10-Q 1 brhc10036875_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q




QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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: 001-39213
 
OneWater Marine Inc.
 (Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
 
83-4330138
(IRS Employer Identification No.)
     
6275 Lanier Islands Parkway
Buford, Georgia
(Address of principal executive offices)
 
30518
(Zip code)

(Registrant’s telephone number, including area code): (678) 541-6300
 


Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Class A common stock, par value $0.01 per share
 
ONEW
 
The Nasdaq Global Market
 
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 Exchange Act). Yes ☒ No
 
The registrant had 14,133,130 shares of Class A common stock, par value $0.01 per share, and 1,429,940 shares of Class B common stock, par value $0.01 per share, outstanding as of April 28, 2022.




ONEWATER MARINE INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022

TABLE OF CONTENTS
Page
     
3
5
Item 1.
5
  5
  6
  7
  9
  10
Item 2.
23
Item 3.
38
Item 4.
38
39
Item 1.
39
Item 1A.
39
Item 2.
40
Item 3.
40
Item 4.
40
Item 5.
40
Item 6.
41

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 The information in this Quarterly Report on Form 10-Q includes “forward-looking statements.” All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the year ended September 30, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 17, 2021, and under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Forward-looking statements may include statements about:

the impact of the novel coronavirus (“COVID-19”) on our business and results of operations;

general economic conditions, including changes in employment levels, consumer demand, preferences and confidence levels, fuel prices, inflation, levels of discretionary income, consumer spending patterns and uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
 
economic conditions in certain geographic regions in which we primarily generate our revenue;

credit markets and the availability and cost of borrowed funds;

our business strategy, including acquisitions and same-store growth;

our ability to integrate acquired dealer groups;

our ability to maintain our relationships with manufacturers, including meeting the requirements of our dealer agreements and receiving the benefits of certain manufacturer incentives;

our ability to finance working capital and capital expenditures;

general domestic and international political and regulatory conditions, including changes in tax or fiscal policy and the effects of current restrictions on various commercial and economic activities in response to the COVID-19 pandemic;

global public health concerns, including the COVID-19 pandemic;

demand for our products and our ability to maintain acceptable pricing for our products and services, including financing, insurance and extended service contracts;

our operating cash flows, the availability of capital and our liquidity;

our future revenue, same-store sales, income, financial condition, and operating performance;

our ability to sustain and improve our utilization, revenue and margins;

competition;

seasonality and inclement weather such as hurricanes, severe storms, fire and floods, generally and in certain geographic regions in which we primarily generate our revenue;

effects of industry-wide supply chain challenges and our ability to manage our inventory;

our ability to retain key personnel and the effects of labor shortages;

environmental conditions and real or perceived human health or safety risks;

any potential tax savings we may realize as a result of our organizational structure;

uncertainty regarding our future operating results and profitability;

other risks associated with the COVID-19 pandemic including, among others, the ability to safely operate our stores, access to inventory and customer demand; and

plans, objectives, expectations and intentions contained in this Form 10-Q that are not historical.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. Should one or more of the risks or uncertainties occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. These risks include, but are not limited to, decline in demand for our products and services, the effects of the COVID-19 pandemic on the Company’s business, the seasonality and volatility of the boat industry, our acquisition strategies, the inability to comply with the financial and other covenants and metrics in our credit facilities, cash flow and access to capital, the timing of development expenditures and the other risks described under “Risk Factors” and discussed elsewhere in our Annual Report on Form 10-K for the year ended September 30, 2021 and discussed elsewhere in this Quarterly Report on Form 10-Q.
 
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.

PART I – FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)

ONEWATER MARINE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except par value and share data)

   
March 31,
2022
   
September 30,
2021
 
Assets
     
Current assets:
           
Cash
 
$
83,030
   
$
62,606
 
Restricted cash
   
5,927
     
11,343
 
Accounts receivable, net
   
82,725
     
28,529
 
Inventories
   
293,170
     
143,880
 
Prepaid expenses and other current assets
   
50,926
     
34,580
 
Total current assets
   
515,778
     
280,938
 
                 
Property and equipment, net
   
77,658
     
67,114
 
Operating lease right-of-use assets
    119,675       89,141  
                 
Other assets:
               
Deposits
   
572
     
526
 
Deferred tax assets
   
31,152
     
29,110
 
Identifiable intangible assets, net
   
231,124
     
85,294
 
Goodwill
   
313,460
     
168,491
 
Total other assets
   
576,308
     
283,421
 
Total assets
 
$
1,289,419
   
$
720,614
 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
 
$
43,858
   
$
18,114
 
Other payables and accrued expenses
   
46,909
     
27,665
 
Customer deposits
   
63,514
     
46,610
 
Notes payable – floor plan
   
254,853
     
114,234
 
Current portion of operating lease liabilities
    11,660       9,159  
Current portion of long-term debt
   
