454

 

 

 

10

 

 

 

1,317

 

 

 

35

 

Mutual funds—equity securities

 

 

661

 

 

 

60

 

 

 

1

 

 

 

3

 

 

 

662

 

 

 

63

 

Other investment funds

 

 

26,533

 

 

 

2,776

 

 

 

 

 

 

 

 

 

26,533

 

 

 

2,776

 

Equity securities

 

 

962

 

 

 

112

 

 

 

1

 

 

 

1

 

 

 

963

 

 

 

113

 

Total

 

$

29,019

 

 

$

2,973

 

 

$

3,405

 

 

$

14

 

 

$

32,424

 

 

$

2,987

 

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.

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 six months ended June 30, 2022, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts. During the six months ended June 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. 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.

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Impairment of Direct Loans

On a quarterly basis, the perpetual care trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual, the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.

When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.

The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts consider, among other things, the following credit quality indicators:

business characteristics and financial conditions of obligors;
current economic conditions and trends;
actual charge-off experience;
current delinquency levels;
value of underlying collateral and guarantees;
regulatory environment; and
any other relevant factors predicting investment recovery.

There were no such impairments during the three and six months ended June 30, 2022 and 2021.

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8.
LONG-TERM DEBT

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

 

 

 

June 30, 2022

 

 

December 31, 2021

 

8.500% Senior Secured Notes due 2029

 

$

400,000

 

 

$

400,000

 

Insurance and vehicle financing

 

 

2,866

 

 

 

762

 

Less deferred financing costs, net of accumulated amortization

 

 

(10,257

)

 

 

(10,599

)

Total debt

 

 

392,609

 

 

 

390,163

 

Less current maturities

 

 

(2,576

)

 

 

(762

)

Total long-term debt

 

$

390,033

 

 

$

389,401

 

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%.

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.

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Table of Contents

 

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.

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:

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;
are 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;
are 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
are 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.

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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 June 30, 2022, the Company was in compliance with the covenants of the 2029 Indenture.

Deferred Financing Costs

For the three months ended June 30, 2022 and 2021, the Company recognized $0.3 million and $0.7 million, respectively, of amortization of deferred financing fees on its various debt facilities. For the six months ended June 30, 2022 and 2021, the Company recognized $0.7 million and $1.7 million, respectively, of amortization of deferred financing fees on its various debt facilities.

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, for the three and six months ended June 30, 2021, which are included in Loss on debt extinguishment in the accompanying condensed consolidated statements of operations.

9.
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 June 30, 2022, 118,723,067 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued or outstanding. At June 30, 2022, there were 81,276,933 shares of Common Stock available for issuance, including 1,389,010 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.

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Table of Contents

 

Stock Options

A rollforward of stock options as of June 30, 2022 is as follows:

 

 

Number of Stock Options

 

 

Weighted Average Exercise Price Per Share ($)

 

Total outstanding at December 31, 2021

 

 

6,075,000

 

 

 

1.27

 

Options granted

 

 

225,000

 

 

 

3.42

 

Options exercised

 

 

(812,163

)

 

 

1.24

 

Options forfeited

 

 

(220,001

)

 

 

1.30

 

Options expired

 

 

 

 

 

 

Total outstanding at June 30, 2022

 

 

5,267,836

 

 

 

1.36

 

For the six months ended June 30, 2022 and 2021, non-cash compensation expense related to stock options was $0.3 million. As of June 30, 2022, total unrecognized compensation cost related to unvested stock options was $0.7 million, which the Company expects to recognize over the remaining weighted-average period of 1.7 year.

Restricted Stock and Phantom Stock

A rollforward of restricted stock and phantom stock awards as of June 30, 2022 is as follows:

 

 

Number of Restricted Stock and Phantom Stock Awards

 

 

Weighted Average Grant Date Fair Value ($)

 

Total non-vested at December 31, 2021

 

 

873,600

 

 

 

1.95

 

Granted

 

 

41,035

 

 

 

2.56

 

Vested

 

 

(93,750

)

 

 

3.88

 

Forfeited

 

 

(45,001

)

 

 

1.71

 

Total non-vested at June 30, 2022

 

 

775,884

 

 

 

1.77

 

For the six months ended June 30, 2022 and 2021, the Company recognized $0.7 million of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. As of June 30, 2022, total unamortized compensation cost related to unvested restricted stock awards was $0.6 million, which the Company expects to recognize over the remaining weighted-average period of 1.4 years.

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):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Deferred contract revenues

 

$

915,822

 

 

$

880,290

 

Deferred merchandise trust revenue

 

 

163,735

 

 

 

150,368

 

Deferred merchandise trust unrealized gains (losses)

 

 

38,651

 

 

 

25,602

 

Deferred revenues

 

$

1,118,208

 

 

$

1,056,260

 

Deferred selling and obtaining costs

 

$

127,927

 

 

$

124,023

 

 

For the six months ended June 30, 2022 and 2021, the Company recognized $42.8 million and $42.9 million, respectively, of the customer contract liabilities balance that existed at December 31, 2021 and 2020, respectively, as revenue.

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The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at June 30, 2022 and December 31, 2021 were as follows (in thousands):

 

 

 

June 30, 2022

 

 

December 31, 2021

 

Customer contract liabilities, gross

 

$

1,145,408

 

 

$

1,082,970

 

Amounts due from customers for unfulfilled performance obligations on cancellable
   pre-need contracts

 

 

(27,200

)

 

 

(26,710

)

Customer contract liabilities, net

 

$

1,118,208

 

 

$

1,056,260

 

 

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 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 Capital Management, LP (“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. On December 9, 2021, this action was consolidated with the Titterton action filed in November 2021 and described below.

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Titterton v. StoneMor Inc., C.A. No.: 2021-1028-SG, pending in the Court of Chancery of the State of Delaware and filed on November 24, 2021. The plaintiff in this case brought a derivative 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. On December 9, 2021, the Fried action was consolidated with this action, with Titterton and Fried appointed as lead plaintiffs. On December 27, 2021, a motion to dismiss plaintiffs’ complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on December 28, 2021, a motion to dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On February 4, 2022, all defendants filed their briefs in support of their motions to dismiss. The plaintiffs subsequently filed an amended complaint on March 11, 2022. The amended complaint includes derivative claims against the individual defendants, Mr. Axelrod, and Axar 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”), as well as for breach of fiduciary duty in connection with the approval of a related-party investment disclosed by the Company. The amended complaint also includes claims against Mr. Axelrod and Axar for unjust enrichment with respect to those same transactions. The plaintiffs seek 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 March 25, 2022, the defendants filed motions to dismiss the amended complaint. On April 22, 2022, all defendants filed their briefs in support of their motions to dismiss. The plaintiffs filed their brief in response to the defendants’ motion to dismiss on May 27, 2022 and the defendants filed their reply brief on June 27, 2022.

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”) to outsource grounds and maintenance services at most of the Company’s funeral homes and cemeteries. Due to certain liquidity constraints and performance issues experienced by Moon, the Company exercised its right under the MSAs to take back the responsibility for grounds and maintenance services at the locations outsourced to Moon with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021, 111 locations effective August 9, 2021, 34 locations effective November 15, 2021 and the remaining locations effective January 7, 2022.

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 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.

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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:

 

 

June 30, 2022

 

 

December 31, 2021

 

Assets:

 

 

 

 

 

 

Operating

 

$

5,449

 

 

$

5,944

 

Finance

 

 

3,035

 

 

 

3,343

 

Total ROU assets(1)

 

$

8,484

 

 

$

9,287

 

Liabilities:

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating

 

$

1,136

 

 

$

1,103

 

Finance

 

 

1,764

 

 

 

1,859

 

Long-term

 

 

 

 

 

 

Operating

 

 

4,514

 

 

 

4,969

 

Finance

 

 

670

 

 

 

1,035

 

Total lease liabilities(2)

 

$

8,084

 

 

$

8,966

 

(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.

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 9.9% and 8.8%, respectively, as of June 30, 2022.

The components of lease expense were as follows:

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

Lease cost

Classification

 

 

 

 

 

Operating lease costs(1)

General and administrative expense

$

912

 

 

$

1,009

 

Finance lease costs

 

 

 

 

 

 

Amortization of leased assets

Depreciation and Amortization

 

468

 

 

 

606

 

Interest on lease liabilities

Interest expense

 

153

 

 

 

166

 

Short-term lease costs(2)

General and administrative expense

 

 

 

 

 

Net lease costs

 

$

1,533

 

 

$

1,781

 

(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.

