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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30,
2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission File Number:
001-39172
STONEMOR INC.
(Exact name of registrant as specified in its charter)
Delaware 80-0103152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3331 Street Road 19020
,
Suite 200
Bensalem
,
Pennsylvania
(Address of principal executive offices) (Zip Code)
(Registrants telephone number, including area code):
(
215
)
826-2800
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share STON New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T ((s)232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
The number of shares of the registrants common stock outstanding at August 10,
2022 was
118,752,924
.
-------------------------------------------------------------------------------
FORM 10-Q OF STONEMOR INC.
TABLE OF CONTENTS
PART I Financial Information
Item 1. Financial Statements (Unaudited) 3
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
Item 4. Controls and Procedures 57
PART II Other Information
Item 1. Legal Proceedings 59
Item 1A. Risk Factors 59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 3. Defaults upon Senior Securities 59
Item 4. Mine Safety Disclosures 59
Item 5. Other Information 59
Item 6. Exhibits 60
Signatures 61
2
-------------------------------------------------------------------------------
Table of Contents
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONEMOR INC.
CONDENSED CONSOLIDATED B
ALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
June 30, December 31,
2022 2021
Assets
Current assets:
Cash and cash equivalents, excluding restricted cash $ 71,238 $ 83,882
Restricted cash 12,021 16,415
Accounts receivable, net of allowance 65,106 62,220
Prepaid expenses 8,073 6,971
Other current assets 12,788 11,459
Total current assets 169,226 180,947
Long-term accounts receivable, net of allowance 76,769 72,309
Cemetery property 299,549 296,758
Property and equipment, net of accumulated depreciation 89,346 82,610
Merchandise trusts, restricted, at fair value 604,760 567,853
Perpetual care trusts, restricted, at fair value 349,150 339,138
Deferred selling and obtaining costs 127,927 124,023
Deferred tax assets 3 21
Goodwill 6,774
Intangible assets, net 51,902 54,023
Other assets 22,629 23,462
Total assets $ 1,798,035 $ 1,741,144
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 55,953 $ 44,704
Accrued interest 4,344 4,344
Current portion, long-term debt 2,576 762
Total current liabilities 62,873 49,810
Long-term debt, net of deferred financing costs 390,033 389,401
Deferred revenues 1,118,208 1,056,260
Deferred tax liabilities 11,093 10,878
Perpetual care trust corpus 349,150 339,138
Other long-term liabilities 41,343 41,399
Total liabilities 1,972,700 1,886,886
Commitments and contingencies
Stockholders' equity:
Common stock, par value $ 1,187 1,182
0.01
per share,
200,000,000
shares authorized,
118,723,067
and
118,290,600
shares issued and outstanding, respectively
Paid-in capital in excess of par value ( ) ( )
82,719 83,286
Accumulated deficit ( ) ( )
93,133 63,638
Total stockholders' equity ( ) ( )
174,665 145,742
Total liabilities and stockholders' equity $ 1,798,035 $ 1,741,144
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
3
-------------------------------------------------------------------------------
Table of Contents
STONEMOR INC.
CONDENSED CONSOLIDATED STATEM
ENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
Revenues:
Cemetery:
Interments $ 22,136 $ 22,906 $ 43,291 $ 43,425
Merchandise 19,744 17,787 34,600 34,069
Services 18,370 17,698 35,228 34,979
Investment 10,204 13,737 26,832 26,635
and other
Funeral
home:
Merchandise 5,040 5,449 11,085 11,422
Services 4,553 5,404 9,988 10,764
Total 80,047 82,981 161,024 161,294
revenues
Costs and
Expenses:
Cost of 12,519 12,435 24,058 23,619
goods sold
Cemetery 21,634 18,090 43,813 36,251
expense
Selling 17,289 14,776 32,862 28,983
expense
General and 12,250 10,650 23,003 20,843
administrative expense
Corporate 12,806 9,534 24,619 19,075
overhead
Depreciation and 2,018 2,027 4,079 4,129
amortization
Funeral home
expenses:
Merchandise 1,389 1,478 3,021 3,139
Services 4,700 4,477 9,457 9,138
Other 3,185 3,239 6,571 6,258
Total costs 87,790 76,706 171,483 151,435
and expenses
Loss on sale of businesses ( ) ( ) ( ) ( )
and other impairments 43 2,220 43 2,220
Other (losses) ( ) 69 ( ) 69
gains 15 15
Operating ( ) 4,124 ( ) 7,708
(loss) income 7,801 10,517
Interest ( ) ( ) ( ) ( )
expense 9,279 9,977 18,565 20,450
Loss on debt ( ) ( )
extinguishment 40,128 40,128
Loss from continuing ( ) ( ) ( ) ( )
operations before income taxes 17,080 45,981 29,082 52,870
Income tax ( ) 9,736 ( ) 11,412
(expense) benefit 181 413
Net loss from ( ) ( ) ( ) ( )
continuing operations 17,261 36,245 29,495 41,458
Discontinued
operations (Note 2):
Income from operations of 860 1,449
discontinued businesses
Income tax
expense
Net income from 860 1,449
discontinued operations
Net $ ( ) $ ( ) $ ( ) $ ( )
loss 17,261 35,385 29,495 40,009
Net loss from continuing $ ( ) $ ( ) $ ( ) $ ( )
operations per common 0.15 0.31 0.25 0.35
share
(basic)
Net income from discontinued 0.01 0.01
operations per common
share
(basic)
Net loss per common $ ( ) $ ( ) $ ( ) $ ( )
share (basic) 0.15 0.30 0.25 0.34
Net loss from continuing operations $ ( ) $ ( ) $ ( ) $ ( )
per common share (diluted) 0.15 0.31 0.25 0.35
Net income from discontinued 0.01 0.01
operations per common share (diluted)
Net loss per common $ ( ) $ ( ) $ ( ) $ ( )
share (diluted) 0.15 0.30 0.25 0.34
Weighted average number 118,476 117,956 118,402 117,933
of common shares
outstanding
- basic
Weighted average number 118,476 117,956 118,402 117,933
of common shares
outstanding
- diluted
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
4
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Table of Contents
STONEMOR INC.
CONDENSED CONSOLIDATED STATEMENT
S OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
(in thousands, except shares)
Common
Stock
Number of Par Value of Paid-in Capital in Accumulated Total
Common Shares Common Shares Excess of Par Value Deficit
Three Months Ended
March 31, 2022
December 118,290,600 $ 1,182 $ ( ) $ ( ) $ ( )
31, 2021 83,286 63,638 145,742
Common stock awards 46,875 1 498 499
under incentive plans
Net ( ) ( )
loss 12,234 12,234
March 31, 118,337,475 $ 1,183 $ ( ) $ ( ) $ ( )
2022 82,788 75,872 157,477
Three Months Ended
June 30, 2022
March 31, 118,337,475 $ 1,183 $ ( ) $ ( ) $ ( )
2022 82,788 75,872 157,477
Common stock awards 859,038 9 499 508
under incentive plans
Shares repurchased related ( ) ( ) ( ) ( )
to incentive plans 473,446 5 430 435
Net ( ) ( )
loss 17,261 17,261
June 30, 118,723,067 $ 1,187 $ ( ) $ ( ) $ ( )
2022 82,719 93,133 174,665
Common
Stock
Number of Par Value of Paid-in Capital in Accumulated Total
Common Shares Common Shares Excess of Par Value Deficit
Three Months Ended
March 31, 2021
December 117,871,141 $ 1,178 $ ( ) $ ( ) $ ( )
31, 2020 85,232 8,359 92,413
Common stock awards 46,875 1 504 505
under incentive plans
Net ( ) ( )
loss 4,624 4,624
March 31, 117,918,016 $ 1,179 $ ( ) $ ( ) $ ( )
2021 84,728 12,983 96,532
Three Months Ended
June 30, 2021
March 31, 117,918,016 $ 1,179 $ ( ) $ ( ) $ ( )
2021 84,728 12,983 96,532
Common stock awards 46,875 1 507 508
under incentive plans
Net ( ) ( )
loss 35,385 35,385
June 30, 117,964,891 $ 1,180 $ ( ) $ ( ) $ ( )
2021 84,221 48,368 131,409
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
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STONEMOR INC.
CONDENSED CONSOLIDATED STATEM
ENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended June 30,
2022 2021
Cash Flows From Operating Activities:
Net loss $ ( ) $ ( )
29,495 40,009
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cost of lots sold 3,179 3,651
Depreciation and amortization 4,079 4,169
Provision for bad debt 2,883 3,519
Non-cash compensation expense 1,007 1,013
Loss on debt extinguishment 40,128
Non-cash interest expense 1,208 3,160
Loss on sale of businesses 43 1,353
Other losses (gains) 15 ( )
69
Changes in assets and liabilities:
Payment of paid-in-kind interest ( )
18,440
Accounts receivable, net of allowance ( ) ( )
13,073 11,522
Merchandise trust fund ( ) ( )
22,568 17,378
Other assets 955 ( )
2,942
Deferred selling and obtaining costs ( ) ( )
4,928 4,229
Deferred revenues 51,761 45,652
Deferred taxes, net 233 ( )
11,523
Payables and other liabilities 11,252 1,900
Net cash provided by (used in) operating activities 6,551 ( )
1,567
Cash Flows From Investing Activities:
Cash paid for acquisitions ( )
18,295
Proceeds from divestitures 173 6,578
Cash paid for capital expenditures ( ) ( )
6,144 3,361
Net cash (used in) provided by investing activities ( ) 3,217
24,266
Cash Flows From Financing Activities:
Proceeds from borrowings 6,001 404,433
Repayments of debt ( ) ( )
3,897 329,294
Principal payment on finance leases ( ) ( )
616 796
Early redemption premium ( )
18,478
Cost of financing activities ( ) ( )
376 10,632
Shares repurchased related to share-based compensation ( )
435
Net cash provided by financing activities 677 45,233
Net (decrease) increase in cash, cash equivalents and restricted cash ( ) 46,883
17,038
Cash, cash equivalents and restricted cashBeginning of period 100,297 60,090
Cash, cash equivalents and restricted cashEnd of period $ 83,259 $ 106,973
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 17,206 $ 31,141
Cash paid during the period for income taxes 2,498 1,989
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 836 $ 961
Operating cash flows from finance leases 153 166
Financing cash flows from finance leases 616 796
Non-cash investing and financing activities:
Right of use assets obtained in exchange for new operating lease liabilities $ 47 $ 3,277
Right of use assets obtained in exchange for new finance lease liabilities 197 105
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements.
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STONEMOR INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
1.
GENERAL
As used in this Quarterly Report on Form 10-Q (the Quarterly Report), unless
the context otherwise requires, references to the terms the Company, StoneMor,
we, us, and our refer to StoneMor Inc. and its consolidated subsidiaries.
Nature of Operations
The Company is a provider of funeral and cemetery products and services in the
death care industry in the United States. As of June 30, 2022, the Company
operated
304
cemeteries in
24
states and Puerto Rico, of which
275
were owned and
29
were operated under lease, management or operating agreements. As of June 30,
2022, the Company also owned and operated
72
funeral homes, including
34
located on the grounds of cemetery properties that the Company owned, in
15
states and Puerto Rico.
The Companys cemeteries provide cemetery property interment rights, such as
burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery
merchandise is comprised of burial vaults, caskets, grave markers and
memorials. Cemetery services include the installation of this merchandise and
other service items. The Company sells these products and services both at the
time of death, which is referred to as at-need, and prior to the time of
death, which is referred to as pre-need.
The Companys funeral home services include family consultation, the removal
and preparation of remains, insurance products and the use of funeral home
facilities for visitation and memorial services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements, which are
unaudited, have been prepared in accordance with the requirements of the
Quarterly Report on Form 10-Q and Generally Accepted Accounting Principles
(GAAP) for interim reporting. They do not include all disclosures normally
made in financial statements contained in Annual Reports on Form 10-K. In
managements opinion, all adjustments necessary for a fair presentation of the
Companys financial position, results of operations and cash flows for the
periods disclosed have been made. The balance sheet as of December 31, 2021
has been derived from the audited consolidated financial statement as of
December 31, 2021, as presented in the Companys Annual Report on Form 10-K for
the year ended December 31, 2021, which was filed with Securities and Exchange
Commission (SEC) on March 31, 2022 (the Annual Report). The interim unaudited
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and the related notes thereto presented in
the Annual Report. The results of operations for the six months ended June 30,
2022 may not necessarily be indicative of the results of operations for the
full year ending December 31, 2022.
The unaudited condensed consolidated financial statements include the accounts
of each of the Companys
100
% owned subsidiaries. These statements also include the accounts of the
merchandise and perpetual care trusts in which the Company has a variable
interest and is the primary beneficiary. The Company operates
29
cemeteries under long-term leases, operating agreements and management
agreements. The operations of
16
of these managed cemeteries have been consolidated.
The Company operates
13
cemeteries under long-term leases and other agreements that do not qualify as
acquisitions for accounting purposes. As a result, the Company did not
consolidate all of the existing assets and liabilities related to these
cemeteries. The Company has consolidated the existing assets and liabilities
of the merchandise and perpetual care trusts associated with these cemeteries
as variable interest entities, since the Company controls and receives the
benefits and absorbs any losses from operating these trusts. Under the
long-term leases, and other agreements associated with these properties, which
are subject to certain termination provisions, the Company is the exclusive
operator of these cemeteries and earns revenues related to sales of
merchandise, services and interment rights and incurs expenses related to such
sales, including the maintenance and upkeep of these cemeteries. Upon
termination of these agreements, the Company will retain all of the benefits
and related contractual obligations incurred from sales generated during the
agreement period. The Company has also recognized the existing customer
contract-related performance obligations that it assumed as part of these
agreements.
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COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus (COVID-19)
spread worldwide posing public health risks that reached pandemic proportions
(including the effect of variants that have developed, the COVID-19 Pandemic).
The COVID-19 Pandemic poses a significant threat to the health and economic
wellbeing of the Companys employees, customers and vendors. The Companys
operations are deemed essential by the state and local governments in which it
operates, with the exception of Puerto Rico, and the Company has been working
with federal, state and local government officials to ensure that it continues
to satisfy their requirements for offering the Companys essential services.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the
Company financially. At the start of the COVID-19 Pandemic in early 2020, the
Company saw its pre-need sales and at-need sales activity decline as Americans
practiced social distancing and crowd size restrictions were put in place.
However, since May 2020, the Company experienced at-need sales growth, and
since late 2020, it has experienced pre-need sales growth. The Company
believes the implementation of its virtual meeting tools early on in the
COVID-19 Pandemic was one of several key steps that had mitigated this
disruption. Throughout the COVID-19 Pandemic, the Companys cemeteries and
funeral homes have largely remained open and available to serve its families
in all the locations in which it operates to the extent permitted by local
authorities and the Company expects that this will continue. The Company has
leveraged the relationships it has made with the families it has served during
its response to the COVID-19 Pandemic, which has directly resulted in new
sales leads and the increase in pre-need sales activity. In addition, as
community restrictions have eased and the COVID-19 vaccine became more widely
available, the Company has experienced growth in its pre-need cemetery sales.
The Company expects the COVID-19 Pandemic could have an adverse effect on its
future results of operations and cash flows depending on COVID-19 variants and
case counts. However, the Company cannot presently predict the likely scope
and severity of that impact. In the event there are confirmed diagnoses of
COVID-19 within a significant number of its facilities, the Company may incur
additional costs related to the closing and subsequent cleaning of these
facilities and the ability to adequately staff the impacted sites. In
addition, the Companys pre-need customers with installment contracts could
default on their installment contracts due to lost work or other financial
stresses arising from the COVID-19 Pandemic. Alternatively, in the event that
COVID-19 case counts continue to normalize and variants become less severe, we
would expect to see a reduction in the demand for at-need products and
services as well as a reduction in pre-need turning to at-need.
Summary of Significant Accounting Policies
Refer to Note 1
General
to the Companys audited consolidated financial statements included in Item 8
of its Annual Report for the complete summary of significant accounting
policies.
Use of Estimates
The preparation of the Companys unaudited condensed consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions as described in its Annual Report. These estimates and assumptions
may affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the unaudited condensed
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting periods. As a result, actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of
three months
or less from the time they are acquired to be cash equivalents. Cash and Cash
Equivalents was
$
71.2
million
and
$
83.9
million
as of June 30, 2022 and December 31, 2021
, respectively.
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Restricted Cash
Cash that is restricted from withdrawal or use under the terms of certain
contractual agreements is recorded as restricted cash. Restricted cash was
$
12.0
million
and
$
16.4
million
as of June 30, 2022 and December 31, 2021
, respectively, which primarily related to cash collateralization of the
Companys letters of credit and surety bonds.
Revenue
The Company's revenues are derived from contracts with customers through sale
and delivery of death care products and services. Primary sources of revenue
are derived from (1) cemetery and funeral home operations generated both
at-need and pre-need, which are classified on the unaudited condensed
consolidated statements of operations as Interments, Merchandise and Services,
(2) investment income, which includes income earned on assets maintained in
perpetual care and merchandise trusts related to pre-need sales of cemetery
and funeral home merchandise and services that are required to be maintained
in the trust by state law and (3) interest earned on pre-need installment
contracts. Investment income is presented within Investment and other for
Cemetery revenue and Services for Funeral home revenue. Revenue is measured
based on the consideration specified in a contract with a customer and is net
of any sales incentives and amounts collected on behalf of third parties.
Pre-need contracts are price guaranteed, providing for future merchandise and
services at prices prevailing when the agreements are signed.
Investment income is earned on certain payments received from customers on
pre-need contracts, which are required by law to be deposited into the
merchandise and service trusts. Amounts are withdrawn from the merchandise
trusts when the Company fulfills the performance obligations. Earnings on
these trust funds, which are specifically identifiable for each performance
obligation, are also included in total transaction price. Pre-need contracts
are generally subject to financing arrangements on an installment basis, with
a contractual term not to exceed
60 months
. Interest income is recognized utilizing the effective interest method. For
those contracts that do not bear a market rate of interest, the Company
imputes such interest based upon the prime rate at the time of origination plus
375
basis points in order to segregate the principal and interest component of the
total contract value. The Company has elected to not adjust the transaction
price for the effects of a significant financing component for contracts that
have payment terms under one year.
At the time of a non-cancellable pre-need sale, the Company records an account
receivable in an amount equal to the total contract value less unearned
finance income and any cash deposit paid. The revenue from both the sales and
interest income from trusted funds are deferred until the merchandise is
delivered or the services are performed. For a sale in a cancellable state, an
account receivable is only recorded to the extent control has transferred to
the customer for interment rights, merchandise or services for which the
Company has not collected cash. The amounts collected from customers in states
in which pre-need contracts are cancellable may be subject to refund
provisions. The Company estimates the fair value of its refund obligation
under such contracts on a quarterly basis and records such obligations within
other long-term liabilities line item on its consolidated balance sheets.
In accordance with Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers
(ASC 606), the Company recognizes revenue in the amount to which the Company
expects to be entitled to when it satisfies a performance obligation by
transferring control over a product or service to a customer. The Company only
recognizes amounts due from a customer for unfulfilled performance obligations
on a cancellable pre-need contract to the extent that control has transferred
to the customer for interments, merchandise or services for which the Company
has not collected cash. The Company defers the recognition of any
nonrefundable up-front fees and incremental direct selling costs associated
with its sales contracts with a customer (i.e., commissions and bonuses) until
the underlying goods or services have been delivered to the customer if the
amortization period associated with the deferred nonrefundable up-front fees
and incremental direct selling is greater than a year; otherwise, these
nonrefundable up-front fees and incremental direct selling costs are expensed
immediately. Incremental direct selling costs are recognized by specific
identification. The Company calculates the deferred selling costs asset by
dividing total deferred selling and obtaining expenses by total deferrable
revenues and multiplying such percentage by the periodic change in gross
deferred revenues. Such costs are recognized when the associated performance
obligation is fulfilled based upon the net change in deferred revenues. All
other selling costs are expensed as incurred.
In addition, the Company maintains a reserve representing the fair value of
the refund obligation that may arise due to state law provisions that include
a guarantee of customer funds collected on unfulfilled performance obligations
and maintained in trust to the extent that the funds are refundable upon a
customers exercise of any cancellation rights.
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Sales taxes assessed by governmental authorities are excluded from revenue.
Any shipping and handling costs that are incurred after control over a product
has transferred to a customer are accounted for as a fulfillment cost and are
included in cost of goods sold.
Nature of Goods and Services
The following is a description of the principal activities within the Companys
two
reportable segments from which the Company generates its revenue.
