Company Quick10K Filing
Select Interior Concepts
Price13.36 EPS0
Shares25 P/E178
MCap340 P/FCF17
Net Debt147 EBIT21
TEV487 TEV/EBIT23
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-21
10-K 2019-12-31 Filed 2020-03-12
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-13
S-1 2018-07-09 Public Filing
10-Q 2018-06-30 Filed 2018-09-06
8-K 2020-06-16
8-K 2020-06-09
8-K 2020-05-21
8-K 2020-05-05
8-K 2020-04-08
8-K 2020-03-16
8-K 2020-03-13
8-K 2020-03-12
8-K 2019-12-12
8-K 2019-11-21
8-K 2019-11-05
8-K 2019-08-19
8-K 2019-08-08
8-K 2019-07-12
8-K 2019-05-15
8-K 2019-05-13
8-K 2019-05-10
8-K 2019-03-20
8-K 2019-03-15
8-K 2019-03-01
8-K 2019-02-06
8-K 2018-12-31
8-K 2018-11-13
8-K 2018-11-13
8-K 2018-09-06
8-K 2018-08-31
8-K 2018-08-13

SIC 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements.
Note 1. Organization and Business Description
Note 2. Summary of Significant Accounting Policies
Note 3. Concentrations, Risks and Uncertainties
Note 4. Acquisitions
Note 5. Inventories
Note 6. Property and Equipment
Note 7. Goodwill and Intangible Assets
Note 8. Lines of Credit
Note 9. Long - Term Debt
Note 10. Commitments and Contingencies
Note 11. Stock Compensation
Note 12. Provision for Income Taxes
Note 13. Related Party Transactions
Note 14. Segment Information
Note 15. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.2 ck0001723866-ex102_65.htm
EX-10.3 ck0001723866-ex103_64.htm
EX-31.1 ck0001723866-ex311_10.htm
EX-31.2 ck0001723866-ex312_9.htm
EX-32.1 ck0001723866-ex321_7.htm
EX-32.2 ck0001723866-ex322_8.htm

Select Interior Concepts Earnings 2019-03-31

Balance SheetIncome StatementCash Flow
4353482611748702016201720182020
Assets, Equity
160127956230-12016201720182020
Rev, G Profit, Net Income
20112-7-16-252016201720182020
Ops, Inv, Fin

10-Q 1 ck0001723866-10q_20190331.htm 10-Q ck0001723866-10q_20190331.htm

 

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 March 31, 2019

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: 001-38632

 

SELECT INTERIOR CONCEPTS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

47-4640296

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

400 Galleria Parkway, Suite 1760

Atlanta, Georgia

30339

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (714) 701-4200

 

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, 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  

Securities registered pursuant to Section 12(b) of the 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

 

SIC

 

The Nasdaq Stock Market LLC

 

As of May 1, 2019, the registrant had 25,821,224 shares of Class A common stock, par value $0.01 per share, outstanding.

 

 

 


SELECT INTERIOR CONCEPTS, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2019

 

 

Table of Contents

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Operations (Unaudited)

2

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

3

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

Signatures

33

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Select Interior Concepts, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

(in thousands, except share data)

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,110

 

 

$

6,362

 

Restricted cash

 

 

 

 

 

3,000

 

Accounts receivable, net of allowance for doubtful accounts of $521

   and $500, respectively

 

 

63,413

 

 

 

63,601

 

Inventories

 

 

109,941

 

 

 

108,270

 

Prepaid expenses and other current assets

 

 

3,696

 

 

 

2,809

 

Income taxes receivable

 

 

834

 

 

 

1,263

 

Total current assets

 

 

184,994

 

 

 

185,305

 

Property and equipment, net of accumulated depreciation of $15,128

   and $13,038, respectively

 

 

21,783

 

 

 

19,798

 

Deferred tax assets, net

 

 

9,355

 

 

 

9,355

 

Goodwill

 

 

98,976

 

 

 

94,593

 

Customer relationships, net of accumulated amortization of $39,309 and

   $35,877, respectively

 

 

80,431

 

 

 

79,843

 

Other intangible assets, net

 

 

21,343

 

 

 

20,872

 

Other assets

 

 

6,175

 

 

 

6,248

 

Total assets

 

$

423,057

 

 

$

416,014

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt, net of financing fees of $511

 

$

1,331

 

 

$

1,368

 

Current portion of capital lease obligations

 

 

620

 

 

 

500

 

Accounts payable

 

 

40,430

 

 

 

37,265

 

Income taxes payable

 

 

984

 

 

 

984

 

Accrued expenses and other current liabilities

 

 

25,925

 

 

 

27,620

 

Customer deposits

 

 

9,379

 

 

 

9,908

 

Total current liabilities

 

 

78,669

 

 

 

77,645

 

Line of credit

 

 

29,611

 

 

 

36,706

 

Long-term debt, net of current portion and financing fees of $1,464 and $1,618,

   respectively

 

 

154,475

 

 

 

142,442

 

Long-term capital lease obligations

 

 

1,434

 

 

 

1,544

 

Other long-term liabilities

 

 

9,489

 

 

 

8,983

 

Total liabilities

 

$

273,678

 

 

$

267,320

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share; 100,000,000 shares authorized;

   25,821,224 and 25,682,669 shares issued and outstanding at

   March 31, 2019 and December 31, 2018, respectively

 

 

257

 

 

 

257

 

Additional paid in capital

 

 

157,159

 

 

 

156,601

 

Accumulated deficit

 

 

(8,037

)

 

 

(8,164

)

Total stockholders' equity

 