17,294
     
11,366
 
Current portion of tax receivable agreement liability
   
915
     
482
 
Total current liabilities
   
439,003
     
227,630
 
                 
Long-term Liabilities:
               
Other long-term liabilities
   
26,060
     
14,991
 
Tax receivable agreement liability
   
45,290
     
39,622
 
Noncurrent operating lease liabilities     108,683       80,464  
Long-term debt, net of current portion and unamortized debt issuance costs
   
321,448
     
103,074
 
Total liabilities
    940,484       465,781  
                 
Stockholders’ Equity:
               
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and outstanding as of March 31, 2022 and September 30, 2021
   
-
     
-
 
Class A common stock, $0.01 par value, 40,000,000 shares authorized, 13,879,290 shares issued and outstanding as of March 31, 2022 and 13,276,538 issued and outstanding as of September 30, 2021
   
139
     
133
 
Class B common stock, $0.01 par value, 10,000,000 shares authorized, 1,429,940 shares issued and outstanding as of March 31, 2022 and 1,819,112 issued and outstanding as of September 30, 2021
   
14
     
18
 
Additional paid-in capital
   
168,095
     
150,825
 
Retained earnings
   
130,560
     
74,952
 
Total stockholders’ equity attributable to OneWater Marine Inc.
   
298,808
     
225,928
 
Equity attributable to non-controlling interests
   
50,127
     
28,905
 
Total stockholders’ equity
   
348,935
     
254,833
 
Total liabilities and stockholders’ equity
 
$
1,289,419
   
$
720,614
 

ONEWATER MARINE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except per share data)
(Unaudited)

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2022
   
2021
   
2022
   
2021
 
Revenues
                 
New boat
 
$
290,020
   
$
239,654
   
$
526,218
   
$
391,482
 
Pre-owned boat
   
75,854
     
56,082
     
129,303
     
94,662
 
Finance & insurance income
   
14,948
     
11,789
     
24,255
     
17,752
 
Service, parts & other
   
61,305
     
22,086
     
98,623
     
39,798
 
Total revenues
   
442,127
     
329,611
     
778,399
     
543,694
 
                                 
Cost of sales (exclusive of depreciation and amortization shown separately below)
                               
New boat
   
208,606
     
187,147
     
384,502
     
309,679
 
Pre-owned boat
   
55,959
     
42,548
     
95,329
     
73,000
 
Service, parts & other
   
35,020
     
11,130
     
55,061
     
19,793
 
Total cost of sales
   
299,585
     
240,825
     
534,892
     
402,472
 
                                 
Selling, general and administrative expenses
   
75,492
     
48,348
     
134,588
     
83,208
 
Depreciation and amortization
   
4,727
     
1,378
     
6,476
     
2,341
 
Transaction costs
   
776
     
368
     
3,821
     
568
 
Change in fair value of contingent consideration
   
2,158
     
-
     
7,904
     
377
 
Income from operations
   
59,389
     
38,692
     
90,718
     
54,728
 
                                 
Other expense (income)
                               
Interest expense – floor plan
   
1,048
     
330
     
1,925
     
1,250
 
Interest expense – other
   
3,097
     
1,215
     
4,626
     
2,139
 
Other expense (income), net
   
109
     
5
     
657
     
(89
)
Total other expense, net
   
4,254
     
1,550
     
7,208
     
3,300
 
Income before income tax expense
   
55,135
     
37,142
     
83,510
     
51,428
 
Income tax expense
   
12,781
     
6,550
     
17,670
     
9,061
 
Net income
   
42,354
     
30,592
     
65,840
     
42,367
 
Less: Net income attributable to non-controlling interests
    1,011      
-
      1,011      
-
 
Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC
   
5,046
     
10,117
     
8,513
     
14,104
 
Net income attributable to OneWater Marine Inc.
 
$
36,297
   
$
20,475
   
$
56,316
   
$
28,263
 
                                 
Earnings per share of Class A common stock – basic
 
$
2.62
   
$
1.88
   
$
4.14
   
$
2.61
 
Earnings per share of Class A common stock – diluted
 
$
2.54
   
$
1.83
   
$
4.02
   
$
2.55
 
                                 
Basic weighted-average shares of Class A common stock outstanding
   
13,864
     
10,901
     
13,619
     
10,838
 
Diluted weighted-average shares of Class A common stock outstanding
   
14,272
     
11,171
     
14,017
     
11,083
 

ONEWATER MARINE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in thousands)
(Unaudited)