Cemetery Operations
The Company generates revenues in its Cemetery Operations segment principally
from (1) providing rights to inter remains in a specific cemetery property
inventory space such as burial lots and constructed mausoleum crypts
(Interments), (2) sales of cemetery merchandise which includes markers (i.e.,
method of identifying a deceased person in a burial space, crypt or niche),
base (i.e., the substrate upon which a marker is placed), vault (i.e., a
container installed in the burial lot in which the casket is placed), caskets,
cremation niches and other cemetery related items and (3) service revenues,
including opening and closing, a service of digging and refilling burial
spaces to install the burial vault and place the casket into the vault,
cremation services and fees for installation of cemetery merchandise. Products
and services may be sold separately or in packages. For packages, the Company
accounts for individual products and services separately as they are distinct
(i.e., the product or service is separately identifiable from other items in
the package and the customer can benefit from it on its own or with other
resources that are readily available to the customer). The consideration
(including any discounts) is allocated among separate products and services in
a package based on their relative stand-alone selling prices. The stand-alone
selling price is determined by management based upon local market conditions
and reasonable ranges for both merchandise and services which is the best
estimate of the stand-alone price. For items that are not sold separately
(e.g., second interment rights), the Company estimates stand-alone selling
prices using the best estimate of market value, using inputs such as average
selling price and list price broken down by each geographic location.
Additionally, the Company considers typical sales promotions that could have
impacted the stand-alone selling price estimates.
Interments revenue is recognized when control transfers, which is when the
property is available for use by the customer. For pre-construction mausoleum
contracts, the Company only recognizes revenue once the property is
constructed and the customer has obtained substantially all of the remaining
benefits of the property.
Merchandise revenue and deferred investment earnings on merchandise trusts are
recognized when a customer obtains control of the product. This usually occurs
when the customer takes possession of the product (title has transferred to
the customer and the merchandise is either installed or stored, at the
direction of the customer, at the vendors warehouse or a third-party warehouse
at no additional cost to the Company). The amount of revenue recognized is
adjusted for expected refunds, which are estimated based on applicable law,
general business practices and historical experience observed specific to the
respective performance obligation. The estimate of the refund obligation is
reevaluated on a quarterly basis. In addition, the Company is entitled to
retain, in certain jurisdictions, a portion of collected customer payments
when a customer cancels a pre-need contract; these amounts are also recognized
in revenue at the time the contract is cancelled.
Service revenue is recognized when the services are performed, and the
performance obligation is thereby satisfied.
The cost of goods sold related to merchandise and services reflects the actual
cost of purchasing products and performing services and the value of cemetery
property depleted through the recognized sales of interment rights. The costs
related to the sales of lots and crypts are determined systematically using a
specific identification method under which the total value of the underlying
cemetery property and the lots available to be sold at the location are used
to determine the cost per lot.
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Funeral Home Operations
The Company generates revenues in its Funeral Home Operations segment
principally from (1) sales of funeral home merchandise which includes caskets
and other funeral related items and (2) service revenues, which includes
services such as family consultation, the removal of and preparation of
remains and the use of funeral home facilities for visitation and services of
remembrance. The Funeral Home Operations segment also include revenues related
to the sale of term and whole life insurance on an agency basis, in which the
Company earns a commission from the sales of these policies. Insurance
commission revenue is reported within service revenues. Products and services
may be sold separately or in packages. For packages, the Company accounts for
individual products and services separately as they are distinct (i.e., the
product or service is separately identifiable from other items in the package
and the customer can benefit from it on its own or with other resources that
are readily available to the customer). The consideration (including any
discounts) is allocated among separate products and services based on their
relative stand-alone selling prices. The relative stand-alone selling price is
determined by management's best estimate of the stand-alone price based upon
the list price at each location. The revenue generated by the Company through
its Funeral Home Operations segment is principally derived from at-need sales.
Merchandise revenue is recognized when a customer obtains control of the
product. This usually occurs when the customer takes possession of the product
(title has transferred to the customer and the merchandise is either installed
or stored, at the direction of the customer, at the vendors warehouse or a
third-party warehouse). The amount of revenue recognized is adjusted for
expected refunds, which are estimated based on applicable law, general
business practices and historical experience observed specific to the
respective performance obligations. The estimate of the refund obligation is
reevaluated on a quarterly basis.
Service revenue is recognized when the services are performed and the
performance obligation is thereby satisfied.
Costs related to the delivery or performance of merchandise and services are
charged to expense when merchandise is delivered or services are performed.
Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment
income from the merchandise trusts is deferred until such time that the
services are performed or the merchandise is delivered. In addition, for
amounts deferred on new contracts and investment income and unrealized gains
on our merchandise trusts, deferred revenues include deferred revenues from
pre-need sales that were entered into by entities prior to the Companys
acquisition of those entities or the assets of those entities. The Company
provides for a profit margin for these deferred revenues to account for the
projected future costs of delivering products and providing services on
pre-need contracts that the Company acquired through acquisition. These
revenues and their associated costs are recognized when the related
merchandise is delivered or services are performed and are presented on a
gross basis on the unaudited condensed consolidated statements of operations.
Accounts Receivable, Net of Allowance
The Company sells pre-need cemetery contracts whereby the customer enters into
arrangements for future pre-need merchandise and services. These sales are
usually made using interest-bearing installment contracts not to exceed
60 months
. The interest income is recorded as revenue when the interest amount is
considered realizable and collectible, which typically coincides with cash
payment. Interest income is not recognized until payments are collected in
accordance with the contract. At the time of a pre-need sale, the Company
records an account receivable in an amount equal to the total contract value
less unearned finance income, unfulfilled performance obligations on
cancellable contracts and any cash deposit paid. The Company recognizes an
allowance for doubtful accounts by applying a cancellation rate to amounts
included in accounts receivable, which is recorded as a reduction in accounts
receivable and a corresponding offset to deferred revenues. The cancellation
rate is based on a
five year
average rate by each specific location. Management evaluates customer
receivables for impairment based upon historical experience, including the age
of the receivables and customers payment histories.
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Leases
The Company leases a variety of assets throughout its organization, such as
office space, funeral homes, warehouses and equipment. The Company has both
operating and finance leases. The Companys operating leases primarily include
office space, funeral homes and equipment. The Companys finance leases
primarily consist of vehicles and certain IT equipment. The Company determines
whether an arrangement is or contains a lease at the inception of the
arrangement based on the facts and circumstances in each contract. Leases with
an initial term of 12 months or less are not recorded on the balance sheet,
and the Company recognizes lease expense for these leases on a straight-line
basis over the lease term. For lease agreements with an initial term in excess
of 12 months, the Company records the lease liability and Right of Use (ROU)
asset at commencement date based upon the present value of the sum of the
remaining minimum rental payments, which exclude executory costs. Certain
adjustments to the ROU asset may be required for items such as initial direct
costs paid or incentives received.
Certain leases provide the Company with the option to renew for additional
periods, with renewal terms that can extend the lease term for periods ranging
from
1
to
30 years
.
Where leases contain escalation clauses, rent abatements and/or concessions,
the Company applies them in the determination of lease expense. The exercise
of lease renewal options is at the Companys sole discretion, and the Company
is only including the renewal option in the lease term when the Company can be
reasonably certain that the Company will exercise the additional options.
As most of the Companys leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available at the
commencement date in determining the present value of lease payments. The
Company evaluates the term of the lease, type of asset and its weighted
average cost of capital to determine its incremental borrowing rate used to
measure the ROU asset and lease liability.
The Company calculates operating lease expense ratably over the lease term
plus any reasonably assured renewal periods. The Company considers reasonably
assured renewal options, fixed escalation provisions and residual value
guarantees in its calculation. Leasehold improvements are amortized over the
shorter of the lease term or asset life, which may include renewal periods
where the renewal is reasonably assured, and are included in the determination
of straight-line rent expense. The depreciable life of assets and leasehold
improvements are generally limited by the expected lease term.
The Companys leases also typically have lease and non-lease components, which
are generally accounted for separately and not included in the measurement of
the ROU asset and lease liability.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded
at their estimated fair value and goodwill or bargain gain is recognized for
any difference between the purchase price of the acquisition and the Company's
fair value estimation. To the extent that new information is obtained during
the measurement period about facts and circumstances that existed at the
closing date, the Company may adjust goodwill, intangible assets, assets or
liabilities associated with the acquisition. The measurement period is no
longer than one year from the date of acquisition. Acquisition-related
expenses are recognized separately from the business combination and are
expensed as incurred.
Goodwill
Goodwill resulting from the acquisitions completed during the six months ended
June 30, 2022, which is preliminary and subject to change, represents the
excess of purchase price over the fair market value of net assets acquired,
based on their respective fair values at the date of acquisition.
The Company will test goodwill for impairment at least annually or if
impairment indicators arise by comparing its reporting units estimated fair
values to carrying values. Because quoted market prices for the reporting
units are not available, the Companys management must apply judgment in
determining the estimated fair value of these reporting units. The Companys
management will use all available information to make these fair value
determinations, including the present values of expected future cash flows
using discount rates commensurate with the risks involved in the Companys
assets and the available market data of the industry group.
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Income Taxes
The Company is subject to U.S. federal income taxes and certain state income
and franchise taxes in the states in which it operates. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis and tax carryforwards,
if applicable. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.
The Company records a valuation allowance to reflect the estimated amount of
deferred tax assets for which realization is uncertain. Management reviews the
valuation allowance at the end of each quarter and makes adjustments if it is
determined that it is more likely than not that the tax benefits will be
realized.
Income tax expense during interim periods is based on the Companys forecasted
annual effective tax rate plus any discrete items on an estimated basis, which
are recorded in the period in which they occur. Discrete items include, but
are not limited to, such events as changes in estimates due to finalization of
income tax returns, tax audit settlements, tax effects of exercised or vested
stock-based awards and increases or decreases in valuation allowances on
deferred tax assets.
For the three months ended June 30, 2022 and 2021, the Company had income tax
expense of
$
0.2
million
and an income tax benefit of
$
9.7
million
, respectively. For the six months ended June 30, 2022 and 2021, the Company
had income tax expense of
$
0.4
million
and an income tax benefit of
$
11.4
million
, respectively. The Companys effective tax rate before discrete items was
1.1
%
and
21.6
%
for the three months ended June 30, 2022 and 2021, respectively, and
1.4
%
and
22.2
%
for the six months ended June 30, 2022 and 2021
, respectively.
Stock-Based Compensation
The Company has a long-term incentive plan under which it is authorized to
grant stock-based compensation awards, such as restricted stock or restricted
units to be settled in common stock and non-qualified stock options (stock
options). The Company recognizes compensation expense in an amount equal to
the fair value of the stock-based awards on the date of grant over the
requisite service period. The fair value of restricted stock awards and
restricted stock unit awards is determined based on the number of restricted
stock or restricted stock units granted and the closing price of the Companys
common stock on the date of grant. The fair value of stock options is
determined by applying the Black-Scholes model to the grant-date market value
of the underlying common stock of the Company. The Company has elected to
recognize forfeiture credits for these stock-based compensation awards as they
are incurred, as this method best reflects actual stock-based compensation
expense.
Tax deductions on the stock-based compensation awards are not realized until
the related income is recognized, which is generally when the awards are
vested or exercised. The Company recognizes deferred tax assets for
stock-based compensation awards that will result in future deductions on its
income tax returns, based on the amount of stock-based compensation recognized
at the statutory tax rate in the jurisdiction in which the Company will
receive a tax deduction. If the tax deduction for a stock-based compensation
award is greater than the cumulative GAAP compensation expense for that
stock-based compensation award upon realization of a tax deduction, an excess
tax benefit will be recognized and recorded as a favorable impact on the
effective tax rate. If the tax deduction for a stock-based compensation award
is less than the cumulative GAAP compensation expense for that stock-based
compensation award upon realization of the tax deduction, a tax shortfall will
be recognized and recorded as an unfavorable impact on the effective tax rate.
Any excess tax benefits or shortfalls will be recorded discretely in the
period in which they occur. The cash flows resulting from any excess tax
benefit will be classified as financing cash flows in the Companys
consolidated statements of cash flows.
The Company provides its employees with the election to settle the income tax
obligations arising from the vesting of their restricted stock-based
compensation awards by the Company withholding stock equal to such income tax
obligations. Shares of stock acquired from employees in connection with the
settlement of the employees income tax obligations on these stock-based
compensation awards are accounted for as treasury shares that are subsequently
retired. Restricted stock awards, restricted stock units and stock options are
not considered issued and outstanding for purposes of earnings per share
calculations until vested or exercised.
13
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Net Income (Loss) per Common Share (Basic and Diluted)
Basic net income (loss) per common share is computed by dividing net income
(loss) attributable to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per
common share is calculated by dividing net income (loss) attributable to
common shares by the sum of the weighted-average number of outstanding common
shares and the dilutive effect of share-based awards, as calculated by the
treasury stock or if converted methods, as applicable. These awards consist of
common shares that are contingently issuable upon the satisfaction of certain
vesting conditions for stock awards granted under the Companys long-term
incentive plan.
The following table sets forth the reconciliation of the Companys
weighted-average number of outstanding common shares for the
three and six months ended June 30, 2022 and 2021 used to compute basic net
income (loss) attributable to common shares to those used to compute diluted
net income (loss) per common share (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Weighted average number of outstanding common sharesbasic 118,476 117,956 118,402 117,933
Plus effect of dilutive incentive awards
(1)
:
Restricted shares
Stock options
Weighted average number of outstanding common sharesdiluted 118,476 117,956 118,402 117,933
(1)
For the three months ended June 30, 2022 and 2021, the diluted weighted-average
number of outstanding common shares does not include
874,182
and
366,641
shares issuable upon the exercise of outstanding options, respectively, and
248,470
and
414,412
restricted common shares, respectively, as their effects would have been
anti-dilutive. For the six months ended June 30, 2022 and 2021, the diluted
weighted-average number of outstanding common shares does not include
881,803
and
592,046
shares issuable upon the exercise of outstanding options, respectively, and
240,694
and
438,718
restricted common shares, respectively, as their effects would have been
anti-dilutive.
Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13,
Credit Losses (Topic 326)
("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured
at amortized cost basis should be presented at the net amount expected to be
collected using historical experience, current conditions and reasonable and
supportable forecasts as a basis for credit loss estimates, instead of the
probable initial recognition threshold used under current GAAP. In November
2018, FASB issued ASU No. 2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses
(ASU 2018-09)
,
which clarified that receivables arising from operating leases are not within
the scope of Accounting Standards Codification (ASC) 326-20,
Financial Instruments-Credit Losses-Measured at Amortized Cost
, and should be accounted for in accordance with ASC 842,
Leases
. In April 2019, FASB issued ASU No. 2019-04,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments (ASU 2019-04), which includes clarifications to the amendments
issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05,
Financial Instruments-Credit Losses (Topic 326),
which provides entities that have certain instruments within the scope of ASC
326-20 with an option to irrevocably elect the fair value option in ASC 825,
Financial Instruments
, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10,
Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842)
(ASU 2019-10), which modifies the effective dates for ASU 2016-13, ASU 2017-12
and ASU 2016-02 to reflect the FASBs new policy of staggering effective dates
between larger public companies and all other companies. With the issuance of
ASU 2019-10, the Companys effective date for adopting all amendments related
to the new credit loss standard has been extended to January 1, 2023. In
November 2019, FASB issued ASU No. 2019-11,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses
(ASU 2019-11), which includes clarifications to and addresses specific
stakeholders issues concerning the amendments issued in ASU 2016-13. In
February 2020, FASB issued ASU No, 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)
and in March 2020 issued ASU No. 2020-03,
Codification Improvements to Financial Instruments
, both of which also provide updates and clarification. The Company plans to
adopt the requirements of these amendments upon their effective date of
January 1, 2023, using the modified-retrospective method and is evaluating the
potential impact of the adoption on its financial position, results of
operations and related disclosures.
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2.
ACQUISITIONS AND DIVESTITURES
Acquisitions
On January 31, 2022, the Company acquired
two
cemeteries in Virginia for cash consideration of $
5.1
million and on May 10, 2022 the Company acquired
two
cemeteries in North Carolina for cash consideration of $
0.3
million, pursuant to a definitive agreement signed on March 23, 2021 with Daly
Seven, Inc. to acquire the
four
cemeteries for a total purchase price of $
5.4
million, subject to customary working capital adjustments.
On March 1, 2022, the Company acquired
one
funeral home in Florida for cash consideration of $
1.7
million, subject to customary working capital adjustments, pursuant to a
definitive agreement signed on March 1, 2022 with MacDonald Funeral Home &
Cremation, Inc.
On March 15, 2022, the Company acquired
one
combination cemetery and funeral home, a separate cemetery and a separate
funeral home in West Virginia for cash consideration of $
11.3
million, subject to customary working capital adjustments, pursuant to a
definitive agreement signed on February 4, 2022 with Roselawn Acquisition
Group LLC, Monte Vista Park LLC, CPJ LLC, and WV Memorial Properties LLC.
The Company accounted for these transactions under the acquisition method of
accounting. Accordingly, the Company recorded the identifiable assets acquired
and liabilities assumed at their respective acquisition date fair values.
Costs associated with the acquisition of the assets noted were expensed as
incurred. For the three and six months ended June 30, 2022, acquisition costs
were
$
0.1
million
and
$
0.9
million
, respectively, and were included in corporate overhead on the condensed
consolidated statement of operations.
The following table summarizes the preliminary estimated fair values assigned
to the assets acquired and liabilities assumed in the acquisitions at the
respective acquisition dates (in thousands):
Assets:
Accounts receivable $ 1,250
Cemetery property 4,438
Property and equipment 6,857
Merchandise trusts, restricted 5,706
Perpetual care trusts, restricted 5,013
Trade names 165
Total assets 23,429
Liabilities:
Deferred revenues 6,795
Perpetual care trust corpus 5,013
Total liabilities 11,808
Fair value of net assets acquired 11,621
Cash consideration paid 18,295
Deferred cash consideration 100
Total consideration 18,395
Goodwill from purchase $ 6,774
The Company recorded goodwill of $
5.5
million and $
1.3
million in the Cemetery Operations reporting segment and the Funeral Home
Operations reporting segment, respectively, for the properties acquired, which
is deductible for tax purposes. The goodwill recorded for the acquisitions
mainly reflects the strategic fit and synergies expected from the acquisitions.
The estimated fair values of assets acquired and liabilities assumed presented
above are provisional and are based on the information that was available as
of the acquisition dates to estimate the fair value of assets acquired and
liabilities assumed, including property and building values and deferred
revenues. The Company believes the information provides a reasonable basis for
estimating the fair values but the Company is waiting for additional
information necessary to finalize those amounts. Therefore, the provisional
measurements of fair value reflected are preliminary and subject to change,
and such change could be significant. The Company expects to finalize the
valuation and complete the purchase price allocation as soon as practicable,
but no later than one year from the respective acquisition dates.
Revenue related to the assets acquired was $
0.9
million and $
1.2
million for the three and six months ended June 30, 2022, respectively, and
net income related to the assets acquired was not considered material.
15
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Divestitures
On April 22, 2022, the Company completed the sale of
two
cemetery properties located in Rhode Island (the Rhode Island Sale) for a
total cash price of $
0.2
million, resulting in a loss on sale of
$
43,000
for the three and six months ended June 30, 2022.
On May 24, 2021, the Company completed the sale of
three
cemetery properties located in Missouri (the Missouri Sale) for a total cash
price of $
0.7
million, resulting in a loss on sale of $
1.7
million for the three and six months ended June 30, 2021.
On April 2, 2021, the Company completed the sale of substantially all of the
Companys assets in Oregon and Washington, consisting of
nine
cemeteries,
ten
funeral establishments and
four
crematories (the Clearstone Assets) pursuant to the terms of an asset sale
agreement entered into on November 6, 2020 (the Clearstone Agreement) with
Clearstone Memorial Partners, LLC for a net cash purchase price of $
6.2
million, subject to certain adjustments (the Clearstone Sale). The Clearstone
Agreement to sell the Clearstone Assets, together with other divestitures
completed in 2020, represented a strategic exit from the west coast.
Therefore, the results of operations of the Clearstone Assets have been
presented as discontinued operations on the accompanying consolidated
statement of operations for the six months ended June 30, 2021.
The following table summarizes the results of discontinued operations (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2021
Cemetery revenues $ $ 1,142
Funeral home revenues 1,146
Cost of goods sold ( )
191
Cemetery expense ( )
233
Selling expense ( )
231
General and administrative expense ( )
151
Depreciation and amortization ( )
40
Funeral home expenses ( )
694
Interest expense ( )
166
Income from discontinued operations before income taxes 582
Net gain on sale of businesses 860 867
Income tax expense
Net income from discontinued operations $ 860 $ 1,449
The following table presents the depreciation and amortization, capital
expenditures, sale proceeds and operating noncash items of the discontinued
operations (in thousands):
Six Months Ended June 30,
2021
Cash flows from discontinued operating activities:
Depreciation and amortization $ 40
Gain on sales of discontinued operations businesses 867
Cash flows from discontinued investing activities:
Capital expenditures $ 10
Proceeds from sales of discontinued businesses 5,898
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3.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Long-term accounts receivable, net, consisted of the following at the dates
indicated (in thousands):
June 30, 2022 December 31, 2021
Customer receivables $ 162,870 $ 154,664
Unearned finance income ( ) ( )
15,215 14,319
Allowance for doubtful accounts ( ) ( )
5,780 5,816
Accounts receivable, net of allowance 141,875 134,529
Less: Current portion, net of allowance 65,106 62,220
Long-term portion, net of allowance $ 76,769 $ 72,309
Activity in the allowance for doubtful accounts was as follows (in thousands):
June 30, 2022 December 31, 2021
Balance, beginning of period $ 5,816 $ 5,711
Provision for doubtful accounts 2,883 6,354
Charge-offs, net ( ) ( )
2,919 6,249
Balance, end of period $ 5,780 $ 5,816
Management evaluates customer receivables for impairment based upon its
historical experience, including the age of the receivables and the customers
payment histories.