$

149,379

 

 

$

148,694

 

Total liabilities and equity

 

$

423,057

 

 

$

416,014

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


Select Interior Concepts, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

For the Three Months Ended March 31,

 

(in thousands, except share data)

 

2019

 

 

2018

 

Revenues, net

 

$

136,920

 

 

$

104,386

 

Cost of revenues

 

 

98,187

 

 

 

76,436

 

Gross profit

 

 

38,733

 

 

 

27,950

 

Selling, general and administrative expenses

 

 

35,467

 

 

 

27,000

 

Income from operations

 

 

3,266

 

 

 

950

 

Other expense:

 

 

 

 

 

 

 

 

Interest expense

 

 

4,329

 

 

 

2,523

 

Other (income) expense, net

 

 

(1,715

)

 

 

239

 

Total other expense, net

 

 

2,614

 

 

 

2,762

 

Income (loss) before provision (benefit) for income taxes

 

 

652

 

 

 

(1,812

)

Provision (benefit) for income taxes

 

 

525

 

 

 

(503

)

Net income (loss)

 

$

127

 

 

$

(1,309

)

Earnings (loss) per share of common stock

 

 

 

 

 

 

 

 

Basic common stock

 

$

0.00

 

 

$

(0.05

)

Diluted common stock

 

$

0.00

 

 

$

(0.05

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic common stock

 

 

25,766,260

 

 

 

25,614,626

 

Diluted common stock

 

 

25,826,120

 

 

 

25,614,626

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


Select Interior Concepts, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2019

 

 

2018

 

Cash flows provided by (used in) operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

127

 

 

$

(1,309

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,249

 

 

 

4,684

 

Equity based compensation

 

 

558

 

 

 

825

 

Change in fair value of earn-out liabilities

 

 

(1,522

)

 

 

 

Deferred benefit from income taxes

 

 

 

 

 

(1,098

)

Amortized interest on deferred debt issuance costs

 

 

178

 

 

 

157

 

Increase in allowance for doubtful accounts

 

 

21

 

 

 

1

 

(Gain) loss on disposal of property and equipment

 

 

(11

)

 

 

17

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,335

 

 

 

4,225

 

Prepaid expenses and other current assets

 

 

(887

)

 

 

(150

)

Inventory

 

 

235

 

 

 

(1,356

)

Other assets

 

 

73

 

 

 

(502

)

Accounts payable

 

 

2,282

 

 

 

(10,015

)

Accrued expenses and other current liabilities

 

 

897

 

 

 

1,522

 

Income taxes payable / receivable

 

 

428

 

 

 

410

 

Customer deposit

 

 

(530

)

 

 

1,131

 

Other long-term liabilities

 

 

118

 

 

 

 

Net cash provided by (used in) operating activities

 

 

10,551

 

 

 

(1,458

)

Cash flows used in investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,880

)

 

 

(2,060

)

Proceeds from disposal of property and equipment

 

 

9

 

 

 

2

 

Acquisition of Intown Design, Inc.

 

 

(10,662

)

 

 

 

Escrow release payment related to acquisition of Greencraft Holdings, LLC

 

 

(3,000

)

 

 

 

Acquisition of NSI, LLC

 

 

 

 

 

(290

)

Acquisition of Elegant Home Design, LLC (Indemnity payment in 2019)

 

 

(1,000

)

 

 

(11,492

)

Net cash used in investing activities

 

 

(16,533

)

 

 

(13,840

)

Cash flows provided by financing activities

 

 

 

 

 

 

 

 

Proceeds from (payment on) line of credit, net

 

 

(7,119

)

 

 

13,061

 

Proceeds from term loan

 

 

11,500

 

 

 

6,250

 

Term loan and line of credit deferred issuance costs

 

 

 

 

 

(31

)

Payments on notes payable

 

 

(388

)

 

 

(294

)

Principal payments on long-term debt

 

 

(263

)

 

 

(263

)

Net cash provided by financing activities

 

 

3,730

 

 

 

18,723

 

Net (decrease) increase in cash

 

$

(2,252

)

 

$

3,425

 

Cash and restricted cash, beginning of period

 

 

9,362

 

 

 

5,547

 

Cash and restricted cash, end of period

 

$

7,110

 

 

$

8,972

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,916

 

 

$

2,183

 

Cash paid for income taxes

 

$

1

 

 

$

184

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

 

Acquisition of equipment and vehicles with long-term debt and capital leases

 

$

1,003

 

 

$

104

 

Earn-out estimate for Intown Design, Inc.

 

$

2,468

 

 

$

 

Accrued purchase price true-up liability related to Intown Design, Inc.

 

$

844

 

 

$

 

Measurement period adjustment related to acquisition of Greencraft Holdings, LLC

 

$

 

 

$

317

 

Acquisition of Elegant Home Design, LLC, indemnity holdback

 

$

 

 

$

1,000

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 

Select Interior Concepts, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Organization and Business Description

These financial statements reflect the consolidated operations of Select Interior Concepts, Inc. (“SIC” or the “Company”).