   
Class A Common Stock
   
Class B Common Stock
                         
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional Paid-in Capital
   
Retained Earnings
   
Non-
controlling Interest
   
Total
Stockholders’
Equity
 
Balance at September 30, 2021
   
13,277
   
$
133
     
1,819
   
$
18
   
$
150,825
   
$
74,952
   
$
28,905
   
$
254,833
 
Net income
   
-
     
-
     
-
     
-
     
-
     
20,019
     
3,467
     
23,486
 
Distributions to members
   
-
     
-
     
-
     
-
     
-
     
(442
)
   
(177
)
   
(619
)
Non-controlling interest in subsidiary
    -       -       -       -       -       -       19,311       19,311  
Exchange of B shares for A shares
   
389
     
4
     
(389
)
   
(4
)
   
7,405
     
-
     
(7,405
)
   
-
 
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis
   
-
     
-
     
-
     
-
     
(283
)
   
-
     
-
     
(283
)
Shares issued upon vesting of equity-based awards, net of tax withholding
    53       1       -       -       (469 )     -       -       (468 )
Shares issued in connection with a business combination
    133       1       -       -       6,833       -       -       6,834  
Equity-based compensation
   
-
     
-
     
-
     
-
     
2,100
     
-
     
-
     
2,100
 
Balance at December 31, 2021
   
13,852
   
$
139
     
1,430
   
$
14
   
$
166,411
   
$
94,529
   
$
44,101
   
$
305,194
 
Net income
   
-
     
-
     
-
     
-
     
-
     
36,297
     
6,057
     
42,354
 
Distributions to members
   
-
     
-
     
-
     
-
     
-
     
(266
)
   
(605
)
   
(871
)
Exchange of B shares for A shares
   
-
     
-
     
-
     
-
     
(574
)
   
-
     
574
     
-
 
Shares issued upon vesting of equity-based awards, net of tax withholding
   
27
     
-
     
-
     
-
     
(455
)
   
-
     
-
     
(455
)
Equity-based compensation
   
-
     
-
     
-
     
-
     
2,713
     
-
     
-
     
2,713
 
Balance at March 31, 2022
   
13,879
   
$
139
     
1,430
   
$
14
   
$
168,095
   
$
130,560
   
$
50,127
   
$
348,935
 

ONEWATER MARINE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in thousands)
(Unaudited)
 
   
Class A Common Stock
   
Class B Common Stock
                         
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional Paid-in Capital
   
Retained Earnings
   
Non-
controlling Interest
   
Total
Stockholders’
Equity
 
Balance at September 30, 2020
   
10,392
   
$
104
     
4,583
   
$
46
   
$
105,947
   
$
16,757
   
$
50,433
   
$
173,287
 
Net income
   
-
     
-
     
-
     
-
     
-
     
7,788
     
3,987
     
11,775
 
Distributions to members
   
-
     
-
     
-
     
-
     
-
     
-
     
(1,319
)
   
(1,319
)
Effect of September offering, including underwriter exercise of option to purchase shares
   
387
     
4
     
(387
)
   
(4
)
   
4,146
     
-
     
(4,256
)
   
(110
)
Exchange of B shares for A shares
   
88
     
1
     
(88
)
   
(1
)
   
916
     
-
     
(916
)
   
-
 
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis
    -       -       -       -       (228 )     -       -       (228 )
Adjustment to adopt Topic 842
    -       -       -       -       -       1,073       -       1,073  
Equity-based compensation
   
-
     
-
     
-
     
-
     
1,078
     
-
     
-
     
1,078
 
Balance at December 31, 2020
   
10,867
   
$
109
     
4,108
   
$
41
   
$
111,859
   
$
25,618
   
$
47,929
   
$
185,556
 
Net income
   
-
     
-
     
-
     
-
     
-
     
20,475
     
10,117
     
30,592
 
Distributions to members
   
-
     
-
     
-
     
-
     
-
     
(61
)
   
(140
)
   
(201
)
Exchange of B shares for A shares
   
37
     
-
     
(37
)
   
-
     
558
     
-
     
(558
)
   
-
 
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis
   
-
     
-
     
-
     
-
     
(6
)
   
-
     
-
     
(6
)
Shares issued upon vesting of equity-based awards, net of tax withholding
   
64
     
1
     
-
     
-
     
(450
)
   
-
     
-
     
(449
)
Equity-based compensation
   
-
     
-
     
-
     
-
     
1,127
     
-
     
-
     
1,127
 
Balance at March 31, 2021     10,968     $ 110       4,071     $ 41     $ 113,088     $ 46,032     $ 57,348     $ 216,619  

ONEWATER MARINE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)