4.
CEMETERY PROPERTY
Cemetery property consisted of the following at the dates indicated (in
thousands):
June 30, 2022 December 31, 2021
Cemetery land $ 232,211 $ 229,736
Mausoleum crypts and lawn crypts 67,338 67,022
Cemetery property $ 299,549 $ 296,758
5.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the dates indicated (in
thousands):
June 30, 2022 December 31, 2021
Buildings and improvements $ 122,789 $ 115,141
Furniture and equipment 54,836 54,099
Funeral home land 11,745 10,932
Property and equipment, gross 189,370 180,172
Less: Accumulated depreciation ( ) ( )
100,024 97,562
Property and equipment, net of accumulated depreciation $ 89,346 $ 82,610
Depreciation expense was
$
1.8
million
and
$
1.7
million
for the three months ended June 30, 2022 and 2021, respectively, and
$
3.6
million
and
$
3.6
million
for the six months ended June 30, 2022 and 2021, respectively.
17
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6.
MERCHANDISE TRUSTS
At June 30, 2022 and December 31, 2021, the Companys merchandise trusts
consisted of investments in debt and equity marketable securities and cash
equivalents, both directly and through mutual and investment funds. All of
these investments are carried at fair value. All of these investments are
subject to the fair value hierarchy and considered either Level 1 or Level 2
assets pursuant to the three-level hierarchy described in Note 13
Fair Value of Financial Instruments
. There were no Level 3 assets. When the Company receives a payment from a
pre-need customer, the Company deposits the amount required by law into the
merchandise trusts that may be subject to cancellation on demand by the
pre-need customer. The Companys merchandise trusts related to states in which
pre-need customers may cancel contracts with the Company comprised
47.6
%
of the total merchandise trust as of June 30, 2022. The merchandise trusts are
variable interest entities (VIE) of which the Company is deemed the primary
beneficiary. The assets held in the merchandise trusts are required to be used
to purchase the merchandise and provide the services to which they relate. If
the value of these assets falls below the cost of purchasing such merchandise
and providing such services, the Company may be required to fund this
shortfall.
The Company included
$
9.4
million and
$
10.3
million of investments held in trust as required by law by the West Virginia
Funeral Directors Association at June 30, 2022 and December 31, 2021,
respectively, in its merchandise trust assets. These trusts are recognized at
their account value, which approximates fair value.
A reconciliation of the Companys merchandise trust activities for the
six months ended June 30, 2022 and 2021 is presented below (in thousands):
Six months ended June 30,
2022 2021
Balancebeginning of period $ 567,853 $ 516,284
Contributions 39,038 28,574
Distributions ( ) ( )
36,629 53,020
Interest and dividends 23,259 20,429
Capital gain distributions 2,181 1,650
Realized gains and losses, net 675 3,031
Other than temporary impairment ( )
136
Taxes ( ) ( )
581 14
Fees ( ) ( )
4,121 3,062
Unrealized change in fair value 13,085 30,532
Balanceend of period $ 604,760 $ 544,268
During the six months ended June 30, 2022 and 2021, purchases of available for
sale securities were approximately
$
39.8
million
and
$
36.6
million
, respectively. During the six months ended June 30, 2022 and 2021, sales,
maturities and paydowns of available for sale securities were approximately
$
14.0
million
and
$
32.6
million
, respectively. Cash flows from pre-need contracts are presented as operating
cash flows in the Companys unaudited condensed consolidated statements of cash
flows.
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The cost and market value associated with the assets held in the merchandise
trusts as of
June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022 Fair Value Cost Gross Gross Fair
Hierarchy Unrealized Unrealized Value
Level Gains Losses
Short-term investments 1 $ 33,580 $ $ $ 33,580
Fixed maturities:
U.S. governmental securities 2 1 1
Corporate debt securities 2
Other debt securities 2
Total fixed maturities 1 1
Mutual fundsdebt securities 1 6,097 ( ) 5,450
647
Mutual fundsequity securities 1 1,022 31 ( ) 1,046
7
Other investment funds 496,349 42,859 ( ) 534,678
(1) 4,530
Equity securities 1 14,687 3,863 ( ) 16,510
2,040
Other invested assets 2 4,053 68 4,121
Total investments 555,789 46,821 ( ) 595,386
7,224
West Virginia Trust Receivable 10,284 ( ) 9,374
910
Total $ 566,073 $ 46,821 $ ( ) $ 604,760
8,134
(1)
Other investment funds are measured at fair value using the net asset value
per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to
permit reconciliation of the fair value hierarchy to the amounts presented in
the balance sheet. This asset class is composed of fixed income funds and
equity funds, which have redemption periods ranging from
1
to
30
days, and private credit funds, which have lockup periods of
zero
to
fourteen
years
with
three
potential
one year
extensions at the discretion of the funds general partners. As of
June 30, 2022, there were
$
160.8
million
in unfunded investment commitments to the private credit funds, which are
callable at any time. This asset class also includes $
127.2
million of direct loans which are accounted for at amortized cost, net of
unamortized origination fees, if any, and are categorized as Level 3
investments in the fair value hierarchy. The interest rates on these direct
loans are consistent with market rates, and their amortized cost approximates
fair value.
December 31, 2021 Fair Value Cost Gross Gross Fair
Hierarchy Unrealized Unrealized Value
Level Gains Losses
Short-term investments 1 $ 51,243 $ $ $ 51,243
Fixed maturities:
U.S. governmental securities 2 1 1
Corporate debt securities 2 1 1
Other debt securities 2
Total fixed maturities 1 1 2
Mutual fundsdebt securities 1 6,097 81 ( ) 6,163
15
Mutual fundsequity securities 1 1,021 245 1,266
Other investment funds 457,447 26,008 ( ) 479,057
(1) 4,398
Equity securities 1 14,696 3,316 ( ) 15,961
2,051
Other invested assets 2 3,766 103 3,869
Total investments 534,271 29,754 ( ) 557,561
6,464
West Virginia Trust Receivable 9,992 300 10,292
Total $ 544,263 $ 30,054 $ ( ) $ 567,853
6,464
(1)
Other investment funds are measured at fair value using the net asset value
per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to
permit reconciliation of the fair value hierarchy to the amounts presented in
the balance sheet. This asset class is composed of fixed income funds and
equity funds, which have redemption periods ranging from
1
to
30
day
s, and private credit funds, which have lockup periods of
zero
to
15
years
with
three
potential
one
year
extensions at the discretion of the funds general partners. As of December 31,
2021, there were
$
112.4
million
in unfunded investment commitments to the private credit funds, which are
callable at any time. This asset class also includes $
125.4
million of direct loans which are accounted for at amortized cost, net of
unamortized origination fees, if any, and are categorized as Level 3
investments in the fair value hierarchy. The interest rates on these direct
loans are consistent with market rates, and their amortized cost approximates
fair value.
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The contractual maturities of debt securities as of
June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022 Less than 1 year 6 years More than
1 year through through 10 years
5 years 10 years
U.S. governmental securities $ $ 1 $ $
Corporate debt securities
Other debt securities
Total fixed maturities $ $ 1 $ $
December 31, 2021 Less than 1 year 6 years More than
1 year through through 10 years
5 years 10 years
U.S. governmental securities $ $ 1 $ $
Corporate debt securities 1
Other debt securities
Total fixed maturities $ $ 2 $ $
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost for each asset held in
the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Companys investments in debt and equity
securities within the merchandise trusts as of
June 30, 2022 and December 31, 2021 is presented below (in thousands):
Less than 12 months 12 months or more Total
June 30, 2022 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Fixed maturities:
U.S. governmental securities $ $ $ $ $ $
Corporate debt securities
Other debt securities
Total fixed maturities
Mutual fundsdebt securities 5,448 646 2 1 5,450 647
Mutual fundsequity securities 55 7 55 7
Other investment funds 44,033 4,530 44,033 4,530
Equity securities 382 35 1,891 2,005 2,273 2,040
Total $ 49,918 $ 5,218 $ 1,893 $ 2,006 $ 51,811 $ 7,224
Less than 12 months 12 months or more Total
December 31, 2021 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Fixed maturities:
U.S. governmental securities $ $ $ 297 $ $ 297 $
Corporate debt securities 620 620
Other debt securities
Total fixed maturities 917 917
Mutual fundsdebt securities 890 15 890 15
Mutual fundsequity securities
Other investment funds 42,645 4,398 42,645 4,398
Equity securities 3,108 2,050 1 1 3,109 2,051
Total $ 46,643 $ 6,463 $ 918 $ 1 $ 47,561 $ 6,464
For all securities in an unrealized loss position, the Company evaluated the
severity of the impairment and length of time that a security has been in a
loss position and concluded the decline in fair value below the assets cost
was temporary in nature. In addition, the Company is not aware of any
circumstances that would prevent the future market value recovery for these
securities.
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Other-Than-Temporary Impairment of Trust Assets
The Company assesses its merchandise trust assets for other-than-temporary
declines in fair value on a quarterly basis. During the six months ended June
30, 2022, the Company determined, based on its review, that there were no
other than temporary impairments to the investment portfolio in the
merchandise trusts. During the six months ended June 30, 2021, the Company
determined, based on its review, that there were
6
securities with an aggregate costs basis of approximately
$
0.3
million
and an aggregate fair value of approximately
$
0.2
million
, resulting in an impairment of
$
0.1
million
, with such impairment considered to be other than temporary due to credit
indicators. Accordingly, the Company adjusted the cost basis of these assets
to their current value and offset these changes against deferred merchandise
trust revenue. These adjustments to deferred revenue will be reflected within
the Companys unaudited condensed consolidated statements of operations in
future periods as the underlying merchandise is delivered or the underlying
service is performed.
Impairment of Direct Loans
On a quarterly basis, the merchandise trusts evaluate the carrying value of
each direct loan for impairment. A direct loan is considered impaired when,
based on current information and events, it is determined that the trusts will
not be able to collect the amounts due according to the loan contract,
including scheduled interest payments. This evaluation is generally based on
delinquency information, an assessment of the borrowers financial condition
and the adequacy of collateral, if any. The trusts would generally place
direct loans on nonaccrual status when the full and timely collection of
interest or principal becomes uncertain and they are 90 days past due for
interest or principal, unless the direct loan is both well-secured and in the
process of collection. When placed on nonaccrual, the trusts would reverse any
accrued unpaid interest receivable against interest income and amortization of
any net deferred fees is suspended. Generally, the trusts would return a
direct loan to accrual status when all delinquent interest and principal
become current under the terms of the credit agreement and collectability of
remaining principal and interest is no longer doubtful. In certain
circumstances, the trusts may place a direct loan on nonaccrual status but
conclude it is not impaired. The trusts may retain independent third-party
valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the
impairment based on the present value of expected future cash flows,
discounted at the receivables effective interest rate, or the estimated fair
value of the collateral, less estimated costs to sell. If it is determined
that the value of an impaired receivable is less than the recorded investment,
the trusts would recognize impairment with a charge to deferred revenue. When
the value of the impaired loan is calculated by discounting expected cash
flows, interest income would be recognized using the loans effective interest
rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any
identified impaired loans. In developing the allowance for credit losses, the
trusts consider, among other things, the following credit quality indicators:
"
business characteristics and financial conditions of obligors;
"
current economic conditions and trends;
"
actual charge-off experience;
"
current delinquency levels;
"
value of underlying collateral and guarantees;
"
regulatory environment; and
"
any other relevant factors predicting investment recovery.
There were
no
such impairments during the
three and six months ended June 30, 2022
and 2021.
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7.
PERPETUAL CARE TRUSTS
At June 30, 2022 and December 31, 2021, the Companys perpetual care trusts
consisted of investments in debt and equity marketable securities and cash
equivalents, both directly as well as through mutual and investment funds. All
of these investments are carried at fair value. All of the investments subject
to the fair value hierarchy are considered either Level 1 or Level 2 assets
pursuant to the three-level hierarchy described in Note 13
Fair Value of Financial Instruments
. There were no Level 3 assets. The perpetual care trusts are VIEs for which
the Company is the primary beneficiary.
A reconciliation of the Companys perpetual care trust activities for the
six months ended June 30, 2022 and 2021 is presented below (in thousands):
Six months ended June 30,
2022 2021
Balancebeginning of period $ 339,138 $ 316,746
Contributions 9,569 4,420
Distributions ( ) ( )
21,177 24,966
Interest and dividends 16,108 19,615
Capital gain distributions 1,483 1,077
Realized gains and losses, net 475 2,994
Other than temporary impairment ( )
55
Taxes ( ) ( )
1,530 890
Fees ( ) ( )
1,697 2,734
Unrealized change in fair value 6,781 10,391
Balanceend of period $ 349,150 $ 326,598
During the six months ended June 30, 2022 and 2021, purchases of available for
sale securities were approximately
$
11.2
million
and
$
19.0
million
, respectively. During the six months ended June 30, 2022 and 2021, sales,
maturities and paydowns of available for sale securities were approximately
$
0.8
million
and
$
11.1
million, respectively. Cash flows from perpetual care trust related contracts
are presented as operating cash flows in Companys unaudited condensed
consolidated statements of cash flows.
The cost and market value associated with the assets held in the perpetual
care trusts as of
June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022 Fair Value Cost Gross Gross Fair
Hierarchy Unrealized Unrealized Value
Level Gains Losses
Short-term investments 1 $ 13,422 $ $ $ 13,422
Fixed maturities:
U.S. governmental securities 2 10 1 11
Corporate debt securities 2
Other debt securities 2
Total fixed maturities 10 1 11
Mutual fundsdebt securities 1 1,904 6 ( ) 1,593
317
Mutual fundsequity securities 1 4,078 584 ( ) 4,365
297
Other investment funds 300,218 22,585 ( ) 320,410
(1) 2,393
Equity securities 1 7,026 2,443 ( ) 9,339
130
Other invested assets 2 9 1 10
Total investments $ 326,667 $ 25,620 $ ( ) $ 349,150
3,137
(1)
Other investment funds are measured at fair value using the net asset value
per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to
permit reconciliation of the fair value hierarchy to the amounts presented in
the balance sheet. This asset class is composed of fixed income funds and
equity funds, which have a redemption period ranging from
1
to
30
days, and private credit funds, which have lockup periods ranging from
zero
to
fourteen
years
with
four
potential
one
year
extensions at the discretion of the funds general partners. As of
June 30, 2022, there were
$
98.4
million in unfunded investment commitments to the private credit funds, which
are callable at any time. This asset class also includes $
81.3
million of direct loans which are accounted for at amortized cost, net of
unamortized origination fees, if any, and are categorized as Level 3
investments in the fair value hierarchy. The interest rates on these direct
loans are consistent with market rates, and their amortized cost approximates
fair value.
22
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December 31, 2021 Fair Value Cost Gross Gross Fair
Hierarchy Unrealized Unrealized Value
Level Gains Losses
Short-term investments 1 $ 25,674 $ $ $ 25,674
Fixed maturities:
U.S. governmental securities 2 12 2 14
Corporate debt securities 2
Other debt securities 2
Total fixed maturities 12 2 14
Mutual fundsdebt securities 1 2,306 28 ( ) 2,299
35
Mutual fundsequity securities 1 3,894 1,341 ( ) 5,172
63
Other investment funds 285,826 14,554 ( ) 297,604
(1) 2,776
Equity securities 1 6,817 1,661 ( ) 8,365
113
Other invested assets 2 9 1 10
Total investments $ 324,538 $ 17,587 $ ( ) $ 339,138
2,987
(1)
Other investment funds are measured at fair value using the net asset value
per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to
permit reconciliation of the fair value hierarchy to the amounts presented in
the balance sheet. This asset class is composed of fixed income funds and
equity funds, which have a redemption period ranging from
1
to
30
days, and private credit funds, which have lockup periods ranging from
zero
to
15
years
with
four
potential
one
year
extensions at the discretion of the funds general partners. As of December 31,
2021, there were
$
67.3
million in unfunded investment commitments to the private credit funds, which
are callable at any time. This asset class also includes $
79.7
million of direct loans which are accounted for at amortized cost, net of
unamortized origination fees, if any, and are categorized as Level 3
investments in the fair value hierarchy. The interest rates on these direct
loans are consistent with market rates, and their amortized cost approximates
fair value.
The contractual maturities of debt securities as of
June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022 Less than 1 year through 6 years through More than
1 year 5 years 10 years 10 years
U.S. governmental securities $ $ 1 $ $ 10
Corporate debt securities
Other debt securities
Total fixed maturities $ $ 1 $ $ 10
December 31, 2021 Less than 1 year through 6 years through More than
1 year 5 years 10 years 10 years
U.S. governmental securities $ $ 1 $ $ 13
Corporate debt securities
Other debt securities
Total fixed maturities $ $ 1 $ $ 13
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Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost of each individual
asset held in the perpetual care trusts on a quarterly basis.
An aging of unrealized losses on the Companys investments in debt and equity
securities within the perpetual care trusts as of
June 30, 2022 and December 31, 2021 is presented below (in thousands):
Less than 12 months 12 months or more Total
June 30, 2022 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Fixed maturities:
U.S. governmental securities $ 1 $ $ $ $ 1 $
Corporate debt securities
Other debt securities
Total fixed maturities 1 1
Mutual fundsdebt securities 823 201 364 116 1,187 317
Mutual fundsequity securities 1,540 219 392 78 1,932 297
Other investment funds 24,535 2,393 24,535 2,393
Equity securities 317 50 76 80 393 130
Total $ 27,216 $ 2,863 $ 832 $ 274 $ 28,048 $ 3,137
Less than 12 months 12 months or more Total
December 31, 2021 Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Fixed maturities:
U.S. governmental securities $ $ $ 990 $ $ 990 $
Corporate debt securities 1,959 1,959
Other debt securities
Total fixed maturities 2,949 2,949
Mutual fundsdebt securities 863 25 454 10 1,317 35
Mutual fundsequity securities 661 60 1 3 662 63
Other investment funds 26,533 2,776 26,533 2,776
Equity securities 962 112 1 1 963 113
Total $ 29,019 $ 2,973 $ 3,405 $ 14 $ 32,424 $ 2,987
For all securities in an unrealized loss position, the Company evaluated the
severity of the impairment and length of time that a security has been in a
loss position and concluded the decline in fair value below the assets cost
was temporary in nature. In addition, the Company is not aware of any
circumstances that would prevent the future market value recovery for these
securities.
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its perpetual care trust assets for other-than-temporary
declines in fair value on a quarterly basis. During the six months ended June
30, 2022, the Company determined, based on its review, that there were no
other than temporary impairments to the investment portfolio in the perpetual
care trusts. During the six months ended June 30, 2021, the Company
determined, based on its review, that there were
6
securities with an aggregate cost basis of approximately
$
84,000
and an aggregate fair value of approximately
$
30,000
, resulting in an impairment of
$
54,000
, with such impairment considered to be other than temporary due to credit
indicators. Accordingly, the Company adjusted the cost basis of these assets
to their current value with the offset going against the liability for
perpetual care trust corpus.
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Impairment of Direct Loans
On a quarterly basis, the perpetual care trusts evaluate the carrying value of
each direct loan for impairment. A direct loan is considered impaired when,
based on current information and events, it is determined that the trusts will
not be able to collect the amounts due according to the loan contract,
including scheduled interest payments. This evaluation is generally based on
delinquency information, an assessment of the borrowers financial condition
and the adequacy of collateral, if any. The trusts would generally place
direct loans on nonaccrual status when the full and timely collection of
interest or principal becomes uncertain and they are 90 days past due for
interest or principal, unless the direct loan is both well-secured and in the
process of collection. When placed on nonaccrual, the trusts would reverse any
accrued unpaid interest receivable against interest income and amortization of
any net deferred fees is suspended. Generally, the trusts would return a
direct loan to accrual status when all delinquent interest and principal
become current under the terms of the credit agreement and collectability of
remaining principal and interest is no longer doubtful. In certain
circumstances, the trusts may place a direct loan on nonaccrual status but
conclude it is not impaired. The trusts may retain independent third-party
valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the
impairment based on the present value of expected future cash flows,
discounted at the receivables effective interest rate, or the estimated fair
value of the collateral, less estimated costs to sell. If it is determined
that the value of an impaired receivable is less than the recorded investment,
the trusts would recognize impairment with a charge to deferred revenue. When
the value of the impaired loan is calculated by discounting expected cash
flows, interest income would be recognized using the loans effective interest
rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any
identified impaired loans. In developing the allowance for credit losses, the
trusts consider, among other things, the following credit quality indicators:
"
business characteristics and financial conditions of obligors;
"
current economic conditions and trends;
"
actual charge-off experience;
"
current delinquency levels;
"
value of underlying collateral and guarantees;
"
regulatory environment; and
"
any other relevant factors predicting investment recovery.