 

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Maturities of the Company’s lease liabilities as of June 30, 2022 were as follows:

Year ending December 31,

 

Operating

 

 

Finance

 

2022

 

$

865

 

 

$

1,345

 

2023

 

 

1,489

 

 

 

816

 

2024

 

 

1,253

 

 

 

211

 

2025

 

 

1,131

 

 

 

114

 

2026

 

 

1,100

 

 

 

151

 

Thereafter

 

 

1,504

 

 

 

44

 

Total

 

$

7,342

 

 

$

2,681

 

Less: Interest

 

 

(1,693

)

 

 

(247

)

Present value of lease liabilities

 

$

5,649

 

 

$

2,434

 

 

Maturities of the Company’s lease liabilities as of December 31, 2021 were as follows:

Year ending December 31,

 

Operating

 

 

Finance

 

2022

 

$

1,661

 

 

$

2,099

 

2023

 

 

1,460

 

 

 

780

 

2024

 

 

1,223

 

 

 

168

 

2025

 

 

1,111

 

 

 

95

 

2026

 

 

1,086

 

 

 

100

 

Thereafter

 

 

1,498

 

 

 

 

Total

 

$

8,039

 

 

$

3,242

 

Less: Interest

 

 

(1,967

)

 

 

(348

)

Present value of lease liabilities

 

$

6,072

 

 

$

2,894

 

Operating and finance lease payments include $0.1 million related to options to extend lease terms that are reasonably certain of being exercised and $1.4 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 5.4 years and 1.4 years, respectively, as of June 30, 2022.

As of June 30, 2022, 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 June 30, 2022, the Company had not entered into any new sale-leaseback arrangements.

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.

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Recurring Fair Value Measurement

At June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021 consisted of its 2029 Notes (see Note 8 Long-Term Debt). At June 30, 2022 and December 31, 2021, the estimated fair value of the Company's 2029 Notes was $352.0 million and $413.5 million, respectively, based on trades made on that date, compared with the carrying amount of $400.0 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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

STATEMENT OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

Cemetery Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

70,454

 

 

$

72,128

 

 

$

139,951

 

 

$

139,108

 

Operating costs and expenses

 

 

(63,692

)

 

 

(55,951

)

 

 

(123,736

)

 

 

(109,696

)

Depreciation and amortization

 

 

(1,423

)

 

 

(1,505

)

 

 

(2,857

)

 

 

(3,081

)

Segment operating profit

 

$

5,339

 

 

$

14,672

 

 

$

13,358

 

 

$

26,331

 

Funeral Home Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

9,593

 

 

$

10,853

 

 

$

21,073

 

 

$

22,186

 

Operating costs and expenses

 

 

(9,274

)

 

 

(9,194

)

 

 

(19,049

)

 

 

(18,535

)

Depreciation and amortization

 

 

(434

)

 

 

(423

)

 

 

(866

)

 

 

(854

)

Segment operating profit

 

$

(115

)

 

$

1,236

 

 

$

1,158

 

 

$

2,797

 

Reconciliation of segment operating profit to net loss from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Cemetery Operations

 

$

5,339

 

 

$

14,672

 

 

$

13,358

 

 

$

26,331

 

Funeral Home Operations

 

 

(115

)

 

 

1,236

 

 

 

1,158

 

 

 

2,797

 

Total segment profit

 

 

5,224

 

 

 

15,908

 

 

 

14,516

 

 

 

29,128

 

Corporate overhead

 

 

(12,806

)

 

 

(9,534

)

 

 

(24,619

)

 

 

(19,075

)

Corporate depreciation and amortization

 

 

(161

)

 

 

(99

)

 

 

(356

)

 

 

(194

)

Loss on sale of businesses and other impairments

 

 

(43

)

 

 

(2,220

)

 

 

(43

)

 

 

(2,220

)

Other (losses) gains

 

 

(15

)

 

 

69

 

 

 

(15

)

 

 

69

 

Interest expense

 

 

(9,279

)

 

 

(9,977

)

 

 

(18,565

)

 

 

(20,450

)

Loss on debt extinguishment

 

 

 

 

 

(40,128

)

 

 

 

 

 

(40,128

)

Income tax (expense) benefit

 

 

(181

)

 

 

9,736

 

 

 

(413

)

 

 

11,412

 

Net loss from continuing operations

 

$

(17,261

)

 

$

(36,245

)

 

$

(29,495

)

 

$

(41,458

)

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW DATA:

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Cemetery Operations

 

$

3,019

 

 

$

1,345

 

 

$

4,963

 

 

$

3,058

 

Funeral Home Operations

 

 

497

 

 

 

35

 

 

 

1,090

 

 

 

96

 

Corporate

 

 

26

 

 

 

207

 

 

 

91

 

 

 

207

 

Total capital expenditures

 

$

3,542

 

 

$

1,587

 

 

$

6,144

 

 

$

3,361

 

 

 

 

June 30, 2022

 

 

December 31, 2021

 

BALANCE SHEET DATA:

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

Cemetery Operations

 

$

1,564,546

 

 

$

1,506,504

 

Funeral Home Operations

 

 

132,364

 

 

 

128,590

 

Corporate

 

 

101,125

 

 

 

106,050

 

Total assets

 

$

1,798,035

 

 

$

1,741,144

 

Goodwill:

 

 

 

 

 

 

Cemetery Operations

 

$

5,444

 

 

$

 

Funeral Home Operations

 

 

1,330

 

 

 

 

Total goodwill

 

$

6,774

 

 

$

 

 

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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):

 

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

Accounts Receivable

 

 

 

 

 

 

Pre-need/at-need contract originations (sales on credit)

 

$

(71,792

)

 

$

(68,390

)

Cash receipts from sales on credit (post-origination)

 

 

58,719

 

 

 

56,868

 

Changes in accounts receivable, net of allowance

 

$

(13,073

)

 

$

(11,522

)

Customer Contract Liabilities

 

 

 

 

 

 

Deferrals:

 

 

 

 

 

 

Cash receipts from customer deposits at origination, net of refunds

 

$

91,425

 

 

$

90,108

 

Withdrawals of realized income from merchandise trusts during the period

 

 

8,538

 

 

 

8,018

 

Pre-need/at-need contract originations (sales on credit)

 

 

71,792

 

 

 

68,390

 

Undistributed merchandise trust investment earnings, net

 

 

12,996

 

 

 

11,406

 

Recognition:

 

 

 

 

 

 

Merchandise trust investment income, net withdrawn as of end of period

 

 

(7,299

)

 

 

(5,088

)

Recognized maturities of customer contracts collected as of end of period

 

 

(108,411

)

 

 

(110,984

)

Recognized maturities of customer contracts uncollected as of end of period

 

 

(17,280

)

 

 

(16,198

)

Changes in customer contract liabilities

 

$

51,761

 

 

$

45,652

 

 

16.
RELATED PARTIES

At June 30, 2022, Axar beneficially owned 74.7% of the Company’s outstanding Common Stock, which constituted 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.

Subadvisor Agreement

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”).

On April 19, 2022, Axar, at the request of the Trust Committee, agreed to terminate the Agreement effective immediately. In connection with the termination, Axar also agreed to waive all fees payable to Axar under the Agreement for the period from January 1, 2022 though the termination date, which amounted to $219,000. During the three and six months ended June 30, 2021, Axar received fees of $103,000 and $172,000, respectively. The termination was requested by the Trust Committee following its review of certain investments by the Company’s trusts recommended by Axar under the Agreement in which Axar had an interest, as more fully described in the Company’s Annual Report. In connection with the termination, the Trust Committee authorized Cornerstone to engage Cambridge Associates LLC, which is also a subadvisor to Cornerstone, to resume providing the administrative and other investment advisory services it had previously furnished to Cornerstone prior to the assumption of such responsibilities by Axar under the Agreement.

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Nomination and Director Voting Agreement

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
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.

Merger Agreement

On May 24, 2022, the Company, Axar Cemetery Parent Corp., a Delaware corporation (“Parent”), and Axar Cemetery Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein and in accordance with the General Corporation Law of the State of Delaware, as amended (the “DGCL”), the Company, Parent and Merger Sub intend to enter into a transaction pursuant to which Merger Sub will be merged with and into the Company (the “Merger,” and, collectively with the other transactions contemplated in the Merger agreement, the “Transactions”), with the Company surviving the Merger and becoming a wholly-owned subsidiary of Parent as a result of the Merger.

Merger Consideration

At the effective time of the Merger (the “Effective Time”), each Share issued and outstanding immediately prior to the Effective Time, other than any Excluded Shares and any Dissenting Shares (as such terms are defined in the Merger Agreement), will be converted into the right to receive $3.50 in cash per Share without interest (the “Merger Consideration”). All Shares that are converted into the right to receive the Merger Consideration will no longer be outstanding and will be automatically cancelled and cease to exist as of the Effective Time. All Excluded Shares that are held by the Company will be automatically cancelled and cease to exist as of the Effective Time, without any conversion thereof and no payment or distribution will be made with respect thereto. All Excluded Shares that are Axar Shares and that are issued and outstanding immediately prior to the Effective Time will be converted into one validly issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the Surviving Corporation (as such term is defined in the Merger Agreement). “Axar Shares” means Shares held by any of Parent, AC Holdings, Merger Sub, any other direct or indirect Subsidiary of Parent or any Axar Vehicle (as such term is defined

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in the Merger Agreement).
 

At the Effective Time, (i) outstanding Company Phantom Units (as such term is defined in the Merger Agreement) will be canceled and converted into the right to receive an amount in cash equal to the product of the Merger Consideration times the number of Shares subject to the award, and (ii) outstanding Company Restricted Shares (as such term is defined in the Merger Agreement) awarded under the Company Equity Plan will vest in full and be converted into the right to receive the Merger Consideration under the same terms and conditions as apply to the receipt of the Merger Consideration by holders of Shares generally.