For the Six Months Ended March 31
 
2022
    2021
 
       
Cash flows from operating activities
     
Net income
 
$
65,840
   
$
42,367
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
   
6,541
     
2,341
 
Equity-based awards
   
4,813
     
2,205
 
Gain on asset disposals
   
(14
)
   
(136
)
Non-cash interest expense
   
626
     
393
 
Deferred income tax provision
   
3,463
     
1,787
 
Loss on change in fair value of contingent consideration
    7,904       -  
(Increase) decrease in assets:
               
Accounts receivable
   
(44,119
)
   
(22,417
)
Inventories
   
(113,879
)
   
(30,551
)
Prepaid expenses and other current assets
   
(14,189
)
   
1,083
 
Deposits
   
(50
)
   
(128
)
Increase (decrease) in liabilities:
               
Accounts payable
   
26,363
     
12,971
 
Other payables and accrued expenses
   
4,810
     
(126
)
Tax receivable agreement liability
    313       -  
Customer deposits
   
8,156
     
20,792
 
Net cash (used in) provided by operating activities
   
(43,422
)
   
30,581
 
                 
Cash flows from investing activities
               
Purchases of property and equipment and construction in progress
   
(7,993
)
   
(5,126
)
Proceeds from disposal of property and equipment
   
22
     
118
 
Cash used in acquisitions
   
(288,894
)
   
(85,499
)
Net cash used in investing activities
   
(296,865
)
   
(90,507
)
                 
Cash flows from financing activities
               
Net borrowings from floor plan
   
140,619
     
55,751
 
Proceeds from long-term debt
   
240,000
     
30,000
 
Payments on long-term debt
   
(13,842
)
   
(3,334
)
Payments of debt issuance costs
   
(4,053
)
   
(653
)
Payments of September 2020 offering costs
   
-
     
(540
)
Payments of contingent consideration
    (53 )     -  
Payments of tax withholdings for equity-based awards
   
(923
)
    (449 )
Distributions to members
   
(6,453
)
   
(1,520
)
Net cash provided by financing activities
   
355,295
     
79,255
 
Net change in cash
   
15,008
     
19,329
 
Cash and restricted cash at beginning of period
   
73,949
     
68,153
 
Cash and restricted cash at end of period
 
$
88,957
   
$
87,482
 
                 
Supplemental cash flow disclosures
               
Cash paid for interest
 
$
5,925
   
$
2,996
 
Cash paid for income taxes
   
6,310
     
7,480
 
                 
Noncash items
               
Acquisition purchase price funded by seller notes payable
 
$
1,126
   
$
2,056
 
Acquisition purchase price funded by contingent consideration
   
15,321
     
5,482
 
Acquisition purchase price funded by issuance of Class A common stock
    6,834       -  
Purchase of property and equipment funded by long-term debt
   
529
     
1,280
 
Initial operating lease right-of-use assets for adoption of Topic 842
    -       71,835  
Right-of-use assets obtained in exchange for new operating lease liabilities     36,174       17,131  

OneWater Marine Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

1.
Description of Company and Basis of Presentation
 
Description of the Business


OneWater Marine Inc. (“OneWater Inc.”) was incorporated in Delaware on April 3, 2019 and was a wholly-owned subsidiary of One Water Marine Holdings, LLC (“OneWater LLC”). Pursuant to a reorganization on February 11, 2020 into a holding company structure for the purpose of facilitating an initial public offering (the “IPO”) and related transactions in order to carry on the business of OneWater LLC and its subsidiaries (together with OneWater Marine Inc., the “Company”), OneWater Inc. is the holding company and its sole material asset is the equity interest in OneWater LLC. OneWater LLC was organized as a limited liability company under the law of the State of Delaware in 2014 and is the parent company of One Water Assets & Operations (“OWAO”), and its wholly-owned and majority-owned subsidiaries.
 

The Company is one of the largest recreational boat retailers in the United States. The Company engages primarily in the retail sale, brokerage, and service of new and pre-owned boats, motors, trailers, the sale of marine parts and accessories, and offers slip and storage accommodations in certain locations. The Company also arranges related boat financing, insurance, and extended service contracts for customers with third-party lenders and insurance companies. As of March 31, 2022, the Company operated a total of 75 retail locations, 10 distribution centers/warehouses and multiple online marketplaces in sixteen states, several of which are in the top twenty states for marine retail expenditures.
 