There were
no
such impairments during the
three and six months ended June 30, 2022
and 2021.
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8.
LONG-TERM DEBT
Total debt consisted of the following at the dates indicated (in thousands):
June 30, 2022 December 31, 2021
8.500 $ 400,000 $ 400,000
% Senior Secured Notes due 2029
Insurance and vehicle financing 2,866 762
Less deferred financing costs, net of accumulated amortization ( ) ( )
10,257 10,599
Total debt 392,609 390,163
Less current maturities ( ) ( )
2,576 762
Total long-term debt $ 390,033 $ 389,401
2029 Notes
On May 11, 2021, the Company issued $
400.0
million aggregate principal amount of
8.500
% Senior Secured Notes due
2029
. The gross proceeds from the sale of the 2029 Notes was $
389.9
million, less advisor fees, legal fees, mortgage costs and other closing
expenses. The 2029 Notes were issued pursuant to the 2029 Indenture, dated as
of May 11, 2021, by and among the Company, the guarantors named therein and
Wilmington Trust, National Association, as trustee and collateral agent
(Wilmington). Capitalized terms that are used in this description of the 2029
Notes but not defined herein shall have the meaning assigned to such terms in
the 2029 Indenture.
Proceeds from the sale of the 2029 Notes were used to fund the redemption in
full of approximately $
338.1
million aggregate principal amount of the
2024
Notes together with an approximately $
18.5
million prepayment premium and pay fees and expenses incurred in connection
with the offering. Any remaining proceeds will be used for general corporate
purposes, which may include acquisitions. Upon deposit of the funds to redeem
the 2024 Notes with the 2024 Trustee, the 2024 Indenture was satisfied and
discharged in accordance with its terms. As a result of the satisfaction and
discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors,
including the Company, have been released from their obligations with respect
to the 2024 Indenture and the 2024 Notes, except with respect to those
provisions of the 2024 Indenture that, by their terms, survive the
satisfaction and discharge of the 2024 Indenture.
Interest; Maturity; Issue Price
Interest on the 2029 Notes accrues at a rate of
8.5
% per year, payable in cash
semiannually
, in arrears, on May 15 and November 15 of each year, beginning on November
15, 2021
. The Notes mature on May 15, 2029. Subject to the covenants contained in the
2029 Indenture, the Company may, without the consent of the holders of the
2029 Notes, issue additional notes under the 2029 Indenture (Additional Notes)
having the same terms in all respects as the 2029 Notes, which shall be
treated with the 2029 Notes as a single class under the 2029 Indenture. The
issue price of the 2029 Notes was
100
%.
Redemption
The 2029 Notes are redeemable at the Companys option, in whole or in part, on
and after May 15, 2024 at the redemption prices (expressed as percentages of
principal amount) set forth below, plus any accrued and unpaid interest, if
any, to, but excluding, the redemption date.
On or after May 15, 2024 and prior to May 15, 2025 104.250
%
On or after May 15, 2025 and prior to May 15, 2026 102.125
%
On or after May 15, 2026 100.000
%
In addition, prior to May 15, 2024, the Company may utilize the net proceeds
of one or more equity offerings to redeem up to
40
% of the aggregate principal amount of the 2029 Notes originally issued under
the 2029 Indenture, including any Additional Notes, at a redemption price of
108.500
% of the principal amount of the 2029 Notes redeemed, plus any accrued and
unpaid interest, if any, to, but excluding, the redemption date, provided that
at least
50
% of the aggregate principal amount of the 2029 Notes (including Additional
Notes) originally issued under the 2029 Indenture remain outstanding following
such redemption.
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During each of the 12-month periods ending May 10, 2022, May 10, 2023 and May
10, 2024, respectively, the Company may redeem up to
10
% of the aggregate principal amount of the 2029 Notes (including Additional
Notes) originally issued under the 2029 Indenture at a redemption price equal
to
103
% of the principal amount of the 2029 Notes redeemed plus accrued and unpaid
interest, if any, to, but excluding, the redemption date.
Prior to May 15, 2024, the 2029 Notes are redeemable at the Companys option,
in whole or in part, at a redemption price equal to
100
% of the principal amount of the 2029 Notes being redeemed plus an applicable
premium (as defined in the 2029 Indenture) along with accrued and unpaid
interest, if any, to, but excluding, the redemption date.
Upon the occurrence of a change of control (as defined in the 2029 Indenture),
if the Company has not previously exercised its right to redeem all of the
outstanding 2029 Notes pursuant to the optional redemption provisions as
described above, the Company must offer to repurchase the 2029 Notes at a
redemption price equal to
101
% of the principal amount of the 2029 Notes, plus accrued and unpaid interest,
if any, to, but excluding, the date of repurchase.
Upon certain asset sales where the excess proceeds from all applicable asset
sales exceed $
10
million since the issue date of the 2029 Notes, the Company may be required in
certain circumstances to make an offer to purchase 2029 Notes with the excess
proceeds from such an asset sale in excess of such $
10
million threshold at a price in cash equal to
100
% of the principal amount thereof, together with accrued and unpaid interest,
if any, to, but excluding, the date of purchase.
Guarantees and Collateral
The Companys obligations under the 2029 Notes and the 2029 Indenture are
jointly and severally guaranteed (the Note Guarantees) by each of the Companys
existing and future direct and indirect domestic subsidiaries, with certain
exceptions, and will be guaranteed by each of the Companys foreign
subsidiaries that guarantees any future credit facility (each applicable
foreign and domestic subsidiary, a 2029 Guarantor and collectively, the 2029
Guarantors). In connection with the Note Guarantees, the Company, the 2029
Guarantors and Wilmington entered into a Security Agreement, dated May 11,
2021 (the Security Agreement). Pursuant to the 2029 Indenture and the Security
Agreement, the Companys obligations under the 2029 Indenture and the 2029
Notes are secured by a lien and security interest (subject to permitted liens
and security interests) in substantially all of the Companys and the 2029
Guarantors existing and future property and assets, excluding certain assets
which include, among others: (a) trust and other fiduciary accounts and
amounts required to be deposited or held therein, (b) assets that may not be
pledged as a matter of law or without governmental approvals, until such time
such assets may be pledged without legal prohibition and (c) owned and leased
real property that (i) may not be pledged as a matter of law or without the
prior approval of any governmental authority or third person, (ii) is not
operated or intended to be operated as a cemetery, crematory or funeral home
or (iii) has a fair market value of less than $
3.0
million.
The 2029 Notes are the Companys senior secured obligations and the guarantees
are the 2029 Guarantors senior secured obligations. The obligations of the
Company and each 2029 Guarantor:
"
rank equal in right of payment with all of the Company and each 2029
Guarantors existing and future senior indebtedness, including any borrowings
under any future credit facility;
"
rank senior in right of payment to all of the Companys and each 2029
Guarantors existing and future subordinated indebtedness;
"
are effectively senior to all of the Companys and each 2029 Guarantors
unsecured senior indebtedness to the extent of the value of the collateral
securing the 2029 Notes and the Note Guarantees;
"
are contractually subordinated to the Companys and each 2029 Guarantors
obligations under any future credit facility permitted by the 2029 Indenture
to the extent of the value of the collateral securing such credit facility and
subject to the terms of any future intercreditor agreement; and
"
are structurally subordinated to all indebtedness and other obligations of the
Companys existing and future subsidiaries that do not guarantee the 2029 Notes.
Covenants
The 2029 Indenture requires the Company and the 2029 Guarantors, as
applicable, to comply with various affirmative covenants regarding, among
other matters, delivery to Wilmington of financial statements and certain
other information or reports filed with the Securities and Exchange Commission.
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The 2029 Indenture requires the Company and the 2029 Guarantors, as
applicable, to comply with certain covenants including, but not limited to,
covenants that, subject to certain exceptions, limit the Companys and 2029
Guarantors ability to: (i) incur additional indebtedness or issue disqualified
capital stock; (ii) pay dividends, redeem subordinated debt or make other
restricted payments; (iii) make certain investments; (iv) create or incur
certain liens; (v) issue stock of subsidiaries; (vi) enter into certain
transactions with affiliates; (vii) merge, consolidate or transfer
substantially all of its respective assets; (viii) agree to dividend or other
payment restrictions affecting the Restricted Subsidiaries; (ix) change the
business it conducts; (x) withdraw any monies or other assets from, or make
any investments of, its trust funds; and (xi) transfer or sell assets,
including capital stock of a Restricted Subsidiary.
Events of Default
The 2029 Indenture contains customary events of default, which could, subject
to certain conditions, cause the 2029 Notes to become immediately due and
payable, including, but not limited to defaults by the Company in the payment
of the principal of any 2029 Notes when the same becomes due and payable at
maturity, upon acceleration or redemption, or otherwise (other than pursuant
to an offer to purchase by the Company) or in the payment of interest on any
2029 Notes when the same becomes due and payable, and the default continues
for a period of 30 days; failure to comply with certain repurchase obligations
in the 2029 Indenture and certain other covenants the 2029 Indenture relating
to mergers, consolidation or sales of assets; failure to comply with certain
other
covenants in the 2029 Indenture beyond the applicable cure period following
notice by Wilmington or the holders of at least
30
% in aggregate principal amount of the 2029 Notes then outstanding
; failure to pay debt within any applicable grace period after the final
maturity or acceleration of such debt by the holders thereof because of a
default, if the total amount of such debt unpaid or accelerated exceeds $
20.0
million; failure to pay final judgments entered by a court or courts of
competent jurisdiction aggregating $
20.0
million or more (excluding amounts covered by insurance), which judgments are
not paid, discharged or stayed, for a period of 60 days; and certain events of
bankruptcy or insolvency.
As of June 30, 2022, the Company was in compliance with the covenants of the
2029 Indenture.
Deferred Financing Costs
For the three months ended June 30, 2022 and 2021, the Company recognized
$
0.3
million
and
$
0.7
million
, respectively, of amortization of deferred financing fees on its various debt
facilities. For the six months ended June 30, 2022 and 2021, the Company
recognized
$
0.7
million
and
$
1.7
million
, respectively, of amortization of deferred financing fees on its various debt
facilities.
In connection with the full redemption of the 2024 Notes, the Company wrote
off unamortized deferred financing fees of $
13.1
million and original issue discount of $
8.5
million, for the three and six months ended June 30, 2021, which are included
in Loss on debt extinguishment in the accompanying condensed consolidated
statements of operations.
9.
STOCKHOLDERS EQUITY
Capital Stock
The Company is authorized to issue two classes of capital stock: common stock, $
0.01
par value per share (Common Stock) and preferred stock, $
0.01
par value per share (Preferred Stock).
At June 30, 2022,
118,723,067
shares of Common Stock were issued and outstanding and
no
shares of Preferred Stock were issued or outstanding. At
June 30, 2022, there were
81,276,933
shares of Common Stock available for issuance, including
1,389,010
shares available for issuance as stock-based incentive compensation under the
Companys Amended and Restated 2019 Long-Term Incentive Plan (as amended, the
Plan), and
10,000,000
shares of Preferred Stock available for issuance.
Stock-based Compensation
The Plan permits the granting of awards covering a total of
9,875,000
common units of the Company. A unit under the Plan is defined as a common unit
of the Company and such other securities as may be substituted or
resubstituted for common units of the Company, including but not limited to
shares of the Companys Common Stock. The Plan is intended to promote the
interests of the Company by providing to employees, consultants and directors
of the Company incentive compensation awards to encourage superior performance
and enhance the Companys ability to attract and retain the services of
individuals who are essential for its growth and profitability and to
encourage them to devote their best efforts to advancing the Companys business.
28
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Stock Options
A rollforward of stock options as of
June 30, 2022 is as follows:
Number of Stock Options Weighted Average Exercise Price Per Share ($)
Total outstanding at December 31, 2021 6,075,000 1.27
Options granted 225,000 3.42
Options exercised ( ) 1.24
812,163
Options forfeited ( ) 1.30
220,001
Options expired
Total outstanding at June 30, 2022 5,267,836 1.36
For the six months ended June 30, 2022 and 2021, non-cash compensation expense
related to stock options was
$
0.3
million
. As of June 30, 2022, total unrecognized compensation cost related to
unvested stock options was
$
0.7
million
, which the Company expects to recognize over the remaining weighted-average
period of
1.7
year.
Restricted Stock and Phantom Stock
A rollforward of restricted stock and phantom stock awards as of
June 30, 2022 is as follows:
Number of Restricted Stock Weighted Average Grant
and Phantom Stock Awards Date Fair Value ($)
Total non-vested at 873,600 1.95
December 31, 2021
Granted 41,035 2.56
Vested ( ) 3.88
93,750
Forfeited ( ) 1.71
45,001
Total non-vested 775,884 1.77
at June 30, 2022
For the six months ended June 30, 2022 and 2021, the Company recognized
$
0.7
million
of non-cash compensation expense related to restricted stock and phantom stock
awards into earnings. As of June 30, 2022, total unamortized compensation cost
related to unvested restricted stock awards was
$
0.6
million
, which the Company expects to recognize over the remaining weighted-average
period of
1.4
years.
10.
DEFERRED REVENUES AND COSTS
The Company defers revenues and all direct costs associated with the sale of
pre-need cemetery merchandise and services until the merchandise is delivered
or the services are performed. The Company recognizes deferred merchandise and
service revenues as customer contract liabilities within long-term liabilities
on its consolidated balance sheets. The Company recognizes deferred direct
costs associated with pre-need cemetery merchandise and service revenues as
deferred selling and obtaining costs within long-term assets on its
consolidated balance sheets. The Company also defers the costs to obtain new
pre-need cemetery and new prearranged funeral business as well as the
investment earnings on the prearranged services and merchandise trusts. Such
costs are recognized when the associated performance obligation is fulfilled
based upon the net change in the customer contract liabilities. All other
selling costs are expensed as incurred. Additionally, the Company has elected
the practical expedient of not recognizing incremental costs to obtain a
contract as incurred, as the associated amortization period is typically
one
year or less.
Deferred revenues and related costs consisted of the following (in thousands):
June 30, 2022 December 31, 2021
Deferred contract revenues $ 915,822 $ 880,290
Deferred merchandise trust revenue 163,735 150,368
Deferred merchandise trust unrealized gains (losses) 38,651 25,602
Deferred revenues $ 1,118,208 $ 1,056,260
Deferred selling and obtaining costs $ 127,927 $ 124,023
For the six months ended June 30, 2022 and 2021, the Company recognized
$
42.8
million
and
$
42.9
million
, respectively, of the customer contract liabilities balance that existed at
December 31, 2021 and 2020, respectively, as revenue.
29
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The components of the customer contract liabilities, net in the Companys
consolidated balance sheets at
June 30, 2022 and December 31, 2021 were as follows (in thousands):
June 30, 2022 December 31, 2021
Customer contract liabilities, gross $ 1,145,408 $ 1,082,970
Amounts due from customers for unfulfilled performance obligations on cancellable ( ) ( )
pre-need contracts 27,200 26,710
Customer contract liabilities, net $ 1,118,208 $ 1,056,260
The Company expects to service approximately
55
% of its deferred revenue in the first 4-5 years and approximately
80
% of its deferred revenue within 18 years. The Company cannot estimate the
period when it expects its remaining performance obligations will be
recognized, because certain performance obligations will only be satisfied at
the time of death.
11.
COMMITMENTS AND CONTINGENCIES
Legal
The Company is subject to state law claims that certain of its officers and
directors breached their fiduciary duties, as well as a claim under federal
law that certain of the Companys prior proxy disclosures were misleading. The
Company could also become subject to additional claims and legal proceedings
relating to the factual allegations made in these actions. While management
cannot reasonably estimate the potential exposure in these matters at this
time, if we do not prevail in any such proceedings, we could be required to
pay substantial damages or settlement costs, subject to certain insurance
coverages. Management has determined that, based on the status of the claims
and legal proceedings described below, the amount of the potential losses
cannot be reasonably estimated at this time. These actions are summarized
below.
"
Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States
District Court for the Eastern District of Pennsylvania, and filed on February
6, 2017. The plaintiff in this case brought, derivatively on behalf of the
Partnership, claims that the officers and directors of StoneMor GP LLC, a
Delaware limited liability company and general partner of the Partnership
(StoneMor GP), aided and abetted in breaches of StoneMor GPs purported
fiduciary duties by, among other things and in general, allegedly making
misrepresentations through the use of non-GAAP accounting standards in the
Partnerships public filings, by allegedly failing to clearly disclose the use
of proceeds from debt and equity offerings, and by allegedly approving
unsustainable distributions. The plaintiff also claims that these actions and
misrepresentations give rise to causes of action for gross mismanagement,
unjust enrichment, and (in connection with a purportedly misleading proxy
statement filed in 2014) violations of Section 14(a) of the Exchange Act. The
derivative plaintiff seeks an award of damages, attorneys fees and costs in
favor of the Partnership as nominal plaintiff, as well as general compliance
and governance changes. This case has been stayed, by the agreement of the
parties, provided that either party may terminate the stay on 30 days notice.
"
Fried v. Axelrod, et al., C.A. No. 2020-1065-SG, pending in the Chancery Court
of the State of Delaware and filed on December 16, 2020. The plaintiff in this
case brought an action he seeks to have certified as a class action that
asserts claims against Axar Capital Management, LP (Axar), Andrew M. Axelrod
and the other individuals who were directors at the time of the transactions
in question and against the Company as a nominal defendant. The complaint
includes direct claims against all individual defendants and derivative claims
against the individual defendants other than Mr. Axelrod for breach of
fiduciary duty in approving certain transactions in connection with the
Companys sale of preferred and common stock to Axar and certain accounts
managed by Axar (the Axar Stock Purchase). The complaint also includes
derivative claims against Axar for breach of fiduciary duty and unjust
enrichment in connection with those same transactions as well as direct claims
against both Axar and Mr. Axelrod for breach of fiduciary duty with respect to
those transactions. Finally, the complaint includes a derivative claim against
all individual defendants for breach of fiduciary duty in connection with the
approval of a related-party investment disclosed by the Company. The plaintiff
seeks rescission of the transactions contemplated by the Axar Stock Purchase
and the related-party investment and/or an award of damages as well as
attorneys fees and costs. On January 6, 2021, a motion to dismiss the
complaint was filed on behalf of the Company and the individual defendants
other than Mr. Axelrod and on January 11, 2021, a motion to dismiss the
complaint was filed on behalf of Axar and Mr. Axelrod. On April 2, 2021, the
plaintiff filed a First Amended Complaint, which included additional factual
background regarding the plaintiffs claims and alleged demand futility, but
did not add additional defendants, claims or relief sought. The defendants
filed a motion to dismiss the First Amended Complaint on April 16, 2021.
Thereafter, the plaintiff and defendants filed a joint stipulation to stay the
Fried litigation. On December 9, 2021, this action was consolidated with the
Titterton action filed in November 2021 and described below.
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"
Titterton v. StoneMor Inc., C.A. No.: 2021-1028-SG, pending in the Court of
Chancery of the State of Delaware and filed on November 24, 2021. The
plaintiff in this case brought a derivative action that asserts claims against
Axar, Andrew M. Axelrod and the other individuals who were directors at the
time of the transactions in question and against the Company as a nominal
defendant. On December 9, 2021, the Fried action was consolidated with this
action, with Titterton and Fried appointed as lead plaintiffs. On December 27,
2021, a motion to dismiss plaintiffs complaint was filed on behalf of the
Company and the individual defendants other than Mr. Axelrod and on December
28, 2021, a motion to dismiss the complaint was filed on behalf of Axar and
Mr. Axelrod. On February 4, 2022, all defendants filed their briefs in support
of their motions to dismiss. The plaintiffs subsequently filed an amended
complaint on March 11, 2022. The amended complaint includes derivative claims
against the individual defendants, Mr. Axelrod, and Axar for breach of
fiduciary duty in approving certain transactions in connection with the
Companys sale of preferred and common stock to Axar and certain accounts
managed by Axar (the Axar Stock Purchase), as well as for breach of fiduciary
duty in connection with the approval of a related-party investment disclosed
by the Company. The amended complaint also includes claims against Mr. Axelrod
and Axar for unjust enrichment with respect to those same transactions. The
plaintiffs seek rescission of the transactions contemplated by the Axar Stock
Purchase and the related-party investment and/or an award of damages as well
as attorneys fees and costs. On March 25, 2022, the defendants filed motions
to dismiss the amended complaint. On April 22, 2022, all defendants filed
their briefs in support of their motions to dismiss. The plaintiffs filed
their brief in response to the defendants motion to dismiss on May 27, 2022
and the defendants filed their reply brief on June 27, 2022.