With respect to Company Options subject to Company Employee Option Awards (as such terms are defined in the Merger Agreement), (A) 50% of the Company Options will be canceled in consideration for the right to receive a lump sum cash payment with respect thereto equal to the product of: (1) the excess, if any, of the Merger Consideration over the applicable exercise price of the applicable Company Employee Option Award, times (2) the number of Shares subject to such Company Options that are cancelled, less any required withholding taxes; and (B) the remaining Company Options will be assumed by Parent and converted into fully vested options to purchase (on the same terms and conditions as were applicable to such Company Options pursuant to the Company Equity Plan and the Company Employee Option Award prior to the Effective Time) that number of Parent Shares equal to the number of Shares subject to such Company Option immediately prior to the Effective Time with an exercise price equal to the exercise price applicable to such Company Option immediately prior to the Effective Time divided by the Option Exchange Ratio (as defined in the Merger Agreement).

The Merger Agreement was entered into following receipt of a proposal from Axar (as such term is defined in the Merger Agreement) on September 22, 2021 (the “Proposal”), in which Axar expressed interest in pursuing discussions concerning strategic alternatives that might be beneficial to the Company and its various stakeholders. After receiving the Proposal, the Board of Directors of the Company (the “Board”) authorized the Conflicts Committee of the Board (the “Conflicts Committee”), consisting entirely of independent directors, to engage in the discussions contemplated by the Proposal, including the authority to engage in discussions concerning and to negotiate the terms and provisions of strategic alternatives. The Conflicts Committee engaged separate financial and legal advisors and over the course of the last several months has negotiated the terms and conditions of Axar’s proposal to acquire all outstanding shares not owned by Axar and its Affiliates (as such term is defined in the Merger Agreement). At a meeting held on May 21, 2022, the Conflicts Committee approved the Merger Agreement in substantially the form subsequently executed and, based on the opinion of its independent financial advisor, Kroll, LLC, operating through its Duff & Phelps Opinions Practice (“Duff & Phelps”), concluded that the consideration payable in the Merger was fair, from a financial perspective, to the Company and its stockholders (other than the holders of the Excluded Shares and Insider Shares, as “Insider Shares” is defined in the Merger Agreement) and unanimously recommended to the Board that it approve the Merger Agreement and the Merger.

The Board, acting on the unanimous recommendation of the Conflicts Committee, (i) determined that the Merger Agreement and the Transactions were fair to, and in the best interest of, the Company and its stockholders, (ii) approved the execution, delivery and performance by the Company of the Merger Agreement and the consummation of the Transactions and (iii) resolved to recommend that the stockholders of the Company tender their Shares to Purchaser pursuant to the Offer. All of the directors of the Company approved the transaction other than Andrew Axelrod, who was not present at the meeting.

Stockholders of the Company will be asked to vote to approve and adopt the Merger Agreement at a stockholders’ meeting that will be held on a date to be announced. A condition to the consummation of the Merger is the approval and adoption of the Merger by the affirmative vote of (i) the holders of at least a majority of the issued and outstanding Shares and (ii) the holders of at least a majority of the issued and outstanding Shares other than the Axar Shares and the Shares held by the Board and the officers of the Company and their respective immediate family members (clauses (i) and (ii), the “Requisite Company Vote”), in each case in accordance with the Company’s certificate of incorporation and bylaws and Delaware law.

Representations, Covenants and Conditions to Closing

The Merger Agreement includes certain representations, warranties and covenants of the Company, on one hand, and Parent and Merger Sub on the other, including certain restrictions with respect to the Company’s business between the date of the Merger Agreement and the consummation of the Merger.

The Company, Parent and Merger Sub also agreed to use their respective reasonable best efforts to take, or cause to be taken, all appropriate actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws or otherwise

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to consummate and make effective the Transactions. The Company, Parent, and Merger Sub also agreed, upon request by any other party, to furnish such other party with all information concerning itself, its Affiliates, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement (as defined in the Merger Agreement), the Schedule 13E-3 or any other statement, filing, notice or application made by or on behalf of Parent, Merger Sub, the Company or any of their respective Affiliates to any third party or any Governmental Authority (as defined in the Merger Agreement) in connection with the Merger and the other Transactions.

Go-Shop Period

The Company agreed to a period (the “Go-Shop Period”) which commenced on the date of the Merger Agreement and ended 60 days thereafter, or July 23, 2022 (the “Go-Shop Period End Date”), during which time the Company and its representatives, acting at the direction and under the supervision of the Conflicts Committee, were permitted to solicit Competing Transactions (as defined in the Merger Agreement) and share information with potential bidders. After the Go-Shop Period End Date, the Company was required to cease discussions with other parties regarding a transaction except for Excluded Parties. “Excluded Parties” means third parties that had, prior to such date, made a bona fide written proposal for a Competing Transaction that the Conflicts Committee determined in good faith on or prior to the Go-Shop Period End Date, after consultation with its financial advisor and outside legal advisors, constituted or was reasonably likely to result in a Superior Proposal (as defined in the Merger Agreement). The Company was required, within two days of the Go-Shop Period End Date, to provide a list of Excluded Parties to Parent with the current terms of any acquisition proposal. During the Go-Shop Period, the Conflicts Committee’s financial advisor contacted five potential strategic buyers and 32 potential financial buyers that the Conflicts Committee and its financial advisor believed could have an interest in reviewing the opportunity and had the financial ability to pursue a potential strategic transaction with the Company. None of the parties contacted entered into a confidentiality agreement with the Company or otherwise pursued a transaction that would be an alternative to the Merger. Now that the Go-Shop Period End Date has passed, the Company is not permitted to solicit potential bidders.

No Solicitation

The Company has also agreed that after the Go-Shop Period End Date, the Company will, and will cause each of the Company Subsidiaries and each of its and their Representatives to, immediately cease and cause to be terminated any existing solicitation of, or discussions or negotiations with, any Third Party (as defined in the Merger Agreement), other than Excluded Parties, relating to any Competing Transaction or any inquiry, discussion, offer or request that could reasonably be expected to lead to a Competing Transaction. Additionally, the Company will, as promptly as possible, request each Third Party (other than any Excluded Party) that has previously executed a confidentiality or similar agreement in connection with its consideration of a Competing Transaction to return to the Company or destroy any non-public information previously furnished or made available to such person or any of its Representatives by or on behalf of the Company or its Representatives in accordance with the terms of the confidentiality agreement in place with such person.

Pursuant to the Merger Agreement, “Superior Proposal” means: a written, bona fide offer that did not result from a breach of the Merger Agreement made by a person with respect to a Competing Transaction that the Conflicts Committee determines, in its good faith judgement (after (a) consultation with its financial advisor and outside legal counsel and (b) taking into consideration all terms and conditions relating to such offer, including all legal, financial, regulatory and other aspects of such offer, including the likelihood and timing of consummation thereof, the identity of the person or group making the offer and any revisions to Axar’s offer made or proposed in writing pursuant to the Merger Agreement), to be more favorable to the Company and the stockholders (other than the holders of the Excluded Shares) from a financial point of view than the Merger. For purposes of the definition of “Superior Proposal,” each reference to “10%” or “20%”, as the case may be, in the definition of “Competing Transaction” is replaced with “50%”. For a Competing Transaction to constitute a Superior Proposal: (i) such Competing Transaction must not be subject to a financing condition; (ii) the Conflicts Committee must have reasonably concluded that the Person making such offer has the financial wherewithal (together with up to $10,000,000 in cash of the Company) necessary to perform its obligations thereunder and to consummate the transactions contemplated thereby (including the financial wherewithal to comply and/or cause the Company to comply with its obligations under Section 5.14 of the Indenture (as such term is defined in the Merger Agreement) in connection therewith); and (iii) any financing required by such Person in connection with the Competing Transaction is then supported by financing commitments that, if executed in connection with definitive documentation for a transaction, would be sufficient for such purposes.

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Termination

The Merger Agreement contains certain termination rights for both the Company and Parent and Merger Sub. The Company will pay Parent a termination fee equal to 4% of the aggregate value of the Shares not owned by Axar Vehicles if: Parent terminates due to a Company breach of the Go-Shop or No Solicitation provisions; after the end of the Go-Shop Period, the Company terminates to enter into a Superior Proposal (as defined in the Merger Agreement) that Parent supports; or either party terminates, and, within six months thereafter, the Company enters into a Competing Transaction (as defined in the Merger Agreement) in which Axar participates. Further, the Company will pay Parent a 50% termination fee (i.e., equal to 2% of the aggregate value of the non-Axar shares) if: before the end of the Go-Shop Period, the Company terminates to enter into a Superior Proposal that Parent supports; or the Company terminates due to a Change in Company Recommendation in connection with an Intervening Event. No Termination Fee is payable if the Company terminates the Merger Agreement upon a change in recommendation in connection with a Superior Proposal that is not supported by Parent.

Co-Investments with Axar and its Affiliates

Investment in Shoe Retailer Debt Facility

In January 2020, the Company’s trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by a discount shoe retailer (the “Shoe Retailer”). 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 the Shoe Retailer, and Mr. Axelrod served on the Shoe Retailer’s board of directors. The Company’s investment in the Shoe Retailer represented approximately 4% of the total fair market value of the Company’s trust assets when the investment was made.