Operating results are generally subject to seasonal variations. Demand for products is generally highest during the third and fourth quarters of the fiscal year and, accordingly, revenues are generally expected to be higher during these periods. General economic conditions and consumer spending patterns can negatively impact the Company’s operating results. Unfavorable local, regional, national, or global economic developments, global public health concerns, including the COVID-19 pandemic, or uncertainties could reduce consumer spending and adversely affect the Company’s business. Consumer spending on discretionary goods may also decline as a result of lower consumer confidence levels, even if prevailing economic conditions are otherwise favorable. Economic conditions in areas in which the Company operates stores, particularly in the Southeast, can have a major impact on the Company’s overall results of operations. Local influences such as corporate downsizing, inclement weather such as hurricanes and other storms, environmental conditions, and other events could adversely affect the Company’s operations in certain markets and in certain periods. Any extended period of adverse economic conditions or low consumer confidence is likely to have a negative effect on the Company’s business.
 

Sales of new boats from the Company’s top ten brands represent approximately 43.8% and 39.8% of total sales for the six months ended March 31, 2022 and 2021, respectively, making them major suppliers of the Company. Of this amount, Malibu Boats, Inc., including its brands Malibu, Axis, Cobalt, Pursuit, Maverick, Hewes, Cobia and Pathfinder accounted for 15.1% and 15.7% of our consolidated revenue for the six months ended March 31, 2022 and 2021, respectively. As is typical in the industry, the Company contracts with most manufacturers under renewable annual dealer agreements, each of which provides the right to sell various makes and models of boats within a given geographic region. Any change or termination of these agreements, or the agreements discussed above, for any reason, or changes in competitive, regulatory, or marketing practices, including rebate or incentive programs, could adversely affect results of operations. Pre-owned boats are usually trade-ins from retail customers who are purchasing a boat from the Company.
 
Principles of Consolidation
 

As the sole managing member of OneWater LLC, OneWater Inc. operates and controls all of the businesses and affairs of OneWater LLC, and through OneWater LLC and its wholly-owned subsidiaries as well as majority-owned subsidiaries over which the Company exercises control, conducts its business. As a result, OneWater Inc. consolidates the financial results of OneWater LLC and its subsidiaries and reports non-controlling interests related to the portion of units of OneWater LLC (the “OneWater LLC Units”) not owned by OneWater Inc., which will reduce net income (loss) attributable to OneWater Inc.’s Class A stockholders. As of March 31, 2022, OneWater Inc. owned 90.7% of the economic interest of OneWater LLC.



Commencing December 31, 2021, the Company owns 80% of the economic interest of Quality Assets and Operations, over which the Company exercises control and the minority interest in this subsidiary has been recorded accordingly. See Note 4 for additional information regarding the acquisition.
 
Basis of Financial Statement Preparation
 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements, which do not include all the information and notes required by such accounting principles for annual financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with OneWater Inc.’s Annual Report on Form 10-K for the year ended September 30, 2021. All adjustments, consisting of only normal recurring adjustments considered necessary for fair presentation, have been reflected in these unaudited condensed consolidated financial statements.


All intercompany transactions have been eliminated in consolidation. The Company operates on a fiscal year basis with the first day of the fiscal year being October 1, and the last day of the year ending on September 30. Additionally, since there are no differences between net income and comprehensive income, all references to comprehensive income have been excluded from the accompanying unaudited condensed consolidated financial statements.
 
COVID-19 Pandemic
 

In March 2020, the Company began seeing the impact of the COVID-19 global pandemic on its business. During the subsequent months the Company followed the guidance of local governments and health officials, we temporarily closed or reduced staffing at certain departments and locations. All locations have reopened and the Company has implemented cleaning and social distancing techniques at each of its locations. In light of the current environment, the Company’s sales team members are providing customers with the option of in-person or virtual walkthroughs of inventory and/or private, at home or on water showings. The duration and related impact on the Company’s consolidated financial statements is currently uncertain, and it is possible that the pandemic, including the resurgence of COVID-19 in certain geographic areas or the emergence of variant strains of the virus, may negatively impact the Company’s future results of operations. The impact of COVID-19 on our suppliers and the recent increase in demand for marine retail products has led to industry-wide supply chain constraints. The Company is monitoring and assessing the situation and preparing for implications to the business, including the ability to safely operate its stores, access to inventory and customer demand.

2.
Summary of Significant Accounting Policies

Fair Value of Financial Instruments
 

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, other payables and accrued expenses, floor plan notes payable, term note payable and revolving note payable with Truist Bank, seller notes payable and company vehicle notes payable. The carrying values approximate their fair values because of the nature of their terms and current market rates of these instruments.
 
Inventories
 

Inventories are stated at the lower of cost or net realizable value. The cost of the new and pre-owned boat inventory is determined using the specific identification method. In assessing lower of cost or net realizable value, the Company considers the aging of the boats, historical sales of a brand and current market conditions. The cost of manufactured and assembled parts and accessories is determined using standard costing. The cost of acquired parts and accessories is determined using the weighted average cost method.
 