SIC is a Delaware corporation that was restructured in November 2017 to be a holding company through which to consolidate diversified building products and services companies.  Through its two primary operating subsidiaries and segments, Residential Design Services (“RDS”) and Architectural Surfaces Group (“ASG”), the Company imports and distributes natural and engineered stone slabs for kitchen and bathroom countertops, operate design centers that merchandise interior products, and provide installation services. RDS interior product offerings include flooring, cabinets, countertops and wall tile, finish carpentry, cabinets, shower enclosures and mirrors.  RDS operates throughout the United States, including in California, Nevada, Arizona, Texas, Virginia, North Carolina, and Georgia.  ASG has operations in the Northeast, Southeast, Southwest, Mountain West, and West Coast regions of the United States.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting.  Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  As such, the information included in these unaudited interim financial statements and condensed notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The condensed consolidated balance sheet as of December 31, 2018 included herein has been derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

The condensed consolidated financial statements include the accounts of SIC, its wholly owned subsidiaries, RDS and ASG, and their respective wholly-owned subsidiaries, and are presented in accordance with GAAP.  All significant intercompany accounts and transactions have been eliminated in combination.  References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative GAAP.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2019.

There have been no changes to our significant accounting policies described in our consolidated financial statements and related disclosures as of December 31, 2018 that have had a material impact on our condensed consolidated financial statements and related notes.

Reorganization

On November 22, 2017, SIC and the former equity holders of RDS and ASG completed a series of restructuring transactions (collectively, the “November 2017 Restructuring Transactions”) whereby certain former equity holders of RDS and ASG contributed a certain amount of equity interests in RDS and ASG to SIC in exchange for shares of Class B common stock, par value $0.01 per share, of SIC (“Class B Common Stock”).

Concurrent with the November 2017 Restructuring Transactions, SIC completed a private offering and private placement of 18,750,000 shares of its Class A common stock, par value $0.01 per share (“Class A Common Stock”), to new investors, at a public offering price of $12.00 per share for gross proceeds of approximately $225 million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses) (“November 2017 Private Offering and Private Placement”).

4


 

In accordance with the terms of the November 2017 Private Offering and Private Placement, in December 2017, SIC completed an additional sale of 3,000,000 shares of Class A Common Stock to new investors at an offering price of $12.00 per share for total gross proceeds of approximately $36.0 million (prior to payment of discounts and fees to the initial purchaser and placement agent and offering expenses).

 

Transition to Public Company

On August 13, 2018, the SEC declared effective the Company’s Registration Statement on Form S-1, which contained a prospectus pursuant to which certain selling stockholders of the Company may offer and sell shares of Class A Common Stock.  On August 16, 2018, the Company’s Class A Common Stock commenced trading on the Nasdaq Capital Market under the ticker symbol “SIC.”

In connection with the listing of the Company’s Class A Common Stock on the Nasdaq Capital Market, following the repurchase and cancellation by the Company of a certain number of shares of Class B Common Stock, each then remaining share of Class B Common Stock was automatically converted into one share of Class A Common Stock, resulting in no shares of Class B Common Stock left outstanding.

Repurchase Agreement

In connection with the November 2017 Private Offering and Private Placement, the Company entered into a Repurchase Agreement with certain affiliates of Trive Capital pursuant to which the Company had the right to repurchase, at a price of $0.01 per share, an aggregate of 800,000 shares of Class A Common Stock held by such affiliates of Trive Capital upon the determination of the non-occurrence of certain Company performance goals or stock trading thresholds specified in the Repurchase Agreement. The Company determined that the performance goals and stock trading thresholds were not met, and repurchased these shares from Trive Capital in April 2019 at par value.

Earnings (Loss) per Share of Common Stock

Basic earnings (loss) per share for the three months ended March 31, 2019 and March 31, 2018 are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share for common stock is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the dilutive effect of restricted stock-based awards using the treasury stock method. The following table sets forth the computation of basic and diluted earnings/(loss) per share for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

(in thousands, except share data)

 

March 31, 2019

 

 

March 31, 2018

 

Net income (loss)

 

$

127

 

 

$

(1,309

)

Weighted average shares of common stock outstanding:

 

 

 

 

 

 

 

 

Basic common stock outstanding

 

 

25,766,260

 

 

 

25,614,626

 

Diluted common stock outstanding

 

 

25,826,120

 

 

 

25,614,626

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

Basic common stock outstanding

 

$

0.00

 

 

$

(0.05

)

Diluted common stock outstanding

 

$

0.00

 

 

$

(0.05

)

 

All restricted stock awards outstanding consisting of 918,228 shares of restricted stock at March 31, 2018 were excluded from the computation of diluted earnings per share in the three months ended March 31, 2018 because the Company reported a net loss and the effect of inclusion would have been antidilutive.  

Equity

Total equity at March 31, 2019 and December 31, 2018 was $149.4 million and $148.7 million, respectively. The change in equity of $0.7 million during the period was a result of an increase in additional paid in capital of $0.6 million related to restricted stock expense and a decrease to the accumulated deficit of $0.1 million resulting from the net income for the three months ended March 31, 2019.

Total equity at March 31, 2018 and December 31, 2017 was $147.6 million and $148.1 million, respectively. The change in equity of ($0.5) million during the period was a result of an increase in additional paid in capital of $0.8 million related to restricted

5


 

stock expense and an increase to the accumulated deficit of $1.3 million resulting from the net loss for the three months ended March 31, 2018.

 

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingencies, and reported revenues and expenses as of and for periods ended on the date of the consolidated financial statements. Actual results may vary materially from the estimates that were used. The Company’s significant accounting estimates include the determination of allowances for doubtful accounts, the lives and methods for recording depreciation and amortization on property and equipment, the fair value of reporting units and indefinite life intangible assets, deferred income taxes and the purchase price allocations used in the Company’s acquisitions.

Fair Value Measurement

ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

The three levels of the fair value hierarchy are as follows:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2—Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3—Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.