The Company is party to other legal proceedings in the ordinary course of its
business, but does not expect the outcome of any proceedings, individually or
in the aggregate, to have a material adverse effect on its financial position,
results of operations or cash flows. The Company carries insurance with
coverage and coverage limits that it believes to be customary in the cemetery
and funeral home industry. Although there can be no assurance that such
insurance will be sufficient to protect the Company against all contingencies,
Management believes that the insurance protection is reasonable in view of the
nature and scope of the Companys operations.
Moon Landscaping, Inc.
On April 2, 2020, the Company entered into two multi-year Master Services
Agreements (the MSAs) with Moon Landscaping, Inc. and its affiliate, Rickert
Landscaping, Inc. (collectively Moon) to outsource grounds and maintenance
services at most of the Companys funeral homes and cemeteries. Due to certain
liquidity constraints and performance issues experienced by Moon, the Company
exercised its right under the MSAs to take back the responsibility for grounds
and maintenance services at the locations outsourced to Moon with respect to
81
locations effective July 1, 2021,
22
locations effective August 1, 2021,
111
locations effective August 9, 2021,
34
locations effective November 15, 2021 and the remaining locations effective
January 7, 2022.
Archdiocese of Philadelphia
In May 2014, the Company entered into lease and management agreements with the
Archdiocese of Philadelphia, pursuant to which the Company has committed to
pay aggregate fixed rent of $
36.0
million in the following amounts:
Lease Years 6-20 (June 1, 2019-May 31, 2034) $
1,000,000
per Lease Year
Lease Years 21-25 (June 1, 2034-May 31, 2039) $
1,200,000
per Lease Year
Lease Years 26-35 (June 1, 2039-May 31, 2049) $
1,500,000
per Lease Year
Lease Years 36-60 (June 1, 2049-May 31, 2074) None
The fixed rent for lease years
six
through
11
, an aggregate of $
6.0
million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the
agreements in accordance with their terms during lease year 11 or the Company
terminates the agreements as a result of a default by the Archdiocese, the
Company is entitled to retain the deferred fixed rent. If the agreements are
not terminated, the deferred fixed rent will become due and payable on or
before June 30, 2025.
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12.
LEASES
The Company leases a variety of assets throughout its organization, such as
office space, funeral homes, warehouses and equipment. In addition the Company
has a sale-leaseback related to
one
of its warehouses. Leases with an initial term of 12 months or less are not
recorded on the Companys consolidated balance sheets, and the Company
recognizes lease expense for these leases on a straight-line basis over the
lease term. For lease agreements with an initial term of more than 12 months,
the Company measures the lease liability at the present value of the sum of
the remaining minimum rental payments, which exclude executory costs.
Certain leases provide the Company with the option to renew for additional
periods, with renewal terms that can extend the lease term for periods ranging
from
1
to
30 years
.
The exercise of lease renewal options is at the Companys sole discretion, and
the Company is only including the renewal option in the lease term when the
Company can be reasonably certain that it will exercise the renewal options.
The Company does have residual value guarantees on the finance leases for its
vehicles, but no residual guarantees on any of its operating leases.
Certain of the Companys leases have variable payments with annual escalations
based on the proportion by which the consumer price index (CPI) for all urban
consumers increased over the CPI index for the prior comparative year.
The Company has the following balances recorded on its consolidated balance
sheets related to leases:
June 30, 2022 December 31, 2021
Assets:
Operating $ 5,449 $ 5,944
Finance 3,035 3,343
Total ROU assets $ 8,484 $ 9,287
(1)
Liabilities:
Current
Operating $ 1,136 $ 1,103
Finance 1,764 1,859
Long-term
Operating 4,514 4,969
Finance 670 1,035
Total lease liabilities $ 8,084 $ 8,966
(2)
(1)
The Companys ROU operating assets and finance assets are presented within
Other assets and Property and equipment, net of accumulated depreciation,
respectively, in its consolidated balance sheets.
(2)
The Companys current lease liabilities and long-term are presented within
Accounts payable and accrued liabilities and Other long-term liabilities,
respectively, in its consolidated balance sheets.
As most of the Companys leases do not provide an implicit rate, the Company
uses its incremental borrowing rate, based on the information available at
commencement date, in determining the present value of lease payments. The
Company used the incremental borrowing rate on January 1, 2019 for operating
leases that commenced prior to that date. The weighted average borrowing rates
for operating and finance leases were
9.9
%
and
8.8
%
, respectively, as of June 30, 2022.
The components of lease expense were as follows:
Six months ended June 30,
2022 2021
Lease cost Classification
Operating lease costs General and administrative expense $ 912 $ 1,009
(1)
Finance lease costs
Amortization of leased assets Depreciation and Amortization 468 606
Interest on lease liabilities Interest expense 153 166
Short-term lease costs General and administrative expense
(2)
Net lease costs $ 1,533 $ 1,781
(1)
The Company includes its variable lease costs under operating lease costs as
these variable lease costs are immaterial.
(2)
The Company does not have any short-term leases with lease terms greater than
one month
.
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Maturities of the Companys lease liabilities as of
June 30, 2022 were as follows:
Year ending December 31, Operating Finance
2022 $ 865 $ 1,345
2023 1,489 816
2024 1,253 211
2025 1,131 114
2026 1,100 151
Thereafter 1,504 44
Total $ 7,342 $ 2,681
Less: Interest ( ) ( )
1,693 247
Present value of lease liabilities $ 5,649 $ 2,434
Maturities of the Companys lease liabilities as of December 31, 2021 were as
follows:
Year ending December 31, Operating Finance
2022 $ 1,661 $ 2,099
2023 1,460 780
2024 1,223 168
2025 1,111 95
2026 1,086 100
Thereafter 1,498
Total $ 8,039 $ 3,242
Less: Interest ( ) ( )
1,967 348
Present value of lease liabilities $ 6,072 $ 2,894
Operating and finance lease payments include
$
0.1
million related to options to extend lease terms that are reasonably certain
of being exercised and
$
1.4
million related to residual value guarantees. The weighted average remaining
lease term for operating and finance leases was
5.4
years and
1.4
years, respectively, as of June 30, 2022.
As of June 30, 2022
,
the Company had no additional operating leases that had not yet commenced, and
did not have any lease transactions with its related parties
. In addition, as of
June 30, 2022
, the Company had not entered into any new sale-leaseback arrangements.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has established a hierarchy to classify the inputs used to measure
the Companys financial instruments at fair value, pursuant to which the
Company is required to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Observable inputs
represent market data obtained from independent sources; whereas, unobservable
inputs reflect the Companys own market assumptions, which are used if
observable inputs are not reasonably available without undue cost and effort.
The hierarchy defines three levels of inputs that may be used to measure fair
value:
"
Level 1 Unadjusted quoted market prices in active markets for identical,
unrestricted assets or liabilities that the reporting entity has the ability
to access at the measurement date.
"
Level 2 Inputs other than quoted prices included within Level 1 that are
observable for the asset and liability or can be corroborated with observable
market data for substantially the same contractual term of the asset or
liability.
"
Level 3 Unobservable inputs based on the entitys own assumptions about the
assumptions market participants would use in the pricing of the asset or
liability and are consequently not based on market activity but rather through
particular valuation techniques.
The carrying value of the Companys current assets and current liabilities on
its consolidated balance sheets approximated or equaled their estimated fair
values due to their short-term nature or imputed interest rates.
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Recurring Fair Value Measurement
At June 30, 2022 and December 31, 2021, the two financial instruments measured
by the Company at fair value on a recurring basis were its merchandise and
perpetual care trusts, which consist of investments in debt and equity
marketable securities and cash equivalents that are carried at fair value and
are classified as either Level 1 or Level 2 (see Note 6
Merchandise Trusts
and Note 7
Perpetual Care Trusts
).
Where quoted prices are available in an active market, securities are
classified as Level 1 investments pursuant to the fair value measurement
hierarchy. Where quoted market prices are not available for the specific
security, fair values are estimated by using either quoted prices of
securities with similar characteristics or an income approach fair value model
with observable inputs that include a combination of interest rates, yield
curves, credit risks, prepayment speeds, rating, and tax-exempt status. These
securities are classified as Level 2 investments pursuant to the fair value
measurements hierarchy. Certain investments in the merchandise and perpetual
care trusts are excluded from the fair value leveling hierarchy in accordance
with GAAP. These funds are measured at fair value using the net asset value
per share practical expedient and have not been categorized in the fair value
hierarchy.
Non-Recurring Fair Value Measurement
The Company may be required to measure certain assets and liabilities at fair
value, such as its indefinite-lived assets and long-lived assets, on a
nonrecurring basis in accordance with GAAP from time to time. These
adjustments to fair value usually result from impairment charges.
Other Financial Instruments
The Companys other financial instruments at June 30, 2022 and December 31,
2021 consisted of its 2029 Notes (see Note 8
Long-Term Debt
). At June 30, 2022 and December 31, 2021, the estimated fair value of the
Company's 2029 Notes was
$
352.0
million
and $
413.5
million, respectively, based on trades made on that date, compared with the
carrying amount of
$
400.0
million
.
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14.
SEGMENT INFORMATION
Management operates the Company in
two
reportable operating segments: Cemetery Operations and Funeral Home
Operations. These operating segments reflect the way the Company manages its
operations and makes business decisions. Management evaluates the performance
of these operating segments based on interments performed, interment rights
sold, pre-need cemetery and at-need cemetery contracts written, revenue and
segment profit (loss). As a percentage of revenue and assets, the Companys
major operations consist of its cemetery operations.
The following tables present financial information with respect to the
Companys segments (in thousands). Corporate costs represent those not directly
associated with an operating segment, such as corporate overhead, interest
expense and income taxes. Corporate assets primarily consist of cash and cash
equivalents and restricted cash.
Three Months Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
STATEMENT OF
OPERATIONS DATA:
Cemetery
Operations:
Revenues $ 70,454 $ 72,128 $ 139,951 $ 139,108
Operating costs ( ) ( ) ( ) ( )
and expenses 63,692 55,951 123,736 109,696
Depreciation and ( ) ( ) ( ) ( )
amortization 1,423 1,505 2,857 3,081
Segment operating $ 5,339 $ 14,672 $ 13,358 $ 26,331
profit
Funeral Home
Operations:
Revenues $ 9,593 $ 10,853 $ 21,073 $ 22,186
Operating costs ( ) ( ) ( ) ( )
and expenses 9,274 9,194 19,049 18,535
Depreciation and ( ) ( ) ( ) ( )
amortization 434 423 866 854
Segment operating $ ( ) $ 1,236 $ 1,158 $ 2,797
profit 115
Reconciliation of segment operating profit
to net loss from continuing operations:
Cemetery $ 5,339 $ 14,672 $ 13,358 $ 26,331
Operations
Funeral Home ( ) 1,236 1,158 2,797
Operations 115
Total segment 5,224 15,908 14,516 29,128
profit
Corporate ( ) ( ) ( ) ( )
overhead 12,806 9,534 24,619 19,075
Corporate depreciation ( ) ( ) ( ) ( )
and amortization 161 99 356 194
Loss on sale of businesses ( ) ( ) ( ) ( )
and other impairments 43 2,220 43 2,220
Other (losses) ( ) 69 ( ) 69
gains 15 15
Interest ( ) ( ) ( ) ( )
expense 9,279 9,977 18,565 20,450
Loss on debt ( ) ( )
extinguishment 40,128 40,128
Income tax ( ) 9,736 ( ) 11,412
(expense) benefit 181 413
Net loss from $ ( ) $ ( ) $ ( ) $ ( )
continuing operations 17,261 36,245 29,495 41,458
CASH FLOW
DATA:
Capital
expenditures:
Cemetery $ 3,019 $ 1,345 $ 4,963 $ 3,058
Operations
Funeral Home 497 35 1,090 96
Operations
Corporate 26 207 91 207
Total capital $ 3,542 $ 1,587 $ 6,144 $ 3,361
expenditures
June 30, 2022 December 31, 2021
BALANCE SHEET DATA:
Assets:
Cemetery Operations $ 1,564,546 $ 1,506,504
Funeral Home Operations 132,364 128,590
Corporate 101,125 106,050
Total assets $ 1,798,035 $ 1,741,144
Goodwill:
Cemetery Operations $ 5,444 $
Funeral Home Operations 1,330
Total goodwill $ 6,774 $
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15.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
The tables presented below provide supplemental information to the unaudited
condensed consolidated statements of cash flows regarding contract origination
and maturity activity included in the pertinent captions on the Companys
unaudited condensed consolidated statements of cash flows (in thousands):
Six months ended June 30,
2022 2021
Accounts Receivable
Pre-need/at-need contract originations (sales on credit) $ ( ) $ ( )
71,792 68,390
Cash receipts from sales on credit (post-origination) 58,719 56,868
Changes in accounts receivable, net of allowance $ ( ) $ ( )
13,073 11,522
Customer Contract Liabilities
Deferrals:
Cash receipts from customer deposits at origination, net of refunds $ 91,425 $ 90,108
Withdrawals of realized income from merchandise trusts during the period 8,538 8,018
Pre-need/at-need contract originations (sales on credit) 71,792 68,390
Undistributed merchandise trust investment earnings, net 12,996 11,406
Recognition:
Merchandise trust investment income, net withdrawn as of end of period ( ) ( )
7,299 5,088
Recognized maturities of customer contracts collected as of end of period ( ) ( )
108,411 110,984
Recognized maturities of customer contracts uncollected as of end of period ( ) ( )
17,280 16,198
Changes in customer contract liabilities $ 51,761 $ 45,652
16.
RELATED PARTIES
At June 30, 2022, Axar beneficially owned
74.7
%
of the Companys outstanding Common Stock, which constituted a majority of the
Companys outstanding Common Stock. As a result, the Company is a controlled
company within the meaning of NYSE corporate governance standards. For
discussion of certain risks and uncertainties attributable to the Company
being a controlled company, see Part I, Item 1A. Risk Factors of the Companys
Annual Report. For discussion on the security ownership of certain beneficial
owners, directors and executives of the Company, see Part III, Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters of the Annual Report.
Subadvisor Agreement
On February 1, 2021, Cornerstone Trust Management Services LLC (Cornerstone),
a wholly-owned subsidiary of the Company, entered into a Subadvisor Agreement
(the Agreement) with Axar. The sole member of Axars general partner is Andrew
M. Axelrod, who serves as the Chairman of the Companys Board of Directors. In
connection with the execution of the Agreement, Mr. Axelrod resigned as a
member of the Trust and Compliance Committee (the Trust Committee) of the
Companys Board of Directors (the Board).
On April 19, 2022, Axar, at the request of the Trust Committee, agreed to
terminate the Agreement effective immediately. In connection with the
termination, Axar also agreed to waive all fees payable to Axar under the
Agreement for the period from January 1, 2022 though the termination date,
which amounted to $
219,000
. During the three and six months ended June 30, 2021, Axar received fees of $
103,000
and $
172,000
, respectively. The termination was requested by the Trust Committee following
its review of certain investments by the Companys trusts recommended by Axar
under the Agreement in which Axar had an interest, as more fully described in
the Companys Annual Report. In connection with the termination, the Trust
Committee authorized Cornerstone to engage Cambridge Associates LLC, which is
also a subadvisor to Cornerstone, to resume providing the administrative and
other investment advisory services it had previously furnished to Cornerstone
prior to the assumption of such responsibilities by Axar under the Agreement.
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Nomination and Director Voting Agreement
The Company is a party to a Nomination and Director Voting Agreement dated as
of September 17, 2018 (as amended on February 4, 2019, June 27, 2019, November
3, 2020 and November 20, 2020, the DVA) with Axar, certain funds and managed
accounts for which it serves as investment manager and its general partner,
Axar GP, LLC (collectively, the Axar Entities), StoneMor GP Holdings LLC, a
Delaware limited liability company and formerly the sole member of StoneMor GP
(GP Holdings), and Robert B. Hellman, Jr., as trustee under the Voting and
Investment Trust Agreement for the benefit of American Cemeteries
Infrastructure Investors LLC (ACII and, collectively with GP Holdings, the
ACII Entities). Under the DVA, and subject to certain conditions and
exceptions, the Axar Entities and their affiliates are prohibited from
acquiring additional shares of the Companys Common Stock. On April 13, 2021,
the Axar Entities, the ACII Entities and the Company entered into a letter
agreement (the Waiver) pursuant to which the Axar Entities were permitted to
acquire some or all of the shares of the Companys Common Stock held by ACII
and its affiliates in a single privately negotiated transaction and not in the
open market. The terms of the Waiver were approved by the Conflicts Committee
of the Companys Board of Directors. The waiver was subject to the following
conditions:
"
any such purchase be consummated on or before May 31, 2021;
"
the Company, the Axar Entities and the ACII Entities have entered into a
further amendment to the DVA to clarify that the standstill period applicable
to the Axar Entities will expire on December 31, 2023;
"
Axar will vote or direct the voting of all shares of the Companys Common Stock
it beneficially owns in favor of amendments to Article VIII of the Companys
Certificate of Incorporation (the Charter) relating to amendments of the
Companys Bylaws and Article X of the Charter with respect to any amendment or
repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article
X or Article XI of the Charter to increase the required stockholder approval
required thereunder from at least sixty six and two thirds percent (66 2/3%)
to at least eighty-five percent (85%) (collectively, the Supermajority
Provisions);
and
"
pending the effectiveness of such amendment to Article VIII and Article X of
the Charter, Axar would not vote or direct the voting of any shares of the
Companys Common Stock in favor of any proposal to which the Supermajority
Provisions are applicable unless such proposal has been approved by the
Companys Board of Directors and its Conflicts Committee.
As contemplated by the Waiver, on April 13, 2021, the Company, the Axar
Entities and the ACII Entities also entered into the Fifth Amendment to the
DVA pursuant to which the parties clarified that the standstill period
applicable to the Axar Entities thereunder would expire on December 31, 2023.
Merger Agreement
On May 24, 2022, the Company, Axar Cemetery Parent Corp., a Delaware
corporation (Parent), and Axar Cemetery Merger Corp., a Delaware corporation
and a wholly-owned subsidiary of Parent (Merger Sub), entered into an
Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger
Agreement, and upon the terms and subject to the conditions described therein
and in accordance with the General Corporation Law of the State of Delaware,
as amended (the DGCL), the Company, Parent and Merger Sub intend to enter into
a transaction pursuant to which Merger Sub will be merged with and into the
Company (the Merger, and, collectively with the other transactions
contemplated in the Merger agreement, the Transactions), with the Company
surviving the Merger and becoming a wholly-owned subsidiary of Parent as a
result of the Merger.
Merger Consideration
At the effective time of the Merger (the Effective Time), each Share issued
and outstanding immediately prior to the Effective Time, other than any
Excluded Shares and any Dissenting Shares (as such terms are defined in the
Merger Agreement), will be converted into the right to receive $
3.50
in cash per Share without interest (the Merger Consideration). All Shares that
are converted into the right to receive the Merger Consideration will no
longer be outstanding and will be automatically cancelled and cease to exist
as of the Effective Time. All Excluded Shares that are held by the Company
will be automatically cancelled and cease to exist as of the Effective Time,
without any conversion thereof and no payment or distribution will be made
with respect thereto. All Excluded Shares that are Axar Shares and that are
issued and outstanding immediately prior to the Effective Time will be
converted into one validly issued, fully paid and non-assessable share of
common stock, par value $
0.01
per
share, of the Surviving Corporation (as such term is defined in the Merger
Agreement). Axar Shares means Shares held by any of Parent, AC Holdings,
Merger Sub, any other direct or indirect Subsidiary of Parent or any Axar
Vehicle (as such term is defined
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in
the Merger Agreement).
At the Effective Time, (i) outstanding Company Phantom Units (as such term is
defined in the Merger Agreement) will be canceled and converted into the right
to receive an amount in cash equal to the product of the Merger Consideration
times the number of Shares subject to the award, and (ii) outstanding Company
Restricted Shares (as such term is defined in the Merger Agreement) awarded
under the Company Equity Plan will vest in full and be converted into the
right to receive the Merger Consideration under the same terms and conditions
as apply to the receipt of the Merger Consideration by holders of Shares
generally.
With respect to Company Options subject to Company Employee Option Awards (as
such terms are defined in the Merger Agreement), (A)
50
% of the Company Options will be canceled in consideration for the right to
receive a lump sum cash payment with respect thereto equal to the product of:
(1) the excess, if any, of the Merger Consideration over the applicable
exercise price of the applicable Company Employee Option Award, times (2) the
number of Shares subject to such Company Options that are cancelled, less any
required withholding taxes; and (B) the remaining Company Options will be
assumed by Parent and converted into fully vested options to purchase (on the
same terms and conditions as were applicable to such Company Options pursuant
to the Company Equity Plan and the Company Employee Option Award prior to the
Effective Time) that number of Parent Shares equal to the number of Shares
subject to such Company Option immediately prior to the Effective Time with an
exercise price equal to the exercise price applicable to such Company Option
immediately prior to the Effective Time divided by the Option Exchange Ratio
(as defined in the Merger Agreement).