Goodwill and Other Identifiable Intangible Assets


Goodwill and intangible assets are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, ‘‘Intangibles - Goodwill and Other’’ (‘‘ASC 350’’), which provides that the excess of cost over the fair value of the net assets of businesses acquired, including other identifiable intangible assets, is recorded as goodwill. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with ASC 350, Goodwill is tested for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred. ASC 350 also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative goodwill impairment test is unnecessary.



Identifiable intangible assets consist of trade names, design libraries and customer relationships related to the acquisitions the Company has completed. The Company has determined that trade names have an indefinite life, as there are no economic, contractual or other factors that limit their useful lives and they are expected to generate value as long as the trade name is utilized by the dealer group, and therefore, are not subject to amortization. Design libraries and customer relationships are amortized over their estimated useful lives of ten years and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Intangible asset amortization expense was approximately $2.6 million for the three and six months ended March 31, 2022. No expense was recorded for the three and six months ended March 31, 2021.

 
Sales Tax
 

The Company collects sales tax on all of the Company’s sales to nonexempt customers and remits the entire amount to the states that imposed the sales tax on and concurrent with specific sales transactions. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and cost of sales.
 
Revenue Recognition
 

Revenue is recognized from the sale of products and commissions earned on new and pre-owned boats (including used, brokerage, consignment and wholesale) when ownership is transferred to the customer, which is generally upon acceptance or delivery. At the time of acceptance or delivery, the customer is able to direct the use of, and obtain substantially all of the benefits at such time. We are the principal with respect to revenue from new, pre-owned and consignment sales and such revenue is recorded at the gross sales price. With respect to brokerage transactions, we are acting as an agent in the transaction, therefore the fee or commission is recorded on a net basis.


Revenue from parts and accessories sold directly to a customer (not on a repair order) are recognized when control of the items is transferred to the customer, which is typically upon shipment. Revenue from parts and service operations (boat maintenance and repairs) are recorded over time as services are performed. Satisfaction of this performance obligation creates an asset with no alternative use for which an enforceable right to payment for performance to date exists within our contractual agreements. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a period of one year or less from contract inception. The Company recorded contract assets in prepaid expenses and other current assets of $4.1 and $2.3 million as of March 31, 2022 and September 30, 2021, respectively.

 

Certain parts and service transactions require the Company to perform shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery). They are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized and are included in selling, general and administrative expenses.



Revenue from storage and marina operations is recognized on a straight-line basis over the term of the contract as services are completed. Revenue from arranging financing, insurance and extended warranty contracts to customers through various third-party financial institutions and insurance companies is recognized when the related boats are sold. We do not directly finance our customers’ boat, motor or trailer purchases. We are acting as an agent in the transaction, therefore the commission is recorded on a net basis. Subject to our agreements and in the event of early cancellation, prepayment or default of such loans or insurance contracts by the customer, we may be assessed a chargeback for a portion of the commission paid by the third-party financial institutions and insurance companies. We reserve for these chargebacks based on our historical experience with repayments or defaults. Chargebacks were not material to the unaudited condensed consolidated financial statements for the three and six months ended March 31, 2022 and 2021.



Contract liabilities consist of deferred revenues from marina and storage operations and customer deposits and are classified in customer deposits in the Company’s unaudited condensed consolidated balance sheets. Deposits received from customers are recorded as a liability until the related sales orders have been fulfilled by us and control of the vessel or part/accessory is transferred to the customer. The activity in customer deposits for the three and six months ended March 31, 2022 is as follows:

 
($ in thousands)
 
Three Months Ended
March 31, 2022
    Six Months Ended
March 31, 2022
 
Beginning contract liability
 
$
56,986
   
$
46,610
 
Revenue recognized from contract liabilities included in the beginning balance
   
(30,334
)
   
(37,251
)
Increases due to cash received, net of amounts recognized in revenue during the period
   
36,862
     
54,155
 
Ending contract liability
 
$
63,514
   
$
63,514
 
 

The following tables set forth percentages on the timing of revenue recognition for the three and six months ended March 31, 2022 and 2021.


   
Three Months Ended
March 31, 2022
   
Three Months Ended
March 31, 2021
 
Goods and services transferred at a point in time
   
95.2
%
   
94.5
%
Goods and services transferred over time
   
4.8
%
   
5.5
%
Total Revenue
   
100.0
%
   
100.0
%

    Six Months Ended
March 31, 2022
    Six Months Ended
March 31, 2021
 
Goods and services transferred at a point in time
   
94.3
%
   
94.2
%
Goods and services transferred over time
   
5.7
%
   
5.8
%
Total Revenue
   
100.0
%
   
100.0
%

Income Taxes
 

OneWater Inc. is a corporation and as a result, is subject to U.S. federal, state and local income taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the consolidated financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the book value and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs. We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

OneWater LLC is treated as a partnership for U.S. federal income tax purposes and therefore does not pay U.S. federal income tax on its taxable income. Instead, the OneWater LLC members are liable for U.S. federal income tax on their respective shares of the Company’s taxable income reported on the members’ U.S. federal income tax returns.