The Company records contingent consideration, or earn-outs, associated with certain acquisitions.  These earn-outs are adjusted to fair value at each reporting period and any change to fair value based on a change in certain factors, such as the discount rate or estimates for the outcome of specified milestone goals, will result in an adjustment to the fair value of the liability. These adjustments will be recorded to income/expense as a measurement period adjustment.  

The earn-out associated with the acquisition of Summit Stoneworks, LLC (“Summit”) in August 2018 with a fair value of $0.5 million is classified as Level 3 as of March 31, 2019 and is valued using the internal rate of return model. The assumptions used in preparing the internal rate of return model include estimates for future revenues from Summit products and services and a discount factor of 8.8% at March 31, 2019.  The assumptions used in preparing the internal rate of return model include estimates for outcome of milestone goals are achieved, the probability of achieving each outcome and discount rates. An adjustment reducing the fair value of the earn-out by $1.4 million was recorded as other income for the three months ended March 31, 2019.

The earn-out associated with the acquisition of T.A.C. Ceramic Tile Co, LLC (“TAC”) in December 2018 with a fair value of $2.0 million is classified as Level 3 as of March 31, 2019 and is valued using the internal rate of return model. The assumptions used in preparing the internal rate of return model include estimates for future revenues from TAC products and services and a discount factor of 8.8% at March 31, 2019. The assumptions used in preparing the internal rate of return model include estimates for outcome of milestone goals are achieved, the probability of achieving each outcome and discount rates.  An adjustment reducing the fair value of the earn-out by $0.3 million was recorded as other income for the three months ended March 31, 2019.

The earn-out associated with the acquisition of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”) in March 2019 with a preliminary fair value of $2.5 million is classified as Level 3 as of March 31, 2019 and is valued using the internal rate of return model. The assumptions used in preparing the internal rate of return model include estimates for future revenues from Intown products and services and a discount factor of 8.8% at March 31, 2019. The assumptions used in preparing the internal rate of return model include estimates for outcome of milestone goals are achieved, the probability of achieving each outcome and discount rates.  

6


 

The earn-out associated with the acquisition of Greencraft Holdings, LLC (“Greencraft”) in December 2017 with a fair value of $8.0 million is included in accrued expenses as of March 31, 2019.

At March 31, 2019 and December 31, 2018, the carrying value of the Company’s cash, accounts receivable, accounts payable, and short-term obligations approximate their respective fair values because of the short maturities of these instruments. The recorded values of the line of credit, term loans, and notes payable approximate their fair values, as interest rates approximate market rates. The Company recognizes transfers between levels at the end of the reporting period as if the transfers occurred on the last day of the reporting period. There were no transfers during 2019 or 2018, other than the Greencraft earn-out out of Level 3 in 2018 due to the availability of observable and known inputs to calculate the fair value of the liability at December 31, 2018.

Intangible Assets

Intangible assets consist of customer relationships, trade names and non-compete agreements. The Company considers all its intangible assets to have definite lives, and such intangible assets are being amortized on the straight-line method over the estimated useful lives of the respective assets or on an accelerated basis based on the expected cash flows generated by the existing customers as follows:

 

 

 

Range of estimated

useful lives

 

Weighted average

useful life

Customer relationships

 

5 years – 10 years

 

10 years

Trade names

 

3 years – 11 years

 

8 years

Non-compete agreements

 

Life of agreement

 

4 years

 

Business Combinations

The Company records business combinations using the acquisition method of accounting. Under the acquisition method of accounting, identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. The excess of the purchase price over the estimated fair value is recorded as goodwill. The purchase price accounting reflected in the accompanying financial statements is provisional and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date).  The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities.  Measurement period adjustments are reflected in the period in which they occur.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets, whenever events or changes in circumstances occur that indicate the carrying value of the asset or asset group may not be recoverable, or at least annually. The assessment for possible impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future undiscounted cash flows of the related operations. If the aggregate of these cash flows is less than the carrying value of such assets, an impairment loss is recognized for the difference between the estimated fair value and the carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. There were no impairment losses on long-lived assets for the periods ended March 31, 2019 or December 31, 2018.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets, including intangible assets. During the year ended December 31, 2018, ASG recorded goodwill of $0.4 million related to the acquisition of the assets of Elegant Home Design, LLC (“Bedrock”), $0.4 million related to the acquisition of the assets of NSI, LLC (“NSI”), and $1.2 million related to the acquisition of the assets of The Tuscany Collection, LLC (“Tuscany”).

During the year ended December 31, 2018, RDS recorded goodwill of $8.3 million related to the acquisition of the assets of Summit and $17.8 million related to the purchase of 100% of the issued and outstanding equity interests of TAC. Additionally, RDS recorded a measurement period adjustment to goodwill for the acquisition of Greencraft of $0.3 million during 2018.

During the three months ended March 31, 2019, RDS recorded goodwill of $4.4 million related to the acquisition of substantially all the assets of Intown. (See Note 4).  

7


 

Goodwill is tested annually for impairment on December 31.  No impairment indicators were present during the three months ended March 31, 2019.

Revenue Recognition

The Company’s revenue derived from the sale of imported granite, marble, and related items is recognized when persuasive evidence of an agreement exists through a purchase order or signed contract detailing the quantity and price, delivery per the agreement has been made, and collectability is reasonably assured.

The Company’s contracts with its homebuilder customers are generally treated as short-term contracts for accounting purposes. These contracts will generally range in length from several days to several weeks. The Company accounts for these contracts under the completed contract method of accounting and will recognize revenue and cost of revenues when obligations under the contract are complete.