Purchase of Nevada Company Shares

On March 9, 2021, the Company's trusts purchased an aggregate of 43,681,528 shares (the “Nevada Company Shares”) of common stock of a Nevada company whose primary assets now consist of cash and tax-related assets (the “Nevada Company”), representing approximately 27% of the outstanding common stock of the Nevada Company, from three private investment funds (the “Nevada Company Sellers”) for an aggregate cash purchase price of $18.0 million. Axar had originally agreed to acquire the Nevada Company Shares pursuant to a Securities Purchase Agreement dated December 31, 2020, among the Nevada Company Sellers and Axar (the “Nevada Company Purchase Agreement”). On February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar recommended to Cornerstone that our trusts purchase the Nevada Company Shares. Pursuant to that recommendation, on February 4, 2021, Axar and our trusts entered into an Assignment and Assumption Agreement (the “Nevada Company Assignment Agreement”), pursuant to which Axar agreed to assign its rights under the Nevada Company Purchase Agreement to our trusts and our trusts agreed to assume Axar’s obligations thereunder. Axar did not receive any additional consideration from our trusts for this assignment and has represented to us that it did not receive any consideration for this assignment from any other person.

The Nevada Company Sellers and Axar entered into the Nevada Company Purchase Agreement while the Subadvisor Agreement was being finalized. Axar has informed us that it entered into the Nevada Company Purchase Agreement with the intention that our trusts would purchase the Nevada Company Shares directly from the Nevada Company Sellers. Axar has represented to Cornerstone that it is not, and at the time it entered into the Nevada Company Purchase Agreement was not, affiliated with any of the Nevada Company Sellers and did not control and was not an affiliate of Nevada Company at the time it executed the Nevada Company Purchase Agreement or when our trusts purchased the Nevada Company Shares. Axar has represented to us that, at the time the Nevada Company Purchase Agreement was signed and at all times thereafter until our trusts completed their purchase of the Nevada Company Shares, funds and accounts affiliated with Axar owned approximately 13.8% of Nevada Company’s outstanding common stock, and that Andrew Axelrod was elected to the board of directors of the Nevada Company on December 31, 2020.

Hotel Fund Loan Agreement

On May 17, 2021, the Company's trusts entered into a Loan Agreement with a hotel investor and developer and certain of its subsidiaries (collectively, the “Hotel Fund”), which was amended and restated on October 12, 2021 (such agreement, as so amended and restated, the “Hotel Fund Loan Agreement”) and subsequently amended on December 13, 2021, March 7, 2022 and April 19, 2022. Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $33.2 million mezzanine loan to the Hotel

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Fund on May 19, 2021 as part of a $162.2 million loan facility originated by an unaffiliated loan fund. The participation by our trusts was based on the recommendation of Axar under the Subadvisor Agreement. As part of the same transaction, funds and other accounts affiliated with or managed by Axar loaned $10.0 million to the Hotel Fund on the same terms as the trusts’ loans, representing the balance of the $43.2 million mezzanine loan, and our trusts and the Axar funds and accounts each received an origination fee equal to 4% of their respective loan amounts. The principal amount of these loans is payable on October 12, 2023, subject to acceleration under the circumstances described in the Hotel Fund Loan Agreement, and bear interest at an adjustable rate equal to one-month LIBOR plus a spread. On February 15, 2022, the administrative agent for the lenders under the Hotel Fund Loan Agreement delivered a reservation of rights letter to the Hotel Fund with respect to the Hotel Fund’s apparent failure to comply with several covenants in the Hotel Fund Loan Agreement, none of which related to payment of amounts due to the lenders. As of June 30, 2022, the interest rate was 19.07%. In April 2022 in connection with an amendment of the Hotel Fund Loan Agreement pursuant to which Axar committed to provide an additional $4.5 million loan discretionary subfacility to the Hotel Fund (our trusts did not participate in this subfacility), Axar and our trusts agreed to have the interest payable on the mezzanine loan in April, May and June 2022 paid in kind. The terms of the subfacility are generally the same as the existing loan and are secured pari passu by the same collateral. An additional amendment, to extend the capitalization period through September 2022, is currently being negotiated. The prior amendments have also provided for the Hotel Fund's cooperation in a sale process of its real estate properties, the appointment of a chief administrative officer and the appointment of an independent financial advisor. Through June 30, 2022, the Company's trusts have received cash interest in the aggregate amount of $7.7 million on this loan from an interest and expense reserve account established for that purpose, and additional interest in the form of an additional $1.6 million in principal of the loan, collectively representing all interest payable to the Company’s trusts under the Hotel Fund Loan Agreement. The Hotel Fund owns its properties in subsidiaries, certain of which are subject to underlying financing arrangements. One of these financing arrangements is currently in default. The Hotel Fund is currently in the process of having its properties marketed for sale, either through brokers or through auction process, or is considering such steps or alternative steps (such as a refinancing in certain cases).

Holdco Loan Assignment

On September 27, 2021, our trusts entered into an Assignment and Acceptance Agreement (the “Holdco Loan Assignment”) with an insurance holding company (“Holdco”) and Holdco’s then current lender (the “Initial Lender”) pursuant to which the Initial Lender agreed to assign to our trusts all of its rights, duties and obligations under a Loan Agreement dated as of July 9, 2019 between the Initial Lender and Holdco (the “Holdco Loan Agreement”). The Initial Lender had previously declared Holdco in default under the terms of the Holdco Loan Agreement. At the closing of the transactions contemplated by the Holdco Loan Assignment on October 6, 2021, our trusts paid the Initial Lender $28.7 million in cash, which equaled the then outstanding principal balance of the loan under the Holdco Loan Agreement (the “Holdco Loan”). The Company was not affiliated with either Holdco or the Initial Lender and Axar has represented to Cornerstone that it did not control and was not an affiliate of either Holdco or the Initial Lender. Also on September 27, 2021, our trusts and Holdco entered into the First Amendment to Loan Agreement (the “Amended Holdco Loan Agreement”) pursuant to which, among other changes, the defaults asserted by the Initial Lender were waived and the interest rate on the Holdco Loan was increased from 10%, all of which had been payable in kind by increasing the principal balance of the loan, to 15%, of which 10% continued to be payable in kind and 5% was payable in cash. In addition, the Amended Holdco Loan Agreement accelerated the maturity of the Holdco Loan to the earliest of the first anniversary of the closing (subject to a six month extension at the request of Holdco with the consent of our trusts) and the occurrence of certain other events described further below. As of June 30, 2022, the interest rate on the Holdco Loan remained at 15%. Through June 30, 2022, the trusts have received cash interest in the aggregate amount of $1.6 million on the Holdco Loan and additional interest in the form of an increase in the principal balance of the Holdco Loan in the amount of $2.2 million, representing all interest payable to our trusts under the Amended Loan Agreement.

Also on September 27, 2021, Axar entered into a letter agreement with Holdco (the “Transaction Letter Agreement”) pursuant to which Holdco agreed, in order to induce Axar to enter into the Amended Holdco Loan Agreement, that it would, if requested by Axar, enter into an agreed-upon form of purchase agreement for the sale of the outstanding capital stock of its wholly-owned insurance company subsidiary (the “Holdco Subsidiary”) to Axar for a purchase price of $100 million, subject to certain conditions including completion by Axar of a customary due diligence investigation and regulatory approval of the transaction by the state insurance regulator. Recently, Axar advised us that the state insurance regulators had advised Axar that regulatory approval of the transaction between Axar and Holdco would not be granted because the contemplated purchase price included a $40 million note to be issued to Holdco, and, as a result, after further negotiations, that Holdco and Axar entered into a purchase agreement dated January 20, 2022, which provided for a cash purchase price of $75 million, less the outstanding amounts owed to our trusts under the Amended Holdco Loan Agreement and a fee that remained payable to the Initial Lender. Axar has advised us that the primary regulatory approval for the sale to Axar under the purchase agreement was received on July 25, 2022, but that other less material approvals remain outstanding. Because the Holdco Loan is secured by the stock of the Holdco Subsidiary, the Holdco Loan is required to be repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or any third party.

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The Amended Holdco Loan Agreement provides that the Holdco Loan is due and payable on the earliest of (a) October 6, 2022 (subject to a six-month extension as discussed above), (b) an election by Holdco not to proceed with the transaction contemplated by the Transaction Letter Agreement, (c) a breach by Holdco of any of its obligations under the Transaction Letter Agreement or any purchase agreement executed with respect to the sale of Holdco Subsidiary or (d) the consummation of the sale of Holdco Subsidiary to Axar.

Also on September 27, 2021, (i) our trusts and Holdco entered into a letter agreement pursuant to which Holdco has paid our trusts a fee of $500,000 (the “StoneMor Trusts Fee Letter Agreement”) and (ii) Axar and Holdco entered into an Expense Fee Letter pursuant to which Holdco agreed to pay Axar’s due diligence expenses of up to $630,000 (the “Expense Fee Letter Agreement”). Entrance of Holdco into both the Expense Fee Letter Agreement and the StoneMor Trusts Fee Letter Agreement were conditions to the effectiveness of the Amended Holdco Loan Agreement.