The Merger Agreement was entered into following receipt of a proposal from
Axar (as such term is defined in the Merger Agreement) on September 22, 2021
(the Proposal), in which Axar expressed interest in pursuing discussions
concerning strategic alternatives that might be beneficial to the Company and
its various stakeholders. After receiving the Proposal, the Board of Directors
of the Company (the Board) authorized the Conflicts Committee of the Board
(the Conflicts Committee), consisting entirely of independent directors, to
engage in the discussions contemplated by the Proposal, including the
authority to engage in discussions concerning and to negotiate the terms and
provisions of strategic alternatives. The Conflicts Committee engaged separate
financial and legal advisors and over the course of the last several months
has negotiated the terms and conditions of Axars proposal to acquire all
outstanding shares not owned by Axar and its Affiliates (as such term is
defined in the Merger Agreement). At a meeting held on May 21, 2022, the
Conflicts Committee approved the Merger Agreement in substantially the form
subsequently executed and, based on the opinion of its independent financial
advisor, Kroll, LLC, operating through its Duff & Phelps Opinions Practice
(Duff & Phelps), concluded that the consideration payable in the Merger was
fair, from a financial perspective, to the Company and its stockholders (other
than the holders of the Excluded Shares and Insider Shares, as Insider Shares
is defined in the Merger Agreement) and unanimously recommended to the Board
that it approve the Merger Agreement and the Merger.
The Board, acting on the unanimous recommendation of the Conflicts Committee,
(i) determined that the Merger Agreement and the Transactions were fair to,
and in the best interest of, the Company and its stockholders, (ii) approved
the execution, delivery and performance by the Company of the Merger Agreement
and the consummation of the Transactions and (iii) resolved to recommend that
the stockholders of the Company tender their Shares to Purchaser pursuant to
the Offer. All of the directors of the Company approved the transaction other
than Andrew Axelrod, who was not present at the meeting.
Stockholders of the Company will be asked to vote to approve and adopt the
Merger Agreement at a stockholders meeting that will be held on a date to be
announced. A condition to the consummation of the Merger is the approval and
adoption of the Merger by the affirmative vote of (i) the holders of at least
a majority of the issued and outstanding Shares and (ii) the holders of at
least a majority of the issued and outstanding Shares other than the Axar
Shares and the Shares held by the Board and the officers of the Company and
their respective immediate family members (clauses (i) and (ii), the Requisite
Company Vote), in each case in accordance with the Companys certificate of
incorporation and bylaws and Delaware law.
Representations, Covenants and Conditions to Closing
The Merger Agreement includes certain representations, warranties and
covenants of the Company, on one hand, and Parent and Merger Sub on the other,
including certain restrictions with respect to the Companys business between
the date of the Merger Agreement and the consummation of the Merger.
The Company, Parent and Merger Sub also agreed to use their respective
reasonable best efforts to take, or cause to be taken, all appropriate
actions, and to do, or cause to be done, all things necessary, proper or
advisable under applicable Laws or otherwise
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to consummate and make effective the Transactions. The Company, Parent, and
Merger Sub also agreed, upon request by any other party, to furnish such other
party with all information concerning itself, its Affiliates, directors,
officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Proxy Statement (as defined in
the Merger Agreement), the Schedule 13E-3 or any other statement, filing,
notice or application made by or on behalf of Parent, Merger Sub, the Company
or any of their respective Affiliates to any third party or any Governmental
Authority (as defined in the Merger Agreement) in connection with the Merger
and the other Transactions.
Go-Shop Period
The Company agreed to a period (the Go-Shop Period) which commenced on the
date of the Merger Agreement and ended 60 days thereafter, or July 23, 2022
(the Go-Shop Period End Date), during which time the Company and its
representatives, acting at the direction and under the supervision of the
Conflicts Committee, were permitted to solicit Competing Transactions (as
defined in the Merger Agreement) and share information with potential bidders.
After the Go-Shop Period End Date, the Company was required to cease
discussions with other parties regarding a transaction except for Excluded
Parties. Excluded Parties means third parties that had, prior to such date,
made a bona fide written proposal for a Competing Transaction that the
Conflicts Committee determined in good faith on or prior to the Go-Shop Period
End Date, after consultation with its financial advisor and outside legal
advisors, constituted or was reasonably likely to result in a Superior
Proposal (as defined in the Merger Agreement). The Company was required,
within two days of the Go-Shop Period End Date, to provide a list of Excluded
Parties to Parent with the current terms of any acquisition proposal. During
the Go-Shop Period, the Conflicts Committees financial advisor contacted five
potential strategic buyers and 32 potential financial buyers that the
Conflicts Committee and its financial advisor believed could have an interest
in reviewing the opportunity and had the financial ability to pursue a
potential strategic transaction with the Company. None of the parties
contacted entered into a confidentiality agreement with the Company or
otherwise pursued a transaction that would be an alternative to the Merger.
Now that the Go-Shop Period End Date has passed, the Company is not permitted
to solicit potential bidders.
No Solicitation
The Company has also agreed that after the Go-Shop Period End Date, the
Company will, and will cause each of the Company Subsidiaries and each of its
and their Representatives to, immediately cease and cause to be terminated any
existing solicitation of, or discussions or negotiations with, any Third Party
(as defined in the Merger Agreement), other than Excluded Parties, relating to
any Competing Transaction or any inquiry, discussion, offer or request that
could reasonably be expected to lead to a Competing Transaction. Additionally,
the Company will, as promptly as possible, request each Third Party (other
than any Excluded Party) that has previously executed a confidentiality or
similar agreement in connection with its consideration of a Competing
Transaction to return to the Company or destroy any non-public information
previously furnished or made available to such person or any of its
Representatives by or on behalf of the Company or its Representatives in
accordance with the terms of the confidentiality agreement in place with such
person.
Pursuant to the Merger Agreement, Superior Proposal means: a written, bona
fide offer that did not result from a breach of the Merger Agreement made by a
person with respect to a Competing Transaction that the Conflicts Committee
determines, in its good faith judgement (after (a) consultation with its
financial advisor and outside legal counsel and (b) taking into consideration
all terms and conditions relating to such offer, including all legal,
financial, regulatory and other aspects of such offer, including the
likelihood and timing of consummation thereof, the identity of the person or
group making the offer and any revisions to Axars offer made or proposed in
writing pursuant to the Merger Agreement), to be more favorable to the Company
and the stockholders (other than the holders of the Excluded Shares) from a
financial point of view than the Merger.
For purposes of the definition of Superior Proposal, each reference to 10% or
20%, as the case may be, in the definition of Competing Transaction is
replaced with 50%.
For a Competing Transaction to constitute a Superior Proposal: (i) such
Competing Transaction must not be subject to a financing condition; (ii) the
Conflicts Committee must have reasonably concluded that the Person making such
offer has the financial wherewithal (together with up to $
10,000,000
in cash of the Company) necessary to perform its obligations thereunder and to
consummate the transactions contemplated thereby (including the financial
wherewithal to comply and/or cause the Company to comply with its obligations
under Section 5.14 of the Indenture (as such term is defined in the Merger
Agreement) in connection therewith); and (iii) any financing required by such
Person in connection with the Competing Transaction is then supported by
financing commitments that, if executed in connection with definitive
documentation for a transaction, would be sufficient for such purposes.
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Termination
The Merger Agreement contains certain termination rights for both the Company
and Parent and Merger Sub. The Company will pay Parent a termination fee equal
to
4
% of the aggregate value of the Shares not owned by Axar Vehicles if: Parent
terminates due to a Company breach of the Go-Shop or No Solicitation
provisions; after the end of the Go-Shop Period, the Company terminates to
enter into a Superior Proposal (as defined in the Merger Agreement) that
Parent supports; or either party terminates, and, within six months
thereafter, the Company enters into a Competing Transaction (as defined in the
Merger Agreement) in which Axar participates. Further, the Company will pay
Parent a
50
% termination fee (i.e., equal to
2
% of the aggregate value of the non-Axar shares) if: before the end of the
Go-Shop Period, the Company terminates to enter into a Superior Proposal that
Parent supports; or the Company terminates due to a Change in Company
Recommendation in connection with an Intervening Event. No Termination Fee is
payable if the Company terminates the Merger Agreement upon a change in
recommendation in connection with a Superior Proposal that is not supported by
Parent.
Co-Investments with Axar and its Affiliates
Investment in Shoe Retailer Debt Facility
In January 2020, the Companys trusts completed the purchase of a $
30
million participation in a new $
70
million debt facility issued by a discount shoe retailer (the Shoe Retailer).
Funds and accounts affiliated with Axar also invested $
20
million in this facility. The investment was initially proposed by the
Chairman of the Board, Mr. Axelrod. The investment was reviewed and approved
in December 2019 in accordance with the Partnerships governance policies in
place at that time. At the time of the investment, the funds and accounts
affiliated with Axar owned approximately
30
% of the equity of the Shoe Retailer, and Mr. Axelrod served on the Shoe
Retailers board of directors. The Companys investment in the Shoe Retailer
represented approximately
4
% of the total fair market value of the Companys trust assets when the
investment was made.
Purchase of Nevada Company Shares
On March 9, 2021, the Company's trusts purchased an aggregate of
43,681,528
shares (the Nevada Company Shares) of common stock of a Nevada company whose
primary assets now consist of cash and tax-related assets (the Nevada
Company), representing approximately
27
% of the outstanding common stock of the Nevada Company, from three private
investment funds (the Nevada Company Sellers) for an aggregate cash purchase
price of $
18.0
million. Axar had originally agreed to acquire the Nevada Company Shares
pursuant to a Securities Purchase Agreement dated December 31, 2020, among the
Nevada Company Sellers and Axar (the Nevada Company Purchase Agreement). On
February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar
recommended to Cornerstone that our trusts purchase the Nevada Company Shares.
Pursuant to that recommendation, on February 4, 2021, Axar and our trusts
entered into an Assignment and Assumption Agreement (the Nevada Company
Assignment Agreement), pursuant to which Axar agreed to assign its rights
under the Nevada Company Purchase Agreement to our trusts and our trusts
agreed to assume Axars obligations thereunder. Axar did
no
t receive any additional consideration from our trusts for this assignment and
has represented to us that it did not receive any consideration for this
assignment from any other person.
The Nevada Company Sellers and Axar entered into the Nevada Company Purchase
Agreement while the Subadvisor Agreement was being finalized. Axar has
informed us that it entered into the Nevada Company Purchase Agreement with
the intention that our trusts would purchase the Nevada Company Shares
directly from the Nevada Company Sellers. Axar has represented to Cornerstone
that it is not, and at the time it entered into the Nevada Company Purchase
Agreement was not, affiliated with any of the Nevada Company Sellers and did
not control and was not an affiliate of Nevada Company at the time it executed
the Nevada Company Purchase Agreement or when our trusts purchased the Nevada
Company Shares. Axar has represented to us that, at the time the Nevada
Company Purchase Agreement was signed and at all times thereafter until our
trusts completed their purchase of the Nevada Company Shares, funds and
accounts affiliated with Axar owned approximately
13.8
% of Nevada Companys outstanding common stock, and that Andrew Axelrod was
elected to the board of directors of the Nevada Company on December 31, 2020.
Hotel Fund Loan Agreement
On May 17, 2021, the Company's trusts entered into a Loan Agreement with a
hotel investor and developer and certain of its subsidiaries (collectively,
the Hotel Fund), which was amended and restated on October 12, 2021 (such
agreement, as so amended and restated, the Hotel Fund Loan Agreement) and
subsequently amended on December 13, 2021, March 7, 2022 and April 19, 2022.
Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $
33.2
million
mezzanine loan to the Hotel
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Fund
on May 19, 2021 as part of a $
162.2
million loan facility originated by an unaffiliated loan fund. The
participation by our trusts was based on the recommendation of Axar under the
Subadvisor Agreement. As part of the same transaction, funds and other
accounts affiliated with or managed by Axar loaned $
10.0
million to the Hotel Fund on the same terms as the trusts loans, representing
the balance of the $
43.2
million mezzanine loan, and our trusts and the Axar funds and accounts each
received an origination fee equal to
4
% of their respective loan amounts. The principal amount of these loans is
payable on October 12, 2023, subject to acceleration under the circumstances
described in the Hotel Fund Loan Agreement, and bear interest at an adjustable
rate equal to one-month LIBOR plus a spread. On February 15, 2022, the
administrative agent for the lenders under the Hotel Fund Loan Agreement
delivered a reservation of rights letter to the Hotel Fund with respect to the
Hotel Funds apparent failure to comply with several covenants in the Hotel
Fund Loan Agreement, none of which related to payment of amounts due to the
lenders. As of June 30, 2022, the interest rate was
19.07
%. In April 2022 in connection with an amendment of the Hotel Fund Loan
Agreement pursuant to which Axar committed to provide an additional $
4.5
million loan discretionary subfacility to the Hotel Fund (our trusts did not
participate in this subfacility), Axar and our trusts agreed to have the
interest payable on the mezzanine loan in April, May and June 2022 paid in
kind. The terms of the subfacility are generally the same as the existing loan
and are secured
pari passu
by the same collateral. An additional amendment, to extend the capitalization
period through September 2022, is currently being negotiated. The prior
amendments have also provided for the Hotel Fund's cooperation in a sale
process of its real estate properties, the appointment of a chief
administrative officer and the appointment of an independent financial
advisor. Through June 30, 2022, the Company's trusts have received cash
interest in the aggregate amount of $
7.7
million on this loan from an interest and expense reserve account established
for that purpose, and additional interest in the form of an additional $
1.6
million in principal of the loan, collectively representing all interest
payable to the Companys trusts under the Hotel Fund Loan Agreement. The Hotel
Fund owns its properties in subsidiaries, certain of which are subject to
underlying financing arrangements. One of these financing arrangements is
currently in default. The Hotel Fund is currently in the process of having its
properties marketed for sale, either through brokers or through auction
process, or is considering such steps or alternative steps (such as a
refinancing in certain cases).
Holdco Loan Assignment
On September 27, 2021, our trusts entered into an Assignment and Acceptance
Agreement (the Holdco Loan Assignment) with an insurance holding company
(Holdco) and Holdcos then current lender (the Initial Lender) pursuant to
which the Initial Lender agreed to assign to our trusts all of its rights,
duties and obligations under a Loan Agreement dated as of July 9, 2019 between
the Initial Lender and Holdco (the Holdco Loan Agreement). The Initial Lender
had previously declared Holdco in default under the terms of the Holdco Loan
Agreement. At the closing of the transactions contemplated by the Holdco Loan
Assignment on October 6, 2021, our trusts paid the Initial Lender $
28.7
million in cash, which equaled the then outstanding principal balance of the
loan under the Holdco Loan Agreement (the Holdco Loan). The Company was not
affiliated with either Holdco or the Initial Lender and Axar has represented
to Cornerstone that it did not control and was not an affiliate of either
Holdco or the Initial Lender. Also on September 27, 2021, our trusts and
Holdco entered into the First Amendment to Loan Agreement (the Amended Holdco
Loan Agreement) pursuant to which, among other changes, the defaults asserted
by the Initial Lender were waived and the interest rate on the Holdco Loan was
increased from
10
%, all of which had been payable in kind by increasing the principal balance
of the loan, to
15
%, of which
10
% continued to be payable in kind and
5
% was payable in cash. In addition, the Amended Holdco Loan Agreement
accelerated the maturity of the Holdco Loan to the earliest of the first
anniversary of the closing (subject to a six month extension at the request of
Holdco with the consent of our trusts) and the occurrence of certain other
events described further below. As of June 30, 2022, the interest rate on the
Holdco Loan remained at
15
%. Through June 30, 2022, the trusts have received cash interest in the
aggregate amount of $
1.6
million on the Holdco Loan and additional interest in the form of an increase
in the principal balance of the Holdco Loan in the amount of $
2.2
million, representing all interest payable to our trusts under the Amended
Loan Agreement.
Also on September 27, 2021, Axar entered into a letter agreement with Holdco
(the Transaction Letter Agreement) pursuant to which Holdco agreed, in order
to induce Axar to enter into the Amended Holdco Loan Agreement, that it would,
if requested by Axar, enter into an agreed-upon form of purchase agreement for
the sale of the outstanding capital stock of its wholly-owned insurance
company subsidiary (the Holdco Subsidiary) to Axar for a purchase price of $
100
million, subject to certain conditions including completion by Axar of a
customary due diligence investigation and regulatory approval of the
transaction by the state insurance regulator. Recently, Axar advised us that
the state insurance regulators had advised Axar that regulatory approval of
the transaction between Axar and Holdco would not be granted because the
contemplated purchase price included a $
40
million note to be issued to Holdco, and, as a result, after further
negotiations, that Holdco and Axar entered into a purchase agreement dated
January 20, 2022, which provided for a cash purchase price of $
75
million, less the outstanding amounts owed to our trusts under the Amended
Holdco Loan Agreement and a fee that remained payable to the Initial Lender.
Axar has advised us that the primary regulatory approval for the sale to Axar
under the purchase agreement was received on July 25, 2022, but that other
less material approvals remain outstanding. Because the Holdco Loan is secured
by the stock of the Holdco Subsidiary, the Holdco Loan is required to be
repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or
any third party.
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The Amended Holdco Loan Agreement provides that the Holdco Loan is due and
payable on the earliest of (a) October 6, 2022 (subject to a six-month
extension as discussed above), (b) an election by Holdco not to proceed with
the transaction contemplated by the Transaction Letter Agreement, (c) a breach
by Holdco of any of its obligations under the Transaction Letter Agreement or
any purchase agreement executed with respect to the sale of Holdco Subsidiary
or (d) the consummation of the sale of Holdco Subsidiary to Axar.
Also on September 27, 2021, (i) our trusts and Holdco entered into a letter
agreement pursuant to which Holdco has paid our trusts a fee of $
500,000
(the StoneMor Trusts Fee Letter Agreement) and (ii) Axar and Holdco entered
into an Expense Fee Letter pursuant to which Holdco agreed to pay Axars due
diligence expenses of up to $
630,000
(the Expense Fee Letter Agreement). Entrance of Holdco into both the Expense
Fee Letter Agreement and the StoneMor Trusts Fee Letter Agreement were
conditions to the effectiveness of the Amended Holdco Loan Agreement.
17.
SUBSEQUENT EVENTS
Note Purchase Agreement and Release
On July 20, 2022, the Company, Fortmore LLC (the LLC), certain affiliates (the
Fortress Purchasers) of Fortress Capital Advisors LLC (Fortress) and certain
holders of the Companys
8.500
% Senior Secured Notes due
2029
(the Company Notes) who were not affiliated with either the Company or
Fortress (the Sellers) entered into a Note Purchase Agreement and Release (the
Purchase Agreement) pursuant to which the LLC and the Fortress Purchasers
(collectively, the Purchasers) agreed to purchase $
100.0
million principal amount of Company Notes held by the Sellers for an aggregate
purchase price equal to
100
% of the principal amount thereof plus all accrued and unpaid interest
thereon. The final settlement of the transactions contemplated by the Purchase
Agreement occurred on July 26, 2022. The Fortress Purchasers collectively
purchased $
65.0
million of such Company Notes and the LLC purchased $
35.0
million of such Company Notes.
On July 20, 2022, the Company and separate affiliates (the Fortress Equity
Entities) of Fortress entered into an Amended and Restated LLC Agreement (the
Operating Agreement) of the LLC. The LLC was capitalized for the purpose of
acquiring and holding $
35.0
million principal amount (the LLC Notes) of Company Notes pursuant to the
Purchase Agreement. The Operating Agreement is described in more detail below.
The Sellers had raised certain issues based on disclosures included in Item 13
of the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2021, including issues relating to compliance by the Company with certain
covenants under the Indenture dated as of May 11, 2021 pursuant to which the
Company Notes were issued (the Indenture) and the adequacy of the disclosures
by the Company in the offering materials pursuant to which the Company Notes
were offered and sold. Throughout its discussion with the Sellers, the Company
was and remains firmly convinced that there was no merit to the issues raised
by the Sellers. However, in the interest of avoiding additional cost as well
as distraction and disruption of its management, the Company agreed to
facilitate the consummation of the transactions contemplated by the Purchase
Agreement but does not intend to facilitate the purchase of other Company
Notes in any similar transactions. In connection with closing under the
Purchase Agreement, the Company also agreed to have its entire $
42.7
million capital contribution to the LLC used as part of the purchase price
paid to the Sellers and to reimburse the Sellers for certain legal fees. In
consideration for the purchase of the Sellers Company Notes and the
reimbursement of the Sellers legal fees, the Sellers acknowledged that there
was no merit to the issues they had raised. The Sellers and the Company also
exchanged mutual releases. In connection with the consummation of the
transactions contemplated by the Purchase Agreement and the Operating
Agreement, the Company expects to record debt extinguishment of $
35.0
million on its balance sheet as of September 30, 2022 and an expense of
approximately $
7.15
million on its consolidated statement of operations for the quarter ending
September 30, 2022.