The Company’s contracts related to multi-family projects are treated as long-term contacts for accounting purposes. Accordingly, the Company recognizes revenue using the percentage-of-completion method of accounting.

The Company estimates provisions for returns, which are accrued at the time a sale is recognized. The Company also realizes rebates to customers as a reduction to revenue in the period the rebate is earned.

Equity-based Compensation

The Company accounts for equity-based awards by measuring the awards at the date of grant and recognizing the grant-date fair value as an expense using either straight-line or accelerated attribution, depending on the specific terms of the award agreements over the requisite service period, which is usually equivalent to the vesting period. See Note 11 for further discussion.

Segment Reporting

In accordance with ASC 280-10-50-1, an operating segment is a component of an entity that has all of the following characteristics:

 

a.

It engages in business activities from which it may earn revenues and incur expenses;

 

b.

Its discrete financial information is available; and

 

c.

Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.

The Company has identified two operating segments that meet all three of the above criteria, RDS and ASG. Each of these operating segments provides products and services that generate revenue and incur expenses as it engages in business activities, and each maintains discrete financial information. Additionally, the Company’s chief operating decision maker, its Chief Executive Officer, reviews financial performance, approves budgets and allocates resources at each of the RDS and ASG operating segment level.

Recent Accounting Pronouncements

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 107 of the JOBS Act. This election allows the Company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU establishes a comprehensive revenue recognition standard for virtually all industries in GAAP, including those that previously followed industry-specific guidance, such as the real estate, construction, and software industries. The core principal of this ASU is to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During 2014-2016, the FASB issued various amendments to this topic and the amendments clarified certain positions and extended the implementation date until annual periods beginning after December 15, 2018.  The Company is currently assessing the impact that ASU 2014-09 will have on its consolidated

8


 

financial statements. The Company will adopt ASU 2014-09 in the fourth quarter of 2019 and intends to use the modified retrospective transition method.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous standards. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of asset not to recognize lease assets and lease liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019, but early application is permitted. The Company is currently evaluating the impact of the provisions of ASU 2016-02 on the presentation of its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016–15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which provides specific guidance on eight cash flow classification and presentation issues arising from certain cash receipts and cash payments that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. As an emerging growth company utilizing the extended transition period for new accounting pronouncements, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments in this ASU should be applied using a retrospective approach. The Company is currently evaluating the impact that the new accounting guidance will have on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. ASU 2016-18 is intended to reduce the diversity in practice around how restricted cash is classified within the statement of cash flows. ASU 2016-18 was effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has evaluated the impact of ASU 2016-18, and adopted the new standard. The Company will not present the release of restricted cash as an investing activity cash inflow. Instead, restricted cash balances have been and will be included in the beginning and ending cash, cash equivalents and restricted cash balances in the statement of cash flows.

Also, in January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805)—Clarifying the Definition of a Business. This ASU provides additional guidance in regards to evaluating whether a transaction should be treated as an asset acquisition (or disposal) or a business combination. Particularly, the amendments to this ASU provide that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This clarification reduces the number of transactions that needs further evaluation for business combination. This ASU became effective for the Company on January 1, 2019. The Company has adopted this standard and will apply it to future acquisitions.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the goodwill impairment test by eliminating the step 2 requirement to determine the fair value of its assets and liabilities at the impairment testing date. ASU 2017-04 is effective for annual periods beginning after December 15, 2021. Early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework (ASU 2018-13). This ASU improves the disclosure requirements for fair value measurements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact of adopting the updated guidance.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing

9


 

implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption of the amendments in ASU 2018-15 is permitted, including adoption in any interim period, for all entities. The amendments in ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently assessing the effect this guidance may have on its consolidated financial statements.

Note 3. Concentrations, Risks and Uncertainties

The Company maintains cash balances primarily at one commercial bank. The accounts are insured by the Federal Deposit Insurance Corporation up to $0.25 million. The amounts held in financial institutions periodically exceed the federally insured limit. Management believes that the financial institutions are financially sound and the risk of loss is minimal.

Credit is extended for some customers and is based on financial condition, and generally, collateral is not required. Credit losses are included in the consolidated financial statements and consistently have been within management’s expectations.

For the three months ended March 31, 2019 and 2018, the Company recognized revenues from one customer which accounted for 10.0% and 11.8% of total revenues, respectively. There were no customers which accounted for 10% or more of total accounts receivable as of March 31, 2019 and December 31, 2018.

Note 4. Acquisitions

Intown Acquisition

On March 1, 2019, RDS acquired substantially all of the assets of Intown Design, Inc., Intown Granite of Charlotte, Inc., and Granitec, LLC, (collectively, “Intown”), an installer of residential and light commercial countertops and cabinets, for total cash consideration of $10.7 million at closing and an additional $0.8 million of purchase price adjustments agreed to with the seller that are yet to be funded and are recorded in accrued liabilities as of March 31, 2019.  The purchase agreement also provides for potential earn-out consideration to the former shareholders of Intown in connection with the achievement of certain 2019 and 2020 financial milestones. The final earn-out payment has no maximum limit, but if certain targets are not met, there may be no earn-out payment.  The contingent earn-out consideration had an estimated fair value of $2.5 million at the date of acquisition and is recorded in other long-term liabilities.  