17.
SUBSEQUENT EVENTS

Note Purchase Agreement and Release
 

On July 20, 2022, the Company, Fortmore LLC (the “LLC”), certain affiliates (the “Fortress Purchasers”) of Fortress Capital Advisors LLC (“Fortress”) and certain holders of the Company’s 8.500% Senior Secured Notes due 2029 (the “Company Notes”) who were not affiliated with either the Company or Fortress (the “Sellers”) entered into a Note Purchase Agreement and Release (the “Purchase Agreement”) pursuant to which the LLC and the Fortress Purchasers (collectively, the “Purchasers”) agreed to purchase $100.0 million principal amount of Company Notes held by the Sellers for an aggregate purchase price equal to 100% of the principal amount thereof plus all accrued and unpaid interest thereon. The final settlement of the transactions contemplated by the Purchase Agreement occurred on July 26, 2022. The Fortress Purchasers collectively purchased $65.0 million of such Company Notes and the LLC purchased $35.0 million of such Company Notes.

On July 20, 2022, the Company and separate affiliates (the “Fortress Equity Entities”) of Fortress entered into an Amended and Restated LLC Agreement (the “Operating Agreement”) of the LLC. The LLC was capitalized for the purpose of acquiring and holding $35.0 million principal amount (the “LLC Notes”) of Company Notes pursuant to the Purchase Agreement. The Operating Agreement is described in more detail below.

The Sellers had raised certain issues based on disclosures included in Item 13 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, including issues relating to compliance by the Company with certain covenants under the Indenture dated as of May 11, 2021 pursuant to which the Company Notes were issued (the “Indenture”) and the adequacy of the disclosures by the Company in the offering materials pursuant to which the Company Notes were offered and sold. Throughout its discussion with the Sellers, the Company was and remains firmly convinced that there was no merit to the issues raised by the Sellers. However, in the interest of avoiding additional cost as well as distraction and disruption of its management, the Company agreed to facilitate the consummation of the transactions contemplated by the Purchase Agreement but does not intend to facilitate the purchase of other Company Notes in any similar transactions. In connection with closing under the Purchase Agreement, the Company also agreed to have its entire $42.7 million capital contribution to the LLC used as part of the purchase price paid to the Sellers and to reimburse the Sellers for certain legal fees. In consideration for the purchase of the Sellers’ Company Notes and the reimbursement of the Sellers’ legal fees, the Sellers acknowledged that there was no merit to the issues they had raised. The Sellers and the Company also exchanged mutual releases. In connection with the consummation of the transactions contemplated by the Purchase Agreement and the Operating Agreement, the Company expects to record debt extinguishment of $35.0 million on its balance sheet as of September 30, 2022 and an expense of approximately $7.15 million on its consolidated statement of operations for the quarter ending September 30, 2022.

LLC Operating Agreement

As noted above, on July 20, 2022, the Company and the Fortress Equity Entities entered into the Operating Agreement. In connection therewith, the Company contributed $42.7 million in cash in exchange for 100% of the Class B interests in the LLC and the Fortress Equity Entities contributed an aggregate of $10,000 in cash in exchange for 100% of the Class A interests in the LLC.

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The Operating Agreement provides that, so long as no Default or Event of Default (as such terms are defined in the Indenture) has occurred and is continuing, amounts received by the LLC in respect of the LLC Notes as (i) interest payments, (ii) any consent fee payments that may be payable pursuant to the Indenture or (iii) payments in connection with the redemption or purchase of the LLC Notes pursuant to the Indenture in excess of the principal amount of the LLC Notes so redeemed or purchased will be distributed to the Company as the sole holder of Class B interests (in such capacity, the “Class B Member”).

If any Fortress Notes (as hereinafter defined) are redeemed, retired, cancelled or exchanged or are otherwise no longer outstanding (subject to certain exceptions specified in the Operating Agreement), and the holders of such Fortress Notes do not receive payment of all principal, interest and fees payable thereon under the terms of the Indenture in connection with any such redemption, retirement, cancellation, exchange or other action, then any payments received by the LLC in respect of the LLC Notes will be distributed to the Fortress Equity Entities as the sole holders of Class A interests (in such capacity, the “Class A Members”), up to an amount equal to the excess of the amount of principal, interests and fees payable to the holders of such Fortress Notes under the Indenture in connection with any such redemption, retirement, cancellation, exchange or other action over the amount of principal, interest and fees received by such holders with respect to such Fortress Notes in connection with any such redemption, retirement, cancellation, exchange or other action.

For purposes of the Operating Agreement, “Fortress Notes” means all Company Notes held by Fortress and its affiliates as of the applicable date of determination. The Company anticipates that Fortress and its affiliates will collectively hold approximately $95.0 million in principal amount of Company Notes upon closing under the Purchase Agreement.

An affiliate of Fortress will be the sole manager of the LLC (the “Manager”) until the 91st day after the date on which no Fortress Notes remain outstanding and the LLC has made all distributions to the Class A Member as described above (the “Priority Payment Date”). Thereafter, the Company will become the sole Manager. Prior to the Priority Payment Date, the Manager is prohibited from taking or permitting the LLC to take certain fundamental actions specified in the Operating Agreement without the prior written consent of the Class B Member, which consent may not be unreasonably withheld, conditioned or delayed. On or after the Priority Payment Date, the LLC has the right to repurchase the Class A Members’ interests in the LLC for a purchase price equal to the initial capital contribution made with respect thereto.

The LLC and certain affiliates of the holders of the Fortress Notes separately entered into an Option and Repurchase Agreement on July 20, 2022 (the “Option Agreement”) under which (i) the LLC was granted an option to purchase up to $20 million in principal amount of Fortress Notes (the “Option”) for a purchase price equal to the sum of all accrued and unpaid interest thereon plus the greater of 100% of the principal amount of such Fortress Notes and the weighted average trading price for the Company Notes for the ten (10) consecutive trading days prior to exercise of the Option and (ii) the LLC was granted the option to purchase all outstanding Fortress Notes at any time prior to the Priority Payment Date during which the Notes Repurchase Condition (as hereinafter defined) is satisfied (the “Notes Repurchase Right”) for a purchase price equal to the amount that the Company would be required to pay to redeem such Fortress Notes under Section 3.07 of the Indenture (the “Notes Repurchase Price”). The “Notes Repurchase Condition” means that no distribution is required to be made to the Class A Member as described above and the LLC has available cash at least equal to the Notes Repurchase Price.

Under the Operating Agreement, the Class B Member has the right to make an additional capital contribution in an amount up to the Option Price and, if it does so, the LLC is obligated to exercise the Option to the extent of such contribution. At any time the Notes Repurchase Condition is satisfied and the Notes Repurchase Right is exercisable, the Class B Member has the right to instruct the LLC to exercise the Notes Repurchase Right and, if it does so, the LLC is obligated to exercise such Notes Repurchase Right.

 

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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 June 30, 2022, we operated 304 cemeteries in 24 states and Puerto Rico, of which 275 were owned and 29 were operated under leases, operating agreements or management agreements. We also owned, operated or managed 72 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 2022 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:

Acquisitions. On January 31, 2022, we acquired two cemeteries in Virginia for cash consideration of $5.1 million and on May 10, 2022 we acquired two cemeteries in North Carolina for cash consideration of $0.3 million, pursuant to a definitive agreement signed on March 23, 2021 with Daly Seven, Inc. to acquire the four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments.

On March 1, 2022, we acquired one funeral home in Florida for cash consideration of $1.7 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on March 1, 2022 with MacDonald Funeral Home & Cremation, Inc.

On March 15, 2022, we acquired one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for cash consideration of $11.3 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on February 4, 2022 with Roselawn Acquisition Group LLC, Monte Vista Park LLC, CPJ LLC, and WV Memorial Properties LLC.

Divestitures. On April 22, 2022, we completed the Rhode Island Sale for a total cash price of $0.2 million, resulting in a loss on sale of $43,000 for the three and six months ended June 30, 2022.

On May 24, 2021, we completed the Missouri Sale for a total cash price of $0.7 million, resulting in a loss on sale of $1.7 million for the three and six months ended June 30, 2021.

Axar Merger Agreement. On May 24, 2022, we, Parent and Merger Sub, entered into the Merger Agreement. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein and in accordance with the DGCL, we, Parent and Merger Sub intend to enter into the Merger and the Transactions with the Company surviving the Merger and becoming a wholly-owned subsidiary of Parent as a result of the Merger. For further details of the Merger Agreement, see Note 16 Related Parties of Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report.
Note Purchase Agreement and Release, LLC Operating Agreement.
On July 20, 2022, we, the LLC, the Fortress Purchasers and certain holders of our 2029 Notes who were not affiliated with either us or Fortress entered into the Purchase Agreement pursuant to which the Purchasers agreed to purchase $100.0 million principal amount of the 2029 Notes held by the Sellers for an aggregate purchase price equal to 100% of the principal amount thereof plus all accrued and unpaid interest thereon. The final settlement of the transactions contemplated by the Purchase Agreement occurred on July 26, 2022. The Fortress Purchasers collectively purchased $65.0 million of such 2029 Notes and the LLC purchased $35.0 million of such 2029 Notes. On July 20, 2022, the Company and the Fortress Equity Entities entered into the Operating Agreement of the LLC. The LLC was capitalized for the purpose of acquiring and holding the LLC Notes pursuant to the Purchase Agreement. For further details, see Note 17
Subsequent Events of Part I, Item 1. Financial Statements (Unaudited) of this Quarterly Report.