LLC Operating Agreement
As noted above, on July 20, 2022, the Company and the Fortress Equity Entities
entered into the Operating Agreement. In connection therewith, the Company
contributed $
42.7
million in cash in exchange for
100
% of the Class B interests in the LLC and the Fortress Equity Entities
contributed an aggregate of $
10,000
in cash in exchange for
100
% of the Class A interests in the LLC.
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The Operating Agreement provides that, so long as no Default or Event of
Default (as such terms are defined in the Indenture) has occurred and is
continuing, amounts received by the LLC in respect of the LLC Notes as (i)
interest payments, (ii) any consent fee payments that may be payable pursuant
to the Indenture or (iii) payments in connection with the redemption or
purchase of the LLC Notes pursuant to the Indenture in excess of the principal
amount of the LLC Notes so redeemed or purchased will be distributed to the
Company as the sole holder of Class B interests (in such capacity, the Class B
Member).
If any Fortress Notes (as hereinafter defined) are redeemed, retired,
cancelled or exchanged or are otherwise no longer outstanding (subject to
certain exceptions specified in the Operating Agreement), and the holders of
such Fortress Notes do not receive payment of all principal, interest and fees
payable thereon under the terms of the Indenture in connection with any such
redemption, retirement, cancellation, exchange or other action, then any
payments received by the LLC in respect of the LLC Notes will be distributed
to the Fortress Equity Entities as the sole holders of Class A interests (in
such capacity, the Class A Members), up to an amount equal to the excess of
the amount of principal, interests and fees payable to the holders of such
Fortress Notes under the Indenture in connection with any such redemption,
retirement, cancellation, exchange or other action over the amount of
principal, interest and fees received by such holders with respect to such
Fortress Notes in connection with any such redemption, retirement,
cancellation, exchange or other action.
For purposes of the Operating Agreement, Fortress Notes means all Company
Notes held by Fortress and its affiliates as of the applicable date of
determination. The Company anticipates that Fortress and its affiliates will
collectively hold approximately $
95.0
million in principal amount of Company Notes upon closing under the Purchase
Agreement.
An affiliate of Fortress will be the sole manager of the LLC (the Manager)
until the 91st day after the date on which no Fortress Notes remain
outstanding and the LLC has made all distributions to the Class A Member as
described above (the Priority Payment Date). Thereafter, the Company will
become the sole Manager. Prior to the Priority Payment Date, the Manager is
prohibited from taking or permitting the LLC to take certain fundamental
actions specified in the Operating Agreement without the prior written consent
of the Class B Member, which consent may not be unreasonably withheld,
conditioned or delayed. On or after the Priority Payment Date, the LLC has the
right to repurchase the Class A Members interests in the LLC for a purchase
price equal to the initial capital contribution made with respect thereto.
The LLC and certain affiliates of the holders of the Fortress Notes separately
entered into an Option and Repurchase Agreement on July 20, 2022 (the Option
Agreement) under which (i) the LLC was granted an option to purchase up to $
20
million in principal amount of Fortress Notes (the Option) for a purchase
price equal to the sum of all accrued and unpaid interest thereon plus the
greater of
100
% of the principal amount of such Fortress Notes and the weighted average
trading price for the Company Notes for the ten (
10
) consecutive trading days prior to exercise of the Option and (ii) the LLC
was granted the option to purchase all outstanding Fortress Notes at any time
prior to the Priority Payment Date during which the Notes Repurchase Condition
(as hereinafter defined) is satisfied (the Notes Repurchase Right) for a
purchase price equal to the amount that the Company would be required to pay
to redeem such Fortress Notes under Section 3.07 of the Indenture (the Notes
Repurchase Price). The Notes Repurchase Condition means that no distribution
is required to be made to the Class A Member as described above and the LLC
has available cash at least equal to the Notes Repurchase Price.
Under the Operating Agreement, the Class B Member has the right to make an
additional capital contribution in an amount up to the Option Price and, if it
does so, the LLC is obligated to exercise the Option to the extent of such
contribution. At any time the Notes Repurchase Condition is satisfied and the
Notes Repurchase Right is exercisable, the Class B Member has the right to
instruct the LLC to exercise the Notes Repurchase Right and, if it does so,
the LLC is obligated to exercise such Notes Repurchase Right.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements discussion and analysis presented below provides information to
assist in understanding the Companys financial condition and results of
operations and should be read in conjunction with the Companys unaudited
condensed consolidated financial statements included in Part I, Item 1
Financial Statements (Unaudited)
of this Quarterly Report.
Certain statements contained in this Quarterly Report, including, but not
limited to, information regarding our operating activities, the plans and
objectives of our management and assumptions regarding our future performance
and plans are forward-looking statements. When used in this Quarterly Report,
the words believes, anticipates, expects and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are based
on managements expectations and estimates. These statements are neither
promises nor guarantees and are made subject to certain risks and
uncertainties that could cause actual results to differ materially from the
results stated or implied in this Quarterly Report. We believe the assumptions
underlying the unaudited condensed consolidated financial statements are
reasonable.
Our primary risks include uncertainties regarding current business and
economic disruptions resulting from the COVID-19 Pandemic, our substantial
indebtedness, our ability to identify and negotiate acceptable agreements with
sellers and purchasers of additional properties, the cash flow from our
pre-need and at-need sales, trusts and financings, which may impact our
ability to meet our financial projections and service our debt, as well as
with our ability to maintain an effective system of internal control over
financial reporting including effective disclosure controls and procedures.
Our risks and uncertainties are more particularly described in Part I, Item 1A.
Risk Factors
of our Annual Report and in Part II, Item 1A of this Quarterly Report. Readers
are cautioned not to place undue reliance on forward-looking statements
included in this Quarterly Report, which speak only as of the date the
statements were made. Except as required by applicable laws, we undertake no
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.
BUSINESS OVERVIEW
We are one of the leading providers of funeral and cemetery products and
services in the death care industry in the United States (U.S.). As of June
30, 2022, we operated 304 cemeteries in 24 states and Puerto Rico, of which
275 were owned and 29 were operated under leases, operating agreements or
management agreements. We also owned, operated or managed 72 funeral homes in
15 states and Puerto Rico.
Our revenue is derived from our Cemetery Operations and Funeral Home
Operations segments. Our Cemetery Operations segment principally generates
revenue from sales of interment rights, cemetery merchandise, which includes
markers, bases, vaults, caskets and cremation niches and our cemetery
services, which include opening and closing services, cremation services and
fees for the installation of cemetery merchandise. Our Funeral Home Operations
segment principally generates revenue from sales of funeral home merchandise,
which includes caskets and other funeral related items and service revenues,
which include services such as family consultation, the removal of and
preparation of remains and the use of funeral home facilities for visitation
and prayer services. These sales occur both at the time of death, which we
refer to as at-need and prior to the time of death, which we refer to as
pre-need. Our Funeral Home Operations segment also include revenues related to
the sale of term and whole life insurance on an agency basis, in which we earn
a commission from the sales of these insurance policies.
The pre-need sales enhance our financial position by providing a backlog of
future revenue from both trust and insurance-funded pre-need funeral and
cemetery sales. We believe pre-need sales add to the stability and
predictability of our revenues and cash flows. Pre-need sales are typically
sold on an installment plan. While revenue on the majority of pre-need funeral
sales is deferred until the time of need, sales of pre-need cemetery property
interment rights provide opportunities for full current revenue recognition
when the property is available for use by the customer.
We also earn investment income on certain payments received from customers on
pre-need contracts, which are required by law to be deposited into our
merchandise and service trusts. Amounts are withdrawn from our merchandise and
service trusts when we fulfill the performance obligations. Earnings on these
trust funds, which are specifically identifiable for each performance
obligation, are also included in the total transaction price. For sales of
interment rights, a portion of the cash proceeds received are required to be
deposited into a perpetual care trust. While the principal balance of the
perpetual care trust must remain in the trust in perpetuity, we recognize
investment income on such assets as revenue, excluding realized gains and
losses from the sale of trust assets. Pre-need contracts are subject to
financing arrangements on an installment basis, with a contractual term not to
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exceed 60 months. Interest income is recognized utilizing the effective
interest method. For those contracts that do not bear a market rate of
interest, we impute such interest based upon the prime rate at the time of
origination plus 150 basis points in order to segregate the principal and
interest components of the total contract value.
Our revenue depends upon the demand for funeral and cemetery services and
merchandise, which can be influenced by a variety of factors, some of which
are beyond our control including demographic trends, such as population
growth, average age, death rates and number of deaths. Our operating results
and cash flows could also be influenced by our ability to remain relevant to
the customers. We provide a variety of unique product and service offerings to
meet the needs of our customers families. The mix of services could influence
operating results, as it influences the average revenue per contract. Expense
management, which includes controlling salaries, merchandise costs, corporate
overhead and other expense categories, could also impact operating results and
cash flows. Lastly, economic conditions, legislative and regulatory changes
and tax law changes, all of which are beyond our control, could impact our
operating results and cash flows.
For further discussion of our key operating metrics, see our Results of
Operations and Liquidity and Capital Resources sections below.
RECENT EVENTS
The following are key events and transactions that have occurred during 2022
that were material to us and/or facilitate an understanding of our unaudited
condensed consolidated financial statements contained in Part I, Item 1 of
this Quarterly Report on Form 10-Q:
"
Acquisitions.
On January 31, 2022, we acquired two cemeteries in Virginia for cash
consideration of $5.1 million and on May 10, 2022 we acquired two cemeteries
in North Carolina for cash consideration of $0.3 million, pursuant to a
definitive agreement signed on March 23, 2021 with Daly Seven, Inc. to acquire
the four cemeteries for a total purchase price of $5.4 million, subject to
customary working capital adjustments.
On March 1, 2022, we acquired one funeral home in Florida for cash
consideration of $1.7 million, subject to customary working capital
adjustments, pursuant to a definitive agreement signed on March 1, 2022 with
MacDonald Funeral Home & Cremation, Inc.
On March 15, 2022, we acquired one combination cemetery and funeral home, a
separate cemetery and a separate funeral home in West Virginia for cash
consideration of $11.3 million, subject to customary working capital
adjustments, pursuant to a definitive agreement signed on February 4, 2022
with Roselawn Acquisition Group LLC, Monte Vista Park LLC, CPJ LLC, and WV
Memorial Properties LLC.
"
Divestitures.
On April 22, 2022, we completed the Rhode Island Sale for a total cash price
of $0.2 million, resulting in a loss on sale of $43,000 for the three and six
months ended June 30, 2022.
On May 24, 2021, we completed the Missouri Sale for a total cash price of $0.7
million, resulting in a loss on sale of $1.7 million for the three and six
months ended June 30, 2021.
"
Axar Merger Agreement.
On May 24, 2022, we, Parent and Merger Sub, entered into the Merger Agreement.
Pursuant to the Merger Agreement, and upon the terms and subject to the
conditions described therein and in accordance with the DGCL, we, Parent and
Merger Sub intend to enter into the Merger and the Transactions with the
Company surviving the Merger and becoming a wholly-owned subsidiary of Parent
as a result of the Merger. For further details of the Merger Agreement, see
Note 16
Related Parties
of Part I, Item 1.
Financial Statements (Unaudited)
of this Quarterly Report.
"
Note Purchase Agreement and Release, LLC Operating Agreement.
On July 20, 2022, we, the LLC, the Fortress Purchasers and certain holders of
our 2029 Notes who were not affiliated with either us or Fortress entered into
the Purchase Agreement pursuant to which the Purchasers agreed to purchase
$100.0 million principal amount of the 2029 Notes held by the Sellers for an
aggregate purchase price equal to 100% of the principal amount thereof plus
all accrued and unpaid interest thereon. The final settlement of the
transactions contemplated by the Purchase Agreement occurred on July 26, 2022.
The Fortress Purchasers collectively purchased $65.0 million of such 2029
Notes and the LLC purchased $35.0 million of such 2029 Notes. On July 20,
2022, the Company and the Fortress Equity Entities entered into the Operating
Agreement of the LLC. The LLC was capitalized for the purpose of acquiring and
holding the LLC Notes pursuant to the Purchase Agreement. For further details,
see Note 17
Subsequent Events
of Part I, Item 1.
Financial Statements (Unaudited)
of this Quarterly Report.
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"
COVID-19 Pandemic.
The COVID-19 Pandemic poses a significant threat to the health and economic
wellbeing of our employees, customers and vendors. Our operations are deemed
essential by the state and local governments in which we operate, with the
exception of Puerto Rico, and we have been working with federal, state and
local government officials to ensure that we continue to satisfy their
requirements for offering our essential services.
Like most businesses world-wide, the COVID-19 Pandemic has impacted us
financially. At the start of the COVID-19 Pandemic in early 2020, we saw our
pre-need sales and at-need sales activity decline as Americans practiced
social distancing and crowd size restrictions were put in place. However,
since May 2020, we have experienced at-need sales growth, and since late 2020,
we have experienced pre-need sales growth. We believe the implementation of
our virtual meeting tools early on in the COVID-19 Pandemic was one of several
key steps to mitigate this disruption. Throughout the COVID-19 Pandemic, our
cemeteries and funeral homes have largely remained open and available to serve
our families in all the locations in which we operate to the extent permitted
by local authorities, and we expect that this will continue. We have leveraged
the relationships we have made with the families we have served during our
response to the COVID-19 Pandemic, which has directly resulted in new sales
leads and the increase in pre-need sales activity. In addition, as community
restrictions have eased and the COVID-19 vaccine became widely available, we
have experienced growth in our pre-need cemetery sales, see Results of
Operations below.
We expect the COVID-19 Pandemic could have an adverse effect on our future
results of operations and cash flows depending on COVID-19 variants and case
counts. However we cannot presently predict, with certainty, the scope and
severity of that impact. In the event there are confirmed diagnoses of
COVID-19 within a significant number of our facilities, we may incur
additional costs related to the closing and subsequent cleaning of these
facilities and the ability to adequately staff the impacted sites. In
addition, our pre-need customers with installment contracts could default on
their installment contracts due to lost work or other financial stresses
arising from the COVID-19 Pandemic. Alternatively, in the event that COVID-19
case counts continue to normalize and variants become less severe, we would
expect to see a reduction in the demand for at-need products and services as
well as a reduction in pre-need turning to at-need.
GENERAL TRENDS AND OUTLOOK
We expect our business to be affected by key trends in the death care
industry, based upon assumptions made by us and information currently
available. Death care industry factors affecting our financial position and
results of operations include, but are not limited to, death rates, per capita
disposable income, demographic trends in terms of number of adults aged 65 and
older, cremation rates and trends and e-commerce sales. In addition, we are
subject to fluctuations in the fair value of equity and fixed-maturity debt
securities held in our trusts. These values can be negatively impacted by
contractions in the credit market and overall downturns in economic activity.
Our ability to make payments on our debt depends on our success at managing
operations with respect to these industry trends. To the extent our underlying
assumptions about or interpretations of available information prove to be
incorrect, our actual results may vary materially from our expected results.
Business Strategies
Our management identified key areas of strategic improvement as part of its
turnaround strategy in 2018, which has allowed us to realize upside in our
operational and financial performance. The key pillars of the turnaround
strategy included:
"
Strategic Evaluation of Asset Base
.
We performed a full asset review to align resources on targeted facilities
while divesting select non-core assets.
"
Decentralized Operating Structure
.
We restructured our operating model with divisional presidents and general
managers to increase responsibility of property-level employees and help
execute on operational and financial strategies.
"
Sales Productivity and Profitable Sales Growth
.
We established key performance indicators, implemented client relationship
management analytics, realigned incentives and created new onboarding program
to improve the productivity of our sales force.
"
Significant Expense Reductions.
We optimized our expense structure by integrating new expense systems,
downsizing headcount and identifying other inefficient uses of resources.
"
Financial Reporting Efficiencies.
We upgraded our internal accounting and financial practices and senior
accounting personnel to generate increased transparency and financial
integrity.
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We are poised to execute on a targeted, long-term growth strategy to reduce
leverage and increase the sustainability of our operations. We have identified
the following pathway to additional growth:
"
Continued Execution of Organic Growth
o
Continue to recognize the benefits of expanding margins created through the
realization of our turnaround strategy and sustainable operational performance;
o
Focus on sales growth and EBITDA at each property location, driving both
at-need and pre-need sales for additional cash flow today and into the future;
o
Explore new product offerings to cater to evolving customer demands including
cremation products; and
o
Deploy capital expenditure projects to capitalize on new sales, performance or
efficiency opportunities.
"
Inorganic Growth and Acquisition Opportunities
o
Target core markets for accretive, strategic growth that complements our
existing portfolio, while leveraging our scale and management capabilities; and
o
Focus on existing synergies to add value to new acquisitions, including trust
management capabilities and a robust pre-need sales program.
"
Naturally De-Lever and Grow Our Platform
o
Use excess cash flow to acquire new properties to create additional EBITDA;
o
Grow at a sustainable pace and integrate assets to take advantage of our
existing platform and management expertise; and
o
Continue to build upon our strong backlog of assets and trust appreciation
through existing operations, organic growth opportunities and future
acquisitions.
Inflationary Trends
During the second quarter of 2022, we began to experience modest cost
increases from our vendors on merchandise and goods due to the broader
inflationary environment and global supply chain issues, and we expect these
impacts to continue through the end of the year. The U.S. economy has recently
experienced an increase in the rate of inflation, which has impacted many
industries and sectors, causing consumers to face rising prices. This
inflationary environment may negatively impact consumers and discretionary
spending. We will continue to assess these impacts and take the appropriate
steps, if necessary, to mitigate these cost increases, if possible.
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RESULTS OF OPERATIONS
We have two distinct reportable segments, Cemetery Operations and Funeral Home
Operations, which are supported by corporate costs and expenses.
Cemetery Operations
Overview
We are currently the one of the largest owners and operators of cemeteries in
the U.S. As of June 30, 2022, we operated 304 cemeteries in 24 states and
Puerto Rico. We owned 275 of these cemeteries, and we managed or operated the
remaining 29 under leases, operating agreements or management agreements.
Revenues from our Cemetery Operations segment accounted for approximately 88%
and 87% of our total revenues for the three and six months ended June 30,
2022, respectively.
Operating Results
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following tables present operating results for our Cemetery Operations
segment for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended June 30,
Variance
2022 2021 $ %
Interments $ 22,136 $ 22,906 $ (770 ) (3 %)
Merchandise 19,744 17,787 1,957 11 %
Services 18,370 17,698 672 4 %
Interest income 1,742 2,261 (519 ) (23 %)
Investment and other 8,462 11,476 (3,014 ) (26 %)
Total revenues 70,454 72,128 (1,674 ) (2 %)
Cost of goods sold 12,519 12,435 84 1 %
Cemetery expense 21,634 18,090 3,544 20 %
Selling expense 17,289 14,776 2,513 17 %
General and administrative expense 12,250 10,650 1,600 15 %
Depreciation and amortization 1,423 1,505 (82 ) (5 %)
Total costs and expenses 65,115 57,456 7,659 13 %
Segment operating profit $ 5,339 $ 14,672 $ (9,333 ) (64 %)
Cemetery interments revenues were $22.1 million for the three months ended
June 30, 2022, a decrease of $0.8 million and 3% from $22.9 million for the
three months ended June 30, 2021. The decrease resulted primarily from a
decrease in pre-need revenues of $0.6 million and a decrease in at-need
revenues of $0.3 million compared to the prior year period which experienced
overall revenue growth attributable to the COVID-19 Pandemic. These decreases
were offset by a $0.1 million increase due to lower cancellations and
promotional discounts.
Cemetery merchandise revenues were $19.7 million for the three months ended
June 30, 2022, an increase of $2.0 million and 11% from $17.8 million for the
three months ended June 30, 2021. The increase resulted primarily from a $1.2
million increase in pre-need turning at-need revenues and an increase in
at-need revenues of $$0.7 million.
Cemetery service revenues were $18.4 million for the three months ended June
30, 2022, an increase of $0.7 million and 4% from $17.7 million for the three
months ended June 30, 2021. The increase resulted from a $0.4 million increase
in pre-need turned at-need revenues and a $0.3 million increase in at-need
revenues.
Investment and other income was $8.5 million for the three months ended June
30, 2022, a decrease of $3.0 million and 26% from $11.5 million for the three
months ended June 30, 2021. The decrease was driven by a decrease in
investment income associated with the perpetual care trust of $4.0 million, a
decrease of $0.6 million in other income and a decrease of $0.5 million in RIA
fees earned. These decreases were offset in part by an increase in investment
income associated with the merchandise trust of $2.1 million.
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Cost of goods sold was $12.5 million for the three months ended June 30, 2022,
an increase of $0.1 million and 1% from $12.4 million for the three months
ended June 30, 2021. As a percentage of cemetery revenue, cost of goods sold
was 17.8% for the three months ended June 30, 2022, compared to 17.2% for the
three months ended June 30, 2021.