The upfront cash paid for the Intown acquisition was financed with additional borrowings from the Company’s third-party financing agreement described in Note 9. The Intown acquisition was accounted for under the acquisition method of accounting, and the assets acquired and liabilities assumed, including identifiable intangible assets, were recorded based on their respective preliminary estimated fair values as of the acquisition date.  The total purchase price consisted of the following:

 

(in thousands)

 

Amount

 

Cash consideration

 

$

10,662

 

Accrued purchase price true-up liability

 

 

844

 

Fair value of earn-out

 

 

2,468

 

 

 

$

13,974

 

 

RDS acquired Intown to further diversify RDS’ geographic mix and channel strength.  The goodwill recorded reflects the strategic value of the acquisition beyond the net value of its assets acquired less liabilities assumed. The goodwill is deductible for tax purposes.

10


 

The Company incurred approximately $0.4 million in direct acquisition costs, all of which were expensed as incurred, and are included in general and administrative expenses in the consolidated statements of operations.  The Company has performed a preliminary valuation of the acquired assets and assumed liabilities of Intown. Using the total consideration for the acquisition, the Company has estimated the allocations to such assets and liabilities. The following table summarizes the estimated allocation of the preliminary purchase price as of the transaction’s closing date.

 

(in thousands)

 

Amount

 

Accounts receivable

 

$

1,392

 

Inventory

 

 

1,905

 

Property and equipment

 

 

1,092

 

Goodwill

 

 

4,383

 

Other intangible assets

 

 

5,310

 

Total assets acquired

 

$

14,082

 

Total liabilities

 

 

108

 

Total consideration

 

$

13,974

 

 

From the date of acquisition to March 31, 2019, Intown generated revenue of $1.7 million and net loss of $0.2 million, which are included in the Company’s Condensed Consolidated Statements of Operations.

 

Pro Forma Results

The following unaudited pro forma information for the three months ended March 31, 2019 and 2018 has been prepared to give effect to the acquisition of Intown as if the acquisition had occurred on January 1, 2018. The pro forma information takes into account the preliminary purchase price allocation. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the Intown acquisition occurred on such date, nor does it purport to predict the results of operations for future periods.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

(in thousands)

 

(unaudited)

 

Pro Forma:

 

 

 

 

 

 

 

 

Total revenue

 

$

139,772

 

 

$

109,063

 

Net loss

 

$

(37

)

 

$

(1,873

)

 

Our pro forma assumptions are as follows:

 

Revenues and costs of sales were based on actual results for the three months ended March 31, 2019 and 2018.

 

General and administrative expenses were based on actual results adjusted by $0.1 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively, for the impact of the amortization expense of the intangible assets acquired with the acquisition.

 

Actual interest expense was adjusted by $0.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, for the imputed interest on the acquired debt issued to fund the acquisition.

 

Income taxes were adjusted to impute the Company’s corporate rate during the period on the pro forma income before taxes.

Bedrock and NSI Acquisitions

The Company made two acquisitions in the first quarter of 2018.  On January 31, 2018, ASG acquired the assets of a slab and tile distributor, Elegant Home Design, LLC (“Bedrock”), for total consideration of $12.5 million.   On March 19, 2018, ASG acquired the assets of NSI, LLC, a Maryland limited liability company (“NSI”), for approximately $0.3 million in cash.  Pro forma revenue and net income for the three months ending March 31, 2018 were not significant for NSI.    

11


 

Pro Forma information for the three months ended March 31, 2018 for Bedrock as follows has been prepared to give effect to the acquisition of Bedrock as if the acquisition had occurred on January 1, 2018. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had this acquisition occurred on such date, nor does it purport to predict the results of operations for future periods.

 

 

 

Three Months

 

 

 

2018

 

(in thousands)

 

(unaudited)

 

Pro Forma:

 

 

 

 

Total revenue

 

$

106,613

 

Net loss

 

$

(1,281

)

 

Our pro forma assumptions are as follows:

 

Revenues and costs of sales were based on actual results for the three months ended March 31, 2018.

 

General and administrative expenses were based on actual results adjusted by $0.02 million for the three months ended March 31, 2018 for the impact of the amortization expense of the intangible assets acquired with the acquisition.

 

Actual interest expense was adjusted by $0.06 million for the three months ended March 31, 2018 for the imputed interest on the acquired debt issued to fund the acquisition.

 

Income taxes were adjusted to impute the Company’s corporate rate during the period on the pro forma income before taxes.

From the date of acquisition to March 31, 2018, Bedrock generated net revenue of $4.8 million and a net income of $0.2 million and for the three months ended March 31, 2019, Bedrock generated net revenue of $7.5 million and a net income of $0.9 million.  These amounts are included in the respective Consolidated Statements of Operations.

 

From the date of the NSI acquisition to March 31, 2018 and for the three months ended March 31, 2019, revenue and net income generated by NSI was not significant.

 

Note 5. Inventories

Inventories are valued at the lower of cost and net realizable value, with cost determined under the first in first out method. The significant components of inventory were as follows:

 

(in thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials

 

$

104,164

 

 

$

103,193

 

Installations in process

 

 

5,777

 

 

 

5,077

 

 

 

$

109,941

 

 

$

108,270

 

 

12


 

Note 6. Property and Equipment

Property and equipment consisted of the following:

 

(in thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Vehicles

 

$

8,698

 

 

$

8,553

 

Machinery and equipment

 

 

6,836

 

 

 

4,513

 

Leasehold improvements

 

 

8,420

 

 

 

7,992

 

Furniture and fixtures

 

 

6,704

 

 

 

7,058

 

Computer equipment

 

 

4,548

 

 

 

4,194

 

Other

 

 

1,705

 

 

 

526

 

 

 

 

36,911

 

 

 

32,836

 

Less: accumulated depreciation and amortization

 

 

(15,128

)

 

 

(13,038

)

Property and equipment, net

 

$

21,783

 

 

$

19,798

 

 

Depreciation and amortization expense of property and equipment totaled $2.0 million and $1.4 million for the three months ended March 31, 2019 and 2018, respectively. For three months ended March 31, 2019, $0.9 million and $1.1 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively. For the three months ended March 31, 2018, $0.8 million and $0.6 million of depreciation expense was included in cost of goods sold and general and administrative expense, respectively.