When there are situations with uncertainty as to the timing of the deduction, the amount of the deduction, or the validity of the deduction, the Company adjusts the financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Positions that meet this criterion are measured using the largest benefit that is more than 50% likely to be realized. Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in the consolidated statements of operations.

Vendor Consideration Received
 

Consideration received from vendors is accounted for in accordance with FASB Accounting Standards Codification 330, ‘‘Inventory’’ (‘‘ASC 330’’). Pursuant to ASC 330, manufacturer incentives based upon cumulative volume of sales and purchases are recorded as a reduction of inventory cost and related cost of sales when the amounts are probable and reasonably estimable.
 
Use of Estimates
 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed periodically, and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying unaudited condensed consolidated financial statements include, but are not limited to, those relating to inventory mark downs, certain assumptions related to intangible and long-lived assets, share based compensation, valuation of acquisition contingent consideration and accruals for expenses relating to business operations.

 
Segment Information
 

As of March 31, 2022 and September 30, 2021, the Company had one operating segment, marine retail. The marine retail segment consists of the sale of new and pre-owned boats, arrangement of finance and insurance products, performance of repair and maintenance services and offering marine related parts and accessories. The marine retail business has discrete financial information and is regularly reviewed by the Company’s chief operating decision maker (“CODM”) to assess performance and allocate resources. The Company has identified its Chief Executive Officer as its CODM. The Company has determined its marine retail operating segment is its reporting unit and is also the reportable segment.

3.
New Accounting Pronouncements
 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes”. The pronouncement is effective for a public company’s annual reporting periods beginning after December 15, 2020, and interim periods within those annual periods. The Company adopted the new guidance in fiscal first quarter 2022. The adoption of the guidance did not have a material impact on the Company’s financial statement.



In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform”, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. The guidance is effective upon issuance and expires on December 31, 2022. The Company is currently assessing the impact of the LIBOR transition and this ASU on the Company’s financial statements.


In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The pronouncement is effective for a public company’s annual reporting periods beginning after December 15, 2022, and interim periods within those annual periods. The Company is currently evaluating the impact that this standard will have on the consolidated financial statements. The Company plans to adopt the pronouncement in fiscal year 2024.

4.
Acquisitions
 

The results of operations of acquisitions are included in the accompanying unaudited condensed consolidated financial statements from the acquisition date. The purchase price of acquisitions is allocated to identifiable tangible assets and intangible assets acquired based on their estimated fair values at the acquisition date, with the excess being allocated to goodwill. Under the acquisition method of accounting, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on information currently available. For acquisitions of Quality Boats and YakGear, the valuation of tangible assets, assumed liabilities and identifiable intangible assets are preliminary as the acquisitions are subject to certain customary closing and post-closing adjustments and certain valuations are not complete. Any changes to the value of identifiable intangible assets will be reclassified from goodwill upon the completion of the valuations.

For the six months ended March 31, 2022, the Company completed the following transactions:

On October 1, 2021, Naples Boat Mart with one location in Florida

On November 30, 2021, T-H Marine, a leading provider of branded marine parts and accessories, with locations in Alabama, Florida, Illinois, Indiana, Oklahoma and Texas

On December 1, 2021, Norfolk Marine Company with one location in Virginia

On December 31, 2021, a majority interest in Quality Boats with three locations in Florida. The sellers retained a 20% economic interest in Quality Boats. The Company has the exclusive right, but not obligation, to acquire the remaining 20% interest at any time before January 1, 2027.

On February 1, 2022, JIF Marine, a leading supplier of stainless steel ladders, dock products and other accessories which is based in Tennessee

On March 1, 2022, YakGear, a leading supplier of kayak equipment, paddle sports accessories and boat mounting accessories which is based in Texas



Consideration paid for the acquisitions was $312.2 million with $288.9 million paid at closing (net of cash acquired), $1.1 million financed through a note payable to the sellers bearing interest at a rate of 4.0% per year, estimated payments of $15.3 million in contingent consideration and the remaining $6.8 million with the issuance of shares of Class A common stock. The notes are payable in one lump sum on December 1, 2024, with interest payments due quarterly. The estimated payments of contingent consideration are part of multiple earnouts varying from the achievement of certain post-acquisition increases in adjusted EBITDA to the generation of acquisition leads for the Company. The acquisition contingent consideration was developed using weighted average projections based on the Company’s historical experience, current forecasts for the industry and current expectations of the ability to generate viable acquisition leads. The minimum payout on acquisition contingent consideration is $5.9 million and the maximum payout is $24.7 million.
 