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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.

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 have 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 early on in the COVID-19 Pandemic was 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. We have leveraged the relationships we have made with the families we have served during our response to the COVID-19 Pandemic, which has directly resulted in new sales leads and the increase in pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became widely available, we have experienced growth in our pre-need cemetery sales, see “Results of Operations” below.

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 case counts. However we cannot presently predict, with certainty, the scope and severity of that impact. 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. Alternatively, in the event that COVID-19 case counts continue to normalize and variants become less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-need turning to at-need.

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
o
Continue to recognize the benefits of expanding margins created through the realization of our turnaround strategy and sustainable operational performance;
o
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;
o
Explore new product offerings to cater to evolving customer demands including cremation products; and
o
Deploy capital expenditure projects to capitalize on new sales, performance or efficiency opportunities.
Inorganic Growth and Acquisition Opportunities
o
Target core markets for accretive, strategic growth that complements our existing portfolio, while leveraging our scale and management capabilities; and
o
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
o
Use excess cash flow to acquire new properties to create additional EBITDA;
o
Grow at a sustainable pace and integrate assets to take advantage of our existing platform and management expertise; and
o
Continue to build upon our strong backlog of assets and trust appreciation through existing operations, organic growth opportunities and future acquisitions.

Inflationary Trends

During the second quarter of 2022, we began to experience modest cost increases from our vendors on merchandise and goods due to the broader inflationary environment and global supply chain issues, and we expect these impacts to continue through the end of the year. The U.S. economy has recently experienced an increase in the rate of inflation, which has impacted many industries and sectors, causing consumers to face rising prices. This inflationary environment may negatively impact consumers and discretionary spending. We will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.

 

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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 June 30, 2022, we operated 304 cemeteries in 24 states and Puerto Rico. We owned 275 of these cemeteries, and we managed or operated the remaining 29 under leases, operating agreements or management agreements. Revenues from our Cemetery Operations segment accounted for approximately 88% and 87% of our total revenues for the three and six months ended June 30, 2022, respectively.

Operating Results

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following tables present operating results for our Cemetery Operations segment for the three months ended June 30, 2022 and 2021 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

Variance

 

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Interments

 

$

22,136

 

 

$

22,906

 

 

$

(770

)

 

 

(3

%)

Merchandise

 

 

19,744

 

 

 

17,787

 

 

 

1,957

 

 

 

11

%

Services

 

 

18,370

 

 

 

17,698

 

 

 

672

 

 

 

4

%

Interest income

 

 

1,742

 

 

 

2,261

 

 

 

(519

)

 

 

(23

%)

Investment and other

 

 

8,462

 

 

 

11,476

 

 

 

(3,014

)

 

 

(26

%)

Total revenues

 

 

70,454

 

 

 

72,128

 

 

 

(1,674

)

 

 

(2

%)

Cost of goods sold

 

 

12,519

 

 

 

12,435

 

 

 

84

 

 

 

1

%

Cemetery expense

 

 

21,634

 

 

 

18,090

 

 

 

3,544

 

 

 

20

%

Selling expense

 

 

17,289

 

 

 

14,776

 

 

 

2,513

 

 

 

17

%

General and administrative expense

 

 

12,250

 

 

 

10,650

 

 

 

1,600

 

 

 

15

%

Depreciation and amortization

 

 

1,423

 

 

 

1,505

 

 

 

(82

)

 

 

(5

%)

Total costs and expenses

 

 

65,115

 

 

 

57,456

 

 

 

7,659

 

 

 

13

%

Segment operating profit

 

$

5,339

 

 

$

14,672

 

 

$

(9,333

)

 

 

(64

%)

Cemetery interments revenues were $22.1 million for the three months ended June 30, 2022, a decrease of $0.8 million and 3% from $22.9 million for the three months ended June 30, 2021. The decrease resulted primarily from a decrease in pre-need revenues of $0.6 million and a decrease in at-need revenues of $0.3 million compared to the prior year period which experienced overall revenue growth attributable to the COVID-19 Pandemic. These decreases were offset by a $0.1 million increase due to lower cancellations and promotional discounts.

Cemetery merchandise revenues were $19.7 million for the three months ended June 30, 2022, an increase of $2.0 million and 11% from $17.8 million for the three months ended June 30, 2021. The increase resulted primarily from a $1.2 million increase in pre-need turning at-need revenues and an increase in at-need revenues of $$0.7 million.

Cemetery service revenues were $18.4 million for the three months ended June 30, 2022, an increase of $0.7 million and 4% from $17.7 million for the three months ended June 30, 2021. The increase resulted from a $0.4 million increase in pre-need turned at-need revenues and a $0.3 million increase in at-need revenues.

Investment and other income was $8.5 million for the three months ended June 30, 2022, a decrease of $3.0 million and 26% from $11.5 million for the three months ended June 30, 2021. The decrease was driven by a decrease in investment income associated with the perpetual care trust of $4.0 million, a decrease of $0.6 million in other income and a decrease of $0.5 million in RIA fees earned. These decreases were offset in part by an increase in investment income associated with the merchandise trust of $2.1 million.

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Cost of goods sold was $12.5 million for the three months ended June 30, 2022, an increase of $0.1 million and 1% from $12.4 million for the three months ended June 30, 2021. As a percentage of cemetery revenue, cost of goods sold was 17.8% for the three months ended June 30, 2022, compared to 17.2% for the three months ended June 30, 2021.

Cemetery expenses were $21.6 million for the three months ended June 30, 2022, an increase of $3.5 million and 20% from $18.1 million for the three months ended June 30, 2021. The increase was due to a $2.4 million increase in repairs and maintenance expense as well as an increase of approximately $1.1 million in general expenditures, including costs associated with cemetery maintenance which had previously been outsourced to Moon.

Selling expenses were $17.3 million for the three months ended June 30, 2022, an increase of $2.5 million and 17% from $14.8 million for the three months ended June 30, 2021. As a percentage of cemetery revenue, selling expenses increased to 24.5% for the three months ended June 30, 2022 from 20.5% for the three months ended June 30, 2021, and included a $1.5 million increase in marketing and advertising expense and a $0.6 million increase in payroll expenses.

General and administrative expenses were $12.3 million for the three months ended June 30, 2022, an increase of $1.6 million and 15% from $10.7 million for the three months ended June 30, 2021. The increase was primarily the result of a $1.4 million increase in payroll and related costs, a $0.3 million increase in legal fees and a $0.1 million increase in insurance costs. These increases were offset by a $0.2 million decrease in other miscellaneous expenses.

Depreciation and amortization expenses were $1.4 million for the three months ended June 30, 2022, a decrease of $0.1 million and 5% from $1.5 million for the three months ended June 30, 2021. The decrease was due to routine depreciation and amortization of the associated asset base.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following tables present operating results for our Cemetery Operations segment for the six months ended June 30, 2022 and 2021 (in thousands):

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Variance

 

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Interments

 

$

43,291

 

 

$

43,425

 

 

$

(134

)

 

 

(0

%)

Merchandise

 

 

34,600

 

 

 

34,069

 

 

 

531

 

 

 

2

%

Services

 

 

35,228

 

 

 

34,979

 

 

 

249

 

 

 

1

%

Interest income

 

 

3,496

 

 

 

4,476

 

 

 

(980

)

 

 

(22

%)

Investment and other

 

 

23,336

 

 

 

22,159

 

 

 

1,177

 

 

 

5

%

Total revenues

 

 

139,951

 

 

 

139,108

 

 

 

843

 

 

 

1

%

Cost of goods sold

 

 

24,058

 

 

 

23,619

 

 

 

439

 

 

 

2

%

Cemetery expense

 

 

43,813

 

 

 

36,251

 

 

 

7,562

 

 

 

21

%

Selling expense

 

 

32,862

 

 

 

28,983

 

 

 

3,879

 

 

 

13

%

General and administrative expense

 

 

23,003

 

 

 

20,843

 

 

 

2,160

 

 

 

10

%

Depreciation and amortization

 

 

2,857

 

 

 

3,081

 

 

 

(224

)

 

 

(7

%)

Total costs and expenses

 

 

126,593

 

 

 

112,777

 

 

 

13,816

 

 

 

12

%

Segment operating profit

 

$

13,358

 

 

$

26,331

 

 

$

(12,973

)

 

 

(49

%)

Cemetery interments revenues were $43.3 million for the six months ended June 30, 2022, a decrease of $0.1 million and 0% from $43.4 million for the six months ended June 30, 2021. The decrease resulted from a decrease in at-need revenues of $0.7 million primarily related to a decline in death rates compared to the prior year period which was impacted by the COVID-19 Pandemic, which was partially offset by an increase in pre-need revenues of $0.2 million and an increase of $0.4 million associated with a decrease in cancellations and promotional discounts.