Note 7. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill by reportable segment were as follows:

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total

Goodwill

 

December 31, 2018

 

$

45,564

 

 

$

49,029

 

 

$

94,593

 

Intown acquisition

 

 

 

 

 

4,383

 

 

 

4,383

 

March 31, 2019

 

$

45,564

 

 

$

53,412

 

 

$

98,976

 

 

13


 

Intangibles Assets

The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of March 31, 2019:

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total Gross

Carrying

Amount

 

Gross Carrying Amount

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

60,180

 

 

$

59,560

 

 

$

119,740

 

Tradenames

 

 

7,740

 

 

 

18,090

 

 

 

25,830

 

Non-compete agreements

 

 

50

 

 

 

350

 

 

 

400

 

 

 

$

67,970

 

 

$

78,000

 

 

$

145,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total

Accumulated

Amortization

 

Accumulated Amortization

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

(14,807

)

 

$

(24,502

)

 

$

(39,309

)

Tradenames

 

 

(1,667

)

 

 

(3,129

)

 

 

(4,796

)

Non-compete agreements

 

 

(12

)

 

 

(79

)

 

 

(91

)

 

 

$

(16,486

)

 

$

(27,710

)

 

$

(44,196

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total Net

Book

Value

 

Net Book Value

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

45,373

 

 

$

35,058

 

 

$

80,431

 

Tradenames

 

 

6,073

 

 

 

14,961

 

 

 

21,034

 

Non-compete agreements

 

 

38

 

 

 

271

 

 

 

309

 

 

 

$

51,484

 

 

$

50,290

 

 

$

101,774

 

 

14


 

The following table provides the gross carrying amount, accumulated amortization and net book value by reportable segment for each class of intangible assets as of December 31, 2018:

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total Gross

Carrying

Amount

 

Gross Carrying Amount

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

60,180

 

 

$

55,540

 

 

$

115,720

 

Tradenames

 

 

7,740

 

 

 

16,800

 

 

 

24,540

 

Non-compete agreements

 

 

50

 

 

 

350

 

 

 

400

 

 

 

$

67,970

 

 

$

72,690

 

 

$

140,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total

Accumulated

Amortization

 

Accumulated Amortization

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

(13,268

)

 

$

(22,609

)

 

$

(35,877

)

Tradenames

 

 

(1,457

)

 

 

(2,543

)

 

 

(4,000

)

Non-compete agreements

 

 

(9

)

 

 

(59

)

 

 

(68

)

 

 

$

(14,734

)

 

$

(25,211

)

 

$

(39,945

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

ASG

 

 

RDS

 

 

Total Net

Book

Value

 

Net Book Value

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

46,912

 

 

$

32,931

 

 

$

79,843

 

Tradenames

 

 

6,283

 

 

 

14,257

 

 

 

20,540

 

Non-compete agreements

 

 

41

 

 

 

291

 

 

 

332

 

 

 

$

53,236

 

 

$

47,479

 

 

$

100,715

 

 

Amortization expense on intangible assets totaled $4.3 million and $3.3 million during the three months ended March 31, 2019 and 2018, respectively.

The estimated annual amortization expense for the next five years and thereafter is as follows:

 

(in thousands)

 

 

 

 

2019 Remaining

 

$

11,424

 

2020

 

 

12,484

 

2021

 

 

12,478

 

2022

 

 

12,401

 

2023

 

 

12,038

 

Thereafter

 

 

40,949

 

 

 

$

101,774

 

 

Note 8. Lines of Credit

SIC Line of Credit

In June 2018, the Company and certain of its subsidiaries entered into an amended and restated loan, security and guaranty agreement, dated as of June 28, 2018, which was amended on December 11, 2018 (the “SIC Credit Facility”), with a commercial bank.  The SIC Credit Facility will be used by the Company, including both RDS and ASG, for operational purposes.  Pursuant to the SIC Credit Facility, the Company has a borrowing-base-governed revolving credit facility that provides for borrowings up to an aggregate of $90 million (after it was increased by $10 million through the amendment in December 2018), and which may be further increased to an aggregate amount not to exceed $130 million upon the satisfaction of certain conditions.

Under the terms of the SIC Credit Facility, the Company has the ability to request the issuance of letters of credit up to a maximum aggregate stated amount of $15 million. The ability to borrow revolving loans under the SIC Credit Facility is reduced on a

15


 

dollar-for-dollar basis by the aggregate stated amount of all outstanding letters of credit. The indebtedness outstanding under the SIC Credit Facility is secured by substantially all of the assets of the Company and its subsidiaries.

The revolving loans under the SIC Credit Facility bear interest at a floating rate, which the Company can elect between a LIBOR based rate plus an applicable margin varying from one hundred twenty five basis points (1.25%) to one hundred seventy five basis points (1.75%) based on the borrowers’ average daily availability determined quarterly, or a base rate determined on the highest of three alternative rates based on the Prime rate, or the Federal Funds rate plus a fifty basis point (0.50%) margin, or a LIBOR based rate plus a two hundred basis point (2.00%) margin.   Upon the occurrence of certain events of default under the SIC Credit Facility, the interest rate applicable to the obligations thereunder may be increased by two hundred basis points (2.00%).  All revolving loans under the SIC Credit Facility are due and payable in full on June 28, 2023, subject to earlier acceleration upon certain conditions.  Letter of credit obligations under the SIC Credit Facility are due and payable on the date set forth in the respective loan documents or upon demand by the lender.