The table below summarizes the fair values (Quality Boats and YakGear are preliminary) of the assets acquired and liabilities assumed at the acquisition date, including the goodwill recorded as a result of the transactions:

Summary of Assets Acquired and Liabilities Assumed                        
($ in thousands)   T-H Marine
    Quality Boats
   
Other
Acquisitions
   
Total
Acquisitions
 
Accounts receivable
  $
8,955
    $
-
    $
1,122
    $
10,077
 
Inventories
   
19,856
     
5,937
     
9,618
     
35,411
 
Prepaid expenses
   
1,547
     
54
     
370
     
1,971
 
Property and equipment
   
3,896
     
803
     
1,227
     
5,926
 
Operating lease right-of-use assets
   
5,960
     
428
     
218
     
6,606
 
Identifiable intangible assets
   
105,500
     
31,700
     
11,276
     
148,476
 
Goodwill
   
51,694
     
78,682
     
14,594
     
144,970
 
Accounts payable
   
(3,876
)
   
-
     
(471
)
   
(4,347
)
Accrued expenses
   
(1,697
)
   
-
     
(553
)
   
(2,250
)
Customer deposits
   
(394
)
   
(5,047
)
   
(3,307
)
   
(8,748
)
Operating lease liabilities
   
(5,960
)
   
(428
)
   
(218
)
   
(6,606
)
Aggregate acquisition date fair value
  $
185,481
    $
112,129
    $
33,876
    $
331,486
 
                                 
Consideration transferred
  $
185,481
    $
92,818
    $
33,876
    $
312,175
 
Fair value of non-controlling interests
   
-
     
19,311
     
-
     
19,311
 
Aggregate acquisition date fair value
  $
185,481
    $
112,129
    $
33,876
    $
331,486
 



Included in our results for the three and six months ended March 31, 2022, the acquisitions contributed $72.4 million and $86.6 million to our consolidated revenue and $12.2 million and $13.3 to our income before income tax expense, respectively. Costs related to acquisitions are included in transaction costs and primarily relate to legal, accounting, valuation and other fees, which are charged directly to operations in the accompanying consolidated statements of operations as incurred in the amount of $0.7 million and $3.7 million for the three and six months ended March 31, 2022, respectively. Comparatively, we recorded $0.4 million and $0.6 million in acquisition related transaction costs for the three and six months ended March 31, 2021, respectively.
 

The following unaudited pro forma summary presents consolidated information as if all acquisitions in the three and six month periods ended March 31, 2022 and 2021 had occurred on October 1, 2020:


   
Three Months Ended
March 31, 2022
   
Three Months Ended
March 31, 2021
 
   
($ in thousands)
 
   
(Unaudited)
 
Pro forma revenue
 
$
443,901
   
$
413,583
 
Pro forma net income
 
$
42,583
   
$
40,468
 


   
Six Months Ended
March 31, 2022
   
Six Months Ended
March 31, 2021
 
   
($ in thousands)
 
   
(Unaudited)
 
Pro forma revenue
 
$
821,412
   
$
734,457
 
Pro forma net income
 
$
66,257
   
$
58,019
 


The amounts have been calculated by applying our accounting policies and estimates. Certain acquired entities completed acquisitions during the periods presented, prior to our acquisition of the business. Their acquisitions are included in the results of their operations from the acquisition date forward but were not included on a pro forma basis. Pro forma net income has been tax affected based on the Company’s effective tax rate in the historical periods presented.



We expect substantially all of the goodwill related to completed acquisitions to be deductible for federal income tax purposes.
 
5.
Inventories
 

Inventories consisted of the following at:


($ in thousands)
 
March 31,
2022
   
September 31,
2021
 
New vessels
 
$
213,420
   
$
105,625
 
Pre-owned vessels
   
32,532
     
22,906
 
Work in process, parts and accessories
   
47,218
     
15,349
 
   
$
293,170
   
$
143,880
 

6.
Goodwill and Other Identifiable Intangible Assets
 

Our acquisitions have resulted in the recording of goodwill and other identifiable intangible assets. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Identifiable intangible assets consist of trade names, design libraries and customer relationships related to the acquisitions the Company has completed. The changes in goodwill and identifiable intangible assets are as follows:


($ in thousands)
 
Goodwill
   
Trade Names
   
Design
Libraries
   
Customer Relationships
   
Total Identifiable Intangible Assets, net