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Cemetery merchandise revenues were $34.6 million for the six months ended June 30, 2022, an increase of $0.5 million and 2% from $34.1 million for the six months ended June 30, 2021. The increase resulted from a $1.1 million increase in pre-need turning at-need revenues and an increase of $0.1 million associated with a decline in cancellations and promotional discounts. These increases were partially offset by a decrease of $0.6 million in at-need revenues.

Cemetery service revenues were $35.2 million for the six months ended June 30, 2022, an increase of $0.2 million and 1% from $35.0 million for the six months ended June 30, 2021. The increase resulted from a $0.2 million increase in pre-need turning at-need revenues and an increase of $0.1 million associated with a decline in cancellations and promotional discounts.

Investment and other income was $23.3 million for the six months ended June 30, 2022, an increase of $1.2 million and 5% from $22.2 million for the six months ended June 30, 2021. The increase resulted from increases of $3.2 million in investment income associated with the merchandise trust, $0.4 million in RIA fees earned and $0.4 million in other income. These increases were offset in part by a decrease in investment income associated with the perpetual care trust of $2.8 million.

Cost of goods sold was $24.1 million for the six months ended June 30, 2022, an increase of $0.4 million and 2% from $23.6 million for the six months ended June 30, 2021. As a percentage of cemetery revenue, cost of goods sold was 17.2% for the six months ended June 30, 2022, compared to 17.0% for the six months ended June 30, 2021.

Cemetery expenses were $43.8 million for the six months ended June 30, 2022, an increase of $7.6 million and 21% from $36.3 million for the six months ended June 30, 2021. The increase was due to a $4.1 million increase in repairs and maintenance expense as well as an increase of approximately $4.0 million in general expenditures, including costs associated with cemetery maintenance which had previously been outsourced to Moon. These increases were offset partially by a $0.5 million decrease in real estate taxes.

Selling expenses were $32.9 million for the six months ended June 30, 2022, an increase of $3.9 million and 13% from $29.0 million for the six months ended June 30, 2021. As a percentage of cemetery revenue, selling expenses increased to 23.5% for the six months ended June 30, 2022 from 20.8% for the six months ended June 30, 2021, and included a $3.0 million increase in marketing and advertising expense and a $0.9 million increase in payroll expenses.

General and administrative expenses were $23.0 million for the six months ended June 30, 2022, an increase of $2.2 million and 10% from $20.8 million for the six months ended June 30, 2021. The increase was primarily the result of a $1.1 million increase in payroll and related expenses, a $0.6 million increase in legal fees, a $0.3 million increase in insurance costs and a $0.2 million increase in other miscellaneous expenses.

Depreciation and amortization expenses were $2.9 million for the six months ended June 30, 2022, a decrease of $0.2 million and 7% from $3.1 million for the six months ended June 30, 2021. The decrease was due to routine depreciation and amortization of the associated asset base.

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Funeral Home Operations

Overview

As of June 30, 2022, we owned, operated or managed 72 funeral homes. These properties were located in 15 states and Puerto Rico. Revenues from Funeral Home Operations accounted for approximately 12% and 13% of our total revenues for the three and six months ended June 30, 2022, respectively.

Operating Results

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following tables present operating results for our Funeral Home Operations for the three months ended June 30, 2022 and 2021 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

Variance

 

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Merchandise

 

$

5,040

 

 

$

5,449

 

 

$

(409

)

 

 

(8

%)

Services

 

 

4,553

 

 

 

5,404

 

 

 

(851

)

 

 

(16

%)

Total revenues

 

 

9,593

 

 

 

10,853

 

 

 

(1,260

)

 

 

(12

%)

Merchandise

 

 

1,389

 

 

 

1,478

 

 

 

(89

)

 

 

(6

%)

Services

 

 

4,700

 

 

 

4,477

 

 

 

223

 

 

 

5

%

Depreciation and amortization

 

 

434

 

 

 

423

 

 

 

11

 

 

 

3

%

Other

 

 

3,185

 

 

 

3,239

 

 

 

(54

)

 

 

(2

%)

Total expenses

 

 

9,708

 

 

 

9,617

 

 

 

91

 

 

 

1

%

Segment operating (loss) profit

 

$

(115

)

 

$

1,236

 

 

$

(1,351

)

 

 

(109

%)

Funeral home merchandise revenues were $5.0 million for the three months ended June 30, 2022, a decrease of $0.4 million and 8% from $5.4 million for the three months ended June 30, 2021. The decrease resulted from a $0.5 million decrease in at-need revenues, partially offset by a $0.1 million increase in pre-need turned at-need revenue.

Funeral home services revenues were $4.6 million for the three months ended June 30, 2022, a decrease of $0.9 million and 16% from $5.4 million for the three months ended June 30, 2021. The decrease was primarily due to a $0.5 million decrease in income recognized on the merchandise trust, a $0.3 million decrease in at-need revenues and a $0.3 million decrease in other funeral home revenues, offset partially by a $0.2 million increase in pre-need turned at-need revenues.

Funeral home expenses were $9.7 million for the three months ended June 30, 2022, an increase of $0.1 million and 1% from $9.6 million for the three months ended June 30, 2021. Funeral home services costs increased $0.2 million, partially offset by a $0.1 million decrease in funeral home merchandise costs.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following tables present operating results for our Funeral Home Operations for the six months ended June 30, 2022 and 2021 (in thousands):

 

 

Six Months Ended June 30,

 

 

 

 

 

 

Variance

 

 

 

2022

 

 

2021

 

 

$

 

 

%

 

Merchandise

 

$

11,085

 

 

$

11,422

 

 

$

(337

)

 

 

(3

%)

Services

 

 

9,988

 

 

 

10,764

 

 

 

(776

)

 

 

(7

%)

Total revenues

 

 

21,073

 

 

 

22,186

 

 

 

(1,113

)

 

 

(5

%)

Merchandise

 

 

3,021

 

 

 

3,139

 

 

 

(118

)

 

 

(4

%)

Services

 

 

9,457

 

 

 

9,138

 

 

 

319

 

 

 

3

%

Depreciation and amortization

 

 

866

 

 

 

854

 

 

 

12

 

 

 

1

%

Other

 

 

6,571

 

 

 

6,258

 

 

 

313

 

 

 

5

%

Total expenses

 

 

19,915

 

 

 

19,389

 

 

 

526

 

 

 

3

%

Segment operating profit

 

$

1,158

 

 

$

2,797

 

 

$

(1,639

)

 

 

(59

%)

 

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Funeral home merchandise revenues were $11.1 million for the six months ended June 30, 2022, a decrease of $0.3 million and 3% from $11.4 million for the six months ended June 30, 2021. The decrease was due to a $0.4 million decrease in at-need revenues, partially offset by an increase of $0.1 million in pre-need turned at-need revenues.

Funeral home services revenues were $10.0 million for the six months ended June 30, 2022, a decrease of $0.8 million and 7% from $10.8 million for the six months ended June 30, 2021. The decrease was primarily due to a $0.4 million decrease in at-need revenues, a $0.3 million decrease in income recognized on the merchandise trust and a $0.2 million decrease in other funeral home revenues, offset partially by a $0.1 million increase in pre-need turned at-need revenues.

Funeral home expenses were $19.9 million for the six months ended June 30, 2022, an increase of $0.5 million and 5% from $19.4 million for the six months ended June 30, 2021. Funeral home services costs increased $0.3 million or 3%. Other funeral home expenses increased $0.3 million, primarily driven by increases in costs associated with repairs and maintenance, cremations and insurance. These increases were partially offset by a decrease in funeral home merchandise costs of $0.1 million or 4%.

Corporate

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Corporate Overhead

Corporate overhead expense was $12.8 million for the three months ended June 30, 2022, an increase of $3.3 million and 34% from $9.5 million for the three months ended June 30, 2021. The increase was primarily related to a $1.6 million increase in non-legal professional fees, a $1.5 million increase in legal fees and a $0.2 million increase in payroll and related expenses.

Loss on Sale of Businesses and Other Impairments

For the three months ended June 30, 2022, we recorded a loss of $43,000 in connection with the Rhode Island Sale in April 2022. For the three months ended June 30, 2021, we recorded a loss of $2.2 million which consisted of a loss of $1.7 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.

Interest Expense

Interest expense was $9.3 million for the three months ended June 30, 2022, a decrease of $0.7 million and 7% from $10.0 million for the three months ended June 30, 2021. The change was due to a decrease of $0.4 million related to a lower interest rate on the 2029 Notes compared to the 2024 Notes and a decrease of $0.3 million due to lower amortization of deferred financing fees.

Loss on Debt Extinguishment

For the three months ended June 30, 2022, there was no loss on debt extinguishment. For the three months ended June 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.

Income Tax Expense/Benefit

Income tax expense was $0.2 million for the three months ended June 30, 2022, compared to an income tax benefit of $9.7 million for the three months ended June 30, 2021. The income tax expense for the three months ended June 30, 2022 was primarily due to our inability to offset deferred tax benefits related to net operating losses against long life deferred tax liabilities for federal and state purposes. The income tax benefit for the three months ended June 30, 2021 was primarily due to the loss from continuing operations.