Cemetery expenses were $21.6 million for the three months ended June 30, 2022,
an increase of $3.5 million and 20% from $18.1 million for the three months
ended June 30, 2021. The increase was due to a $2.4 million increase in
repairs and maintenance expense as well as an increase of approximately $1.1
million in general expenditures, including costs associated with cemetery
maintenance which had previously been outsourced to Moon.
Selling expenses were $17.3 million for the three months ended June 30, 2022,
an increase of $2.5 million and 17% from $14.8 million for the three months
ended June 30, 2021. As a percentage of cemetery revenue, selling expenses
increased to 24.5% for the three months ended June 30, 2022 from 20.5% for the
three months ended June 30, 2021, and included a $1.5 million increase in
marketing and advertising expense and a $0.6 million increase in payroll
expenses.
General and administrative expenses were $12.3 million for the three months
ended June 30, 2022, an increase of $1.6 million and 15% from $10.7 million
for the three months ended June 30, 2021. The increase was primarily the
result of a $1.4 million increase in payroll and related costs, a $0.3 million
increase in legal fees and a $0.1 million increase in insurance costs. These
increases were offset by a $0.2 million decrease in other miscellaneous
expenses.
Depreciation and amortization expenses were $1.4 million for the three months
ended June 30, 2022, a decrease of $0.1 million and 5% from $1.5 million for
the three months ended June 30, 2021. The decrease was due to routine
depreciation and amortization of the associated asset base.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following tables present operating results for our Cemetery Operations
segment for the six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended June 30,
Variance
2022 2021 $ %
Interments $ 43,291 $ 43,425 $ (134 ) (0 %)
Merchandise 34,600 34,069 531 2 %
Services 35,228 34,979 249 1 %
Interest income 3,496 4,476 (980 ) (22 %)
Investment and other 23,336 22,159 1,177 5 %
Total revenues 139,951 139,108 843 1 %
Cost of goods sold 24,058 23,619 439 2 %
Cemetery expense 43,813 36,251 7,562 21 %
Selling expense 32,862 28,983 3,879 13 %
General and administrative expense 23,003 20,843 2,160 10 %
Depreciation and amortization 2,857 3,081 (224 ) (7 %)
Total costs and expenses 126,593 112,777 13,816 12 %
Segment operating profit $ 13,358 $ 26,331 $ (12,973 ) (49 %)
Cemetery interments revenues were $43.3 million for the six months ended June
30, 2022, a decrease of $0.1 million and 0% from $43.4 million for the six
months ended June 30, 2021. The decrease resulted from a decrease in at-need
revenues of $0.7 million primarily related to a decline in death rates
compared to the prior year period which was impacted by the COVID-19 Pandemic,
which was partially offset by an increase in pre-need revenues of $0.2 million
and an increase of $0.4 million associated with a decrease in cancellations
and promotional discounts.
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Cemetery merchandise revenues were $34.6 million for the six months ended June
30, 2022, an increase of $0.5 million and 2% from $34.1 million for the six
months ended June 30, 2021. The increase resulted from a $1.1 million increase
in pre-need turning at-need revenues and an increase of $0.1 million
associated with a decline in cancellations and promotional discounts. These
increases were partially offset by a decrease of $0.6 million in at-need
revenues.
Cemetery service revenues were $35.2 million for the six months ended June 30,
2022, an increase of $0.2 million and 1% from $35.0 million for the six months
ended June 30, 2021. The increase resulted from a $0.2 million increase in
pre-need turning at-need revenues and an increase of $0.1 million associated
with a decline in cancellations and promotional discounts.
Investment and other income was $23.3 million for the six months ended June
30, 2022, an increase of $1.2 million and 5% from $22.2 million for the six
months ended June 30, 2021. The increase resulted from increases of $3.2
million in investment income associated with the merchandise trust, $0.4
million in RIA fees earned and $0.4 million in other income. These increases
were offset in part by a decrease in investment income associated with the
perpetual care trust of $2.8 million.
Cost of goods sold was $24.1 million for the six months ended June 30, 2022,
an increase of $0.4 million and 2% from $23.6 million for the six months ended
June 30, 2021. As a percentage of cemetery revenue, cost of goods sold was
17.2% for the six months ended June 30, 2022, compared to 17.0% for the six
months ended June 30, 2021.
Cemetery expenses were $43.8 million for the six months ended June 30, 2022,
an increase of $7.6 million and 21% from $36.3 million for the six months
ended June 30, 2021. The increase was due to a $4.1 million increase in
repairs and maintenance expense as well as an increase of approximately $4.0
million in general expenditures, including costs associated with cemetery
maintenance which had previously been outsourced to Moon. These increases were
offset partially by a $0.5 million decrease in real estate taxes.
Selling expenses were $32.9 million for the six months ended June 30, 2022, an
increase of $3.9 million and 13% from $29.0 million for the six months ended
June 30, 2021. As a percentage of cemetery revenue, selling expenses increased
to 23.5% for the six months ended June 30, 2022 from 20.8% for the six months
ended June 30, 2021, and included a $3.0 million increase in marketing and
advertising expense and a $0.9 million increase in payroll expenses.
General and administrative expenses were $23.0 million for the six months
ended June 30, 2022, an increase of $2.2 million and 10% from $20.8 million
for the six months ended June 30, 2021. The increase was primarily the result
of a $1.1 million increase in payroll and related expenses, a $0.6 million
increase in legal fees, a $0.3 million increase in insurance costs and a $0.2
million increase in other miscellaneous expenses.
Depreciation and amortization expenses were $2.9 million for the six months
ended June 30, 2022, a decrease of $0.2 million and 7% from $3.1 million for
the six months ended June 30, 2021. The decrease was due to routine
depreciation and amortization of the associated asset base.
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Funeral Home Operations
Overview
As of June 30, 2022, we owned, operated or managed 72 funeral homes. These
properties were located in 15 states and Puerto Rico. Revenues from Funeral
Home Operations accounted for approximately 12% and 13% of our total revenues
for the three and six months ended June 30, 2022, respectively.
Operating Results
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The following tables present operating results for our Funeral Home Operations
for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended June 30,
Variance
2022 2021 $ %
Merchandise $ 5,040 $ 5,449 $ (409 ) (8 %)
Services 4,553 5,404 (851 ) (16 %)
Total revenues 9,593 10,853 (1,260 ) (12 %)
Merchandise 1,389 1,478 (89 ) (6 %)
Services 4,700 4,477 223 5 %
Depreciation and amortization 434 423 11 3 %
Other 3,185 3,239 (54 ) (2 %)
Total expenses 9,708 9,617 91 1 %
Segment operating (loss) profit $ (115 ) $ 1,236 $ (1,351 ) (109 %)
Funeral home merchandise revenues were $5.0 million for the three months ended
June 30, 2022, a decrease of $0.4 million and 8% from $5.4 million for the
three months ended June 30, 2021. The decrease resulted from a $0.5 million
decrease in at-need revenues, partially offset by a $0.1 million increase in
pre-need turned at-need revenue.
Funeral home services revenues were $4.6 million for the three months ended
June 30, 2022, a decrease of $0.9 million and 16% from $5.4 million for the
three months ended June 30, 2021. The decrease was primarily due to a $0.5
million decrease in income recognized on the merchandise trust, a $0.3 million
decrease in at-need revenues and a $0.3 million decrease in other funeral home
revenues, offset partially by a $0.2 million increase in pre-need turned
at-need revenues.
Funeral home expenses were $9.7 million for the three months ended June 30,
2022, an increase of $0.1 million and 1% from $9.6 million for the three
months ended June 30, 2021. Funeral home services costs increased $0.2
million, partially offset by a $0.1 million decrease in funeral home
merchandise costs.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The following tables present operating results for our Funeral Home Operations
for the six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended June 30,
Variance
2022 2021 $ %
Merchandise $ 11,085 $ 11,422 $ (337 ) (3 %)
Services 9,988 10,764 (776 ) (7 %)
Total revenues 21,073 22,186 (1,113 ) (5 %)
Merchandise 3,021 3,139 (118 ) (4 %)
Services 9,457 9,138 319 3 %
Depreciation and amortization 866 854 12 1 %
Other 6,571 6,258 313 5 %
Total expenses 19,915 19,389 526 3 %
Segment operating profit $ 1,158 $ 2,797 $ (1,639 ) (59 %)
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Funeral home merchandise revenues were $11.1 million for the six months ended
June 30, 2022, a decrease of $0.3 million and 3% from $11.4 million for the
six months ended June 30, 2021. The decrease was due to a $0.4 million
decrease in at-need revenues, partially offset by an increase of $0.1 million
in pre-need turned at-need revenues.
Funeral home services revenues were $10.0 million for the six months ended
June 30, 2022, a decrease of $0.8 million and 7% from $10.8 million for the
six months ended June 30, 2021. The decrease was primarily due to a $0.4
million decrease in at-need revenues, a $0.3 million decrease in income
recognized on the merchandise trust and a $0.2 million decrease in other
funeral home revenues, offset partially by a $0.1 million increase in pre-need
turned at-need revenues.
Funeral home expenses were $19.9 million for the six months ended June 30,
2022, an increase of $0.5 million and 5% from $19.4 million for the six months
ended June 30, 2021. Funeral home services costs increased $0.3 million or 3%.
Other funeral home expenses increased $0.3 million, primarily driven by
increases in costs associated with repairs and maintenance, cremations and
insurance. These increases were partially offset by a decrease in funeral home
merchandise costs of $0.1 million or 4%.
Corporate
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Corporate Overhead
Corporate overhead expense was $12.8 million for the three months ended June
30, 2022, an increase of $3.3 million and 34% from $9.5 million for the three
months ended June 30, 2021. The increase was primarily related to a $1.6
million increase in non-legal professional fees, a $1.5 million increase in
legal fees and a $0.2 million increase in payroll and related expenses.
Loss on Sale of Businesses and Other Impairments
For the three months ended June 30, 2022, we recorded a loss of $43,000 in
connection with the Rhode Island Sale in April 2022. For the three months
ended June 30, 2021, we recorded a loss of $2.2 million which consisted of a
loss of $1.7 million in connection with the Missouri Sale in May 2021 and an
impairment of $0.5 million related to property and equipment held for sale.
Interest Expense
Interest expense was $9.3 million for the three months ended June 30, 2022, a
decrease of $0.7 million and 7% from $10.0 million for the three months ended
June 30, 2021. The change was due to a decrease of $0.4 million related to a
lower interest rate on the 2029 Notes compared to the 2024 Notes and a
decrease of $0.3 million due to lower amortization of deferred financing fees.
Loss on Debt Extinguishment
For the three months ended June 30, 2022, there was no loss on debt
extinguishment. For the three months ended June 30, 2021, we recorded a loss
of $40.1 million related to the full redemption of the 2024 Notes, which was
comprised of an early redemption fee of $18.5 million and the write-off of
deferred financing fees and original issue discount of $21.6 million.
Income Tax Expense/Benefit
Income tax expense was $0.2 million for the three months ended June 30, 2022,
compared to an income tax benefit of $9.7 million for the three months ended
June 30, 2021. The income tax expense for the three months ended June 30, 2022
was primarily due to our inability to offset deferred tax benefits related to
net operating losses against long life deferred tax liabilities for federal
and state purposes. The income tax benefit for the three months ended June 30,
2021 was primarily due to the loss from continuing operations.
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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Corporate Overhead
Corporate overhead expense was $24.6 million for the six months ended June 30,
2022, an increase of $5.5 million and 29% from $19.1 million for the six
months ended June 30, 2021. The increase was primarily related to a $2.2
million increase in non-legal professional fees, a $1.5 million increase legal
fees, a $0.8 million increase in acquisition related costs, a $0.4 million
increase in payroll and related expenses and a $0.6 million increase in other
corporate overhead expenses.
Loss on Sale of Businesses and Other Impairments
For the six months ended June 30, 2022, we recorded a loss of $43,000 in
connection with the Rhode Island Sale in April 2022. For the six months ended
June 30, 2021, we recorded a loss of $2.2 million which consisted of a loss of
$1.7 million in connection with the Missouri Sale in May 2021 and an
impairment of $0.5 million related to property and equipment held for sale.
Interest Expense
Interest expense was $18.6 million for the six months ended June 30, 2022, a
decrease of $1.9 million and 9% from $20.5 million for the six months ended
June 30, 2021. The change was due to a decrease of $1.0 million due to lower
amortization of deferred financing fees and a decrease of $0.9 million related
to a lower interest rate on the 2029 Notes compared to the 2024 Notes.
Loss on Debt Extinguishment
For the six months ended June 30, 2022, there was no loss on debt
extinguishment. For the six months ended June 30, 2021, we recorded a loss of
$40.1 million related to the full redemption of the 2024 Notes, which was
comprised of an early redemption fee of $18.5 million and the write-off of
deferred financing fees and original issue discount of $21.6 million.
Income Tax Expense/Benefit
Income tax expense was $0.4 million for the six months ended June 30, 2022,
compared to an income tax benefit of $11.4 million for the six months ended
June 30, 2021. The income tax expense for the six months ended June 30, 2022
was primarily due to our inability to offset deferred tax benefits related to
net operating losses against long life deferred tax liabilities for federal
and state purposes. The income tax benefit for the six months ended June 30,
2021 was primarily due to the loss from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of liquidity are cash generated from operations, proceeds
from asset sales and the remaining proceeds from the sale of the 2029 Notes.
In addition, we anticipate entering into a $60 million senior secured
revolving credit facility in August 2022 to provide additional liquidity. Our
primary cash requirements, in addition to normal operating expenses, are for
capital expenditures, net contributions to the merchandise and perpetual care
trust funds, debt service and acquisitions. Amounts contributed to the
merchandise trust funds will be withdrawn at the time of the delivery of the
product or service sold to which the contribution related, which will reduce
the amount of additional borrowings or asset sales needed.
While we rely heavily on our available cash and cash flows from operating
activities to execute our operational strategy and meet our financial
commitments and other short-term financial needs, we cannot be certain that
sufficient capital will be generated through operations or be available to us
to the extent required and on acceptable terms. Based on our forecasted
operating performance, we believe that we will be able to continue as a going
concern for the next twelve-month period.
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Cash Flows
The following table summarizes our unaudited condensed consolidated statements
of cash flows by class of activities in thousands:
Six Months Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ 6,551 $ (1,567 )
Net cash (used in) provided by investing activities (24,266 ) 3,217
Net cash provided by financing activities 677 45,233
Significant Sources and Uses of Cash During the Six Months Ended June 30, 2022
and 2021
Operating Activities
Net cash provided by operating activities was $6.6 million for the six months
ended June 30, 2022 as compared to net cash used in operating activities of
$1.6 million during the six months ended June 30, 2021. The $8.1 million
change in operating cash flows was primarily due to the change in working
capital items which resulted in a net increase in operating cash flows of
$42.1 million, offset in part by a decrease of $34.0 million resulting from an
increase in net loss excluding non-cash items.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022
was $24.3 million as compared to net cash provided by investing activities of
$3.2 million for the six months ended June 30, 2021. The net cash used in
investing activities for the six months ended June 30, 2022 was attributable
to the cash paid for acquisitions of $18.3 million and capital expenditures
for purchases and maintenance of property, plant and equipment of $6.1
million. Net cash provided by investing activities during the six months ended
June 30, 2021 was attributable to proceeds from divestitures of $6.6 million,
partially offset by capital expenditures for purchases and maintenance of
property, plant and equipment of $3.4 million.
Financing Activities
Net cash provided by financing activities for the six months ended June 30,
2022 was $677,000 as compared to $45.2 million for the six months ended June
30, 2021. Net cash provided by financing activities for the six months ended
June 30, 2022 was primarily due to proceeds from borrowings for financed
insurance policies, which was offset by debt and finance lease payments. Net
cash provided by financing activities for the six months ended June 30, 2021
was primarily due to proceeds from the issuance of the 2029 Notes offset
partially by the full redemption of the 2024 Notes and the related early
redemption fee and costs of financing.
The following table summarizes maintenance and expansion capital expenditures
for the periods presented (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Maintenance capital expenditures $ 1,984 $ 755 $ 3,392 $ 1,042
Expansion capital expenditures 1,558 832 2,752 2,319
Total capital expenditures $ 3,542 $ 1,587 $ 6,144 $ 3,361
Long-Term Debt
On May 11, 2021, we issued $400.0 million aggregate principal amount of 8.500%
Senior Secured Notes due 2029 and used a substantial portion of the proceeds
to fund the redemption of all of our outstanding 2024 Notes. For further
details on our 2029 Notes, see Note 8
Long-Term Debt
of Part I, Item 1.
Financial Statements (Unaudited)
of this Quarterly Report.
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Surety Bonds
We have entered into arrangements with certain surety companies, whereby such
companies agree to issue surety bonds on our behalf as financial assurance
and/or as required by existing state and local regulations. The surety bonds
are used for various business purposes; however, the majority of the surety
bonds issued and outstanding have been used to support our pre-need sales
activities.
When selling pre-need contracts, we may post surety bonds where allowed by
state law. We post the surety bonds in lieu of trusting a certain amount of
funds received from the customer. If we were not able to renew or replace any
such surety bond, we would be required to fund the trust only for the portion
of the applicable pre-need contracts for which we have received payments from
the customers, less any applicable retainage, in accordance with state law. We
have provided cash collateral to secure these surety bond obligations and may
be required to provide additional cash collateral in the future under certain
circumstances.
For the six months ended June 30, 2022 and 2021, we had $102.5 million and
$99.5 million, respectively, of cash receipts from sales attributable to
related bond contracts. These amounts do not consider reductions associated
with taxes, obtaining costs or other costs.
Surety bond premiums are paid annually and the bonds are automatically
renewable until maturity of the underlying pre-need contracts, unless we are
given prior notice of cancellation. Except for cemetery pre-construction bonds
(which are irrevocable), the surety companies generally have the right to
cancel the surety bonds at any time with appropriate notice. In the event a
surety company were to cancel the surety bond, we are required to obtain
replacement surety assurance from another surety company or fund a trust for
an amount generally less than the posted bond amount. We do not expect that we
will be required to fund material future amounts related to these surety bonds
due to a lack of surety capacity or surety company non-performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our unaudited condensed consolidated financial statements
and related notes included within Part I, Item 1.
Financial Statements (Unaudited)
of this Quarterly Report in conformity with GAAP requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and disclosure of contingent assets and liabilities that
arose during the reporting period and through the date our financial
statements are filed with the SEC. Although we base our estimates on
historical experience and various other assumptions we believe to be
reasonable, actual results may differ from these estimates.
A critical accounting estimate or policy is one that requires a high level of
subjective judgement by management and could have a material impact to our
financial position, results of operations or cash flows if actuals vary
significantly from our estimates.
There have been no significant changes to the critical accounting policies and
estimates identified in the Annual Report, as described in Part II, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
in the Annual Report, except as described in Part 1, Item 1. Financial
Statements, Note 1, Business Combinations, Goodwill and Recently Adopted
Accounting Standards.
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ITEM 3. QUANTITATIVE AN
D QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide forward-looking
quantitative and qualitative information about our potential exposure to
market risks. The term "market" risk refers to the risk of gains or losses
arising from changes in interest rates and prices of marketable securities.
The disclosures are not meant to be precise indicators of expected future
gains or losses, but rather indicators of reasonably possible gains or losses.
This forward-looking information provides indicators of how we view and manage
our ongoing market risk exposures. All of our market risk-sensitive
instruments were entered into for purposes other than trading.
The trusts are invested in assets with the primary objective of maximizing
income and distributable cash flow for trust distributions, while maintaining
an acceptable level of risk. Certain asset classes in which we invest for the
purpose of maximizing yield are subject to an increased market risk. This
increased market risk will create volatility in the unrealized gains and
losses of the trust assets from period to period.
INTEREST-BEARING INVESTMENTS
The interest-bearing investments in our merchandise trusts and perpetual care
trusts that are subject to interest rate sensitivity consist of fixed-income
securities, money market investments and other short-term investments. As of
June 30, 2022, the accumulated fair value of the interest-bearing investments
in our merchandise trusts and perpetual care trusts was $33.6 million and
$13.4 million, respectively, or 5.6% and 3.8% of the fair value of our total
trust assets, respectively.
MARKETABLE EQUITY SECURITIES
The marketable equity securities in our merchandise trusts and perpetual care
trusts that are subject to market price sensitivity consist of individual
equity securities as well as closed and open-ended mutual funds. As of June
30, 2022, the accumulated fair value of the marketable equity securities in
our merchandise trusts and perpetual care trusts was $16.5 million and $9.3
million, respectively, or 2.7% and 2.7% of the fair value of our total trust
assets, respectively.
OTHER INVESTMENT FUNDS
Other investment funds are measured at fair value using the net asset value
per share practical expedient. This asset class is composed of fixed income
funds and equity funds, which have a redemption period ranging from 1 to 30
days, and private credit funds, which have lockup periods ranging from zero to
fourteen years with four potential one year extensions at the discretion of
the funds general partners. This asset class has an inherent valuation risk as
the values provided by investment fund managers may not represent the
liquidation values obtained by the trusts upon redemption or liquidation of
the fund assets. As of June 30, 2022