Under the SIC Credit Facility, the Company and its subsidiaries are required to comply with certain customary restrictive covenants that, among other things and with certain exceptions, limit the ability of the Company and its subsidiaries, as applicable, to (i) incur additional indebtedness and liens in connection therewith, (ii) pay dividends and make certain other restricted payments, (iii) effect mergers or consolidations, (iv) enter into transactions with affiliates, (v) sell or dispose of property or assets, and (vi) engage in unrelated lines of business.  

As of March 31, 2019, $30.0 million was outstanding under the SIC Credit Facility. The SIC Credit Facility is subject to certain financial covenants. At March 31, 2019, the Company was in compliance with the financial covenants.

The Company incurred debt issuance costs of $0.5 million in connection with the SIC Credit Facility. These costs will be amortized to non-cash interest expense over the term of the agreement on a straight-line basis which approximates the effective interest method. Non-cash interest expense related to these costs was $0.03 million for the three months ended March 31, 2019. The Company entered into the SIC Credit Facility in June 2018, so there was no non-cash interest expense related to these costs for the three months ended March 31, 2018. At March 31, 2019, SIC had $0.4 million of unamortized debt issuance costs related to the SIC Credit Facility. These costs are shown as a direct deduction of the line of credit liability in the accompanying condensed consolidated balance sheets.

Note 9. Long-Term Debt

Long-term debt consisted of the following:

 

(in thousands)

 

March 31, 2019

 

 

December 31, 2018

 

RDS equipment and vehicle notes

 

$

1,654

 

 

$

956

 

ASG term loans

 

 

156,127

 

 

 

144,983

 

 

 

 

157,781

 

 

 

145,939

 

Unamortized debt issuance costs

 

 

(1,975

)

 

 

(2,129

)

Total long-term debt

 

 

155,806

 

 

 

143,810

 

Current portion of long-term debt, net of financing fees

 

$

1,331

 

 

$

1,368

 

Long-term debt, net of current portion and financing fees

 

$

154,475

 

 

$

142,442

 

 

RDS Equipment and Vehicle Notes

RDS has financed the acquisition of certain vehicles, property, and equipment with notes payable that mature at various times through September 2025. As of March 31, 2019 and December 31, 2018, the outstanding balance on equipment and vehicle notes payable totaled $1.7 million and $1.0 million, respectively. These notes are secured by the vehicles and equipment that were financed and require monthly interest and principal payments.

ASG Term Loans

In December 2015, ASG entered into a loan agreement with a financial institution offering a term loan in the aggregate amount of $1.7 million to finance the purchase of equipment. Amounts due under the term loan bear interest at 3.75% per annum with interest payable monthly. Principal payments are due in monthly installments beginning April 8, 2016 through maturity (March 8, 2021). At March 31, 2019 and December 31, 2018, ASG had $0.6 million and $0.7 million outstanding under this term loan, respectively.

16


 

In May 2016, ASG entered into a loan agreement with an investor offering a term loan in the amount of $0.2 million to finance improvements to ASG’s facilities in Anaheim, California. Amounts outstanding under the term loan bear interest at 8% per annum. Payments consisting of principal and interest are due monthly through maturity (January 1, 2023). As of March 31, 2019 and December 31, 2018, ASG had $0.1 million outstanding under this term loan.

On February 28, 2017, AG&M and Pental, as the borrowers, entered into a financing agreement, as amended, with third party lenders (the “Term Loan Facility”), which initially provided for a $105.0 million term loan facility. The Term Loan Facility was amended in June 2018 to define the borrowers as Select Interior Concepts, Inc. and its subsidiaries, was further amended in August 2018 to adjust the borrowing capacity to $101.4 million, and was further amended in December 2018 to increase the borrowing capacity to $174.2 million.

Borrowings under the Term Loan Facility bear interest per year equal to either: (i) the base rate plus 5.25% for a base rate loan, or (ii) the LIBOR rate plus 7.25% for a LIBOR loan.  (9.75% per annum as of March 31, 2019). The base rate is the greater of the publicly announced interest rate by the reference bank as its reference rate, the base commercial lending rate or prime rate, and 3.5% per annum. Interest is payable monthly with principal payments due in quarterly installments beginning July 1, 2017 through maturity (February 28, 2023). The Company borrowed an additional $11.5 million under the Term Loan Facility to fund the acquisition of Intown on March 1, 2019. As of March 31, 2019 and December 31, 2018, the Company had $155.4 million and $144.2 million outstanding, respectively, under the Term Loan Facility.

Substantially all of the Company’s assets, including accounts receivable and inventory, are collateral for the Term Loan Facility, except assets collateralized by the SIC Credit Facility which hold a senior position. The Company is also restricted from paying dividends to its stockholders. Additionally, substantially all of the Company’s subsidiaries are restricted by the Term Loan Facility from providing loans, advances and dividends to the SIC parent company. The Company is required to meet certain financial and nonfinancial covenants pursuant to these term loans. The Company was in compliance with all financial and non-financial covenants as of March 31, 2019 and December 31, 2018.

The Company incurred debt issuance costs in connection with its term loans. These costs are being amortized to non-cash interest expense over the terms of the related notes on a straight-line basis, which approximates the effective interest rate method. Non-cash interest expense related to these costs was $0.1 million for the three months ended M