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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Corporate Overhead

Corporate overhead expense was $24.6 million for the six months ended June 30, 2022, an increase of $5.5 million and 29% from $19.1 million for the six months ended June 30, 2021. The increase was primarily related to a $2.2 million increase in non-legal professional fees, a $1.5 million increase legal fees, a $0.8 million increase in acquisition related costs, a $0.4 million increase in payroll and related expenses and a $0.6 million increase in other corporate overhead expenses.

Loss on Sale of Businesses and Other Impairments

For the six months ended June 30, 2022, we recorded a loss of $43,000 in connection with the Rhode Island Sale in April 2022. For the six months ended June 30, 2021, we recorded a loss of $2.2 million which consisted of a loss of $1.7 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.

Interest Expense

Interest expense was $18.6 million for the six months ended June 30, 2022, a decrease of $1.9 million and 9% from $20.5 million for the six months ended June 30, 2021. The change was due to a decrease of $1.0 million due to lower amortization of deferred financing fees and a decrease of $0.9 million related to a lower interest rate on the 2029 Notes compared to the 2024 Notes.

Loss on Debt Extinguishment

For the six months ended June 30, 2022, there was no loss on debt extinguishment. For the six months ended June 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.

Income Tax Expense/Benefit

Income tax expense was $0.4 million for the six months ended June 30, 2022, compared to an income tax benefit of $11.4 million for the six months ended June 30, 2021. The income tax expense for the six months ended June 30, 2022 was primarily due to our inability to offset deferred tax benefits related to net operating losses against long life deferred tax liabilities for federal and state purposes. The income tax benefit for the six months ended June 30, 2021 was primarily due to the loss from continuing operations.

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. In addition, we anticipate entering into a $60 million senior secured revolving credit facility in August 2022 to provide additional liquidity. Our primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust funds, debt service and acquisitions. 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, we believe that we will be able to continue as a going concern for the next twelve-month period.

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Cash Flows

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

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

Net cash provided by (used in) operating activities

 

$

6,551

 

 

$

(1,567

)

Net cash (used in) provided by investing activities

 

 

(24,266

)

 

 

3,217

 

Net cash provided by financing activities

 

 

677

 

 

 

45,233

 

Significant Sources and Uses of Cash During the Six Months Ended June 30, 2022 and 2021

Operating Activities

Net cash provided by operating activities was $6.6 million for the six months ended June 30, 2022 as compared to net cash used in operating activities of $1.6 million during the six months ended June 30, 2021. The $8.1 million change in operating cash flows was primarily due to the change in working capital items which resulted in a net increase in operating cash flows of $42.1 million, offset in part by a decrease of $34.0 million resulting from an increase in net loss excluding non-cash items.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2022 was $24.3 million as compared to net cash provided by investing activities of $3.2 million for the six months ended June 30, 2021. The net cash used in investing activities for the six months ended June 30, 2022 was attributable to the cash paid for acquisitions of $18.3 million and capital expenditures for purchases and maintenance of property, plant and equipment of $6.1 million. Net cash provided by investing activities during the six months ended June 30, 2021 was attributable to proceeds from divestitures of $6.6 million, partially offset by capital expenditures for purchases and maintenance of property, plant and equipment of $3.4 million.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022 was $677,000 as compared to $45.2 million for the six months ended June 30, 2021. Net cash provided by financing activities for the six months ended June 30, 2022 was primarily due to proceeds from borrowings for financed insurance policies, which was offset by debt and finance lease payments. Net cash provided by financing activities for the six months ended June 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.

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Maintenance capital expenditures

 

$

1,984

 

 

$

755

 

 

$

3,392

 

 

$

1,042

 

Expansion capital expenditures

 

 

1,558

 

 

 

832

 

 

 

2,752

 

 

 

2,319

 

Total capital expenditures

 

$

3,542

 

 

$

1,587

 

 

$

6,144

 

 

$

3,361

 

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.

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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 six months ended June 30, 2022 and 2021, we had $102.5 million and $99.5 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.

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, except as described in Part 1, Item 1. Financial Statements, Note 1, “Business Combinations,” “Goodwill” and “Recently Adopted Accounting Standards.”

 

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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 June 30, 2022, the accumulated fair value of the interest-bearing investments in our merchandise trusts and perpetual care trusts was $33.6 million and $13.4 million, respectively, or 5.6% and 3.8% 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 June 30, 2022, the accumulated fair value of the marketable equity securities in our merchandise trusts and perpetual care trusts was $16.5 million and $9.3 million, respectively, or 2.7% and 2.7% 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 fourteen years with four 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 June 30, 2022, the fair value of other investment funds in our merchandise trusts and perpetual care trusts represented 88.4% and 91.8%, respectively, of the fair value of total trust assets. The fair market value of the holdings in these funds was $534.7 million and $320.4 million in our merchandise trusts and perpetual care trusts, respectively, as of June 30, 2022, 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 June 30, 2022. 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, 2021. We conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 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, 2021 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 COSO framework. More specifically, management did not implement effective oversight to support deployment of control activities due to lack of clear and consistent accountability for the performance of internal control over financial reporting responsibilities in certain areas important to financial reporting and implementation of related corrective actions in a timely manner.

B. Establishment and review of certain accounting policies and corresponding recognition of income statement impacts:

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 consistent 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 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. Additionally, the Company concluded that it did not design effective controls that would lead to a timely identification of a material error in deferred revenues.

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C. Evaluation of historical deferred revenue adjustment:

The Company’s internal controls designed to prevent a material misstatement in the recorded amount of deferred revenues as of the balance sheet date were not designed appropriately. Management did not have effective review and monitoring controls over historical contract servicing and revenue recognition at a sufficient level of precision to detect potential misstatements of the related balance sheet accounts.

D. Identification and disclosure of Related Party transactions:

The Company’s internal controls over the identification and disclosure of related party transactions were not designed appropriately and thus failed to operate effectively. More specifically, as noted in Note 17 Related Parties to our consolidated financial statements as of and for the year ended December 31, 2021, the Company identified various related party transactions in connection with its year-end financial closing procedures, which had not been timely identified by Cornerstone, the Company’s investment advisory subsidiary, or disclosed in our prior quarterly periods because Cornerstone did not have effective procedures in place to ensure that the information needed to analyze whether investment transactions it was recommending for our trusts constituted related party transactions was obtained and reviewed in a timely fashion.

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 material weaknesses A through C referenced above accurately reflect the material weaknesses in our internal control over financial reporting as of June 30, 2022. Management, with oversight from our Audit Committee, has identified and planned actions that we believe will remediate the material weaknesses A through C described above once fully implemented and operating for a sufficient period of time, and we will continue to devote significant time and attention, including internal and external resources, to these remedial efforts. For material weakness D, Management, in conjunction with the Trust and Compliance Committee, has implemented the following, as the primary remediation of this material weakness (subject to control operating effectiveness testing over a sufficient period of time):

Terminated the Subadvisor Agreement with Axar,
Developed a specific certification for Axar regarding affiliation or ownership in connection with any Cornerstone investment recommendations,
Appointed StoneMor’s Chief Compliance Officer and General Counsel as the second officer of Cornerstone who is required to review and approve all recommendations for investments over a certain dollar threshold, and
Provided training for Cornerstone employees.

For a more comprehensive discussion of Management’s remediation action plans refer to Item 9A., Disclosure Controls and Procedures, of our 2021 Annual Report on Form 10-K.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended June 30, 2022, 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 2021 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 June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II- OTHER INFORMATION

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 in Part I, Item 1A. Risk Factors of our Annual Report. 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 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.

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

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

(a)
Total Number of Shares Purchased
(1)

 

 

(b)
Average Price Paid per Share
(2)

 

 

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

April 26, 2022

 

 

205,311

 

 

$

2.55

 

 

 

 

 

$

 

May 26, 2022

 

 

209,588

 

 

$

3.42

 

 

 

 

 

$

 

June 2, 2022

 

 

58,548

 

 

$

3.43

 

 

 

 

 

$

 

Total

 

 

473,446

 

 

$

3.04

 

 

 

 

 

$

 

(1)
Represents shares withheld upon the exercise of options to purchase shares of the Company’s common stock under the Plan to satisfy exercise price and tax obligations in connection with such exercise and which thus may be deemed to have been repurchased by the Company.
(2)
The value of the shares withheld was the closing price of the Company’s common stock on the last trading day before the date on which such shares were withheld.

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 filed with this Quarterly Report on Form 10-Q (numbered in accordance with Item 601 of Regulation S-K).

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Description

 

Form

Exhibit

Filing Date

 

 

 

 

 

 

 

2.1

 

Agreement and Plan of Merger, dated as of May 24, 2022, by and among StoneMor Inc., Axar Cemetery Parent Corp., and Axar Cemetery Merger Corp.

 

8-K

2.1

May 25, 2022

 

 

 

 

 

 

 

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)

 

 

 

 

 

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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: August 12, 2022

 

 

 

By:

 

/s/ Joseph M. Redling

 

 

 

 

 

 

Joseph M. Redling

 

 

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: August 12, 2022

 

 

 

By:

 

/s/ Jeffrey DiGiovanni

 

 

 

 

 

 

Jeffrey DiGiovanni

 

 

 

 

 

 

Senior Vice President and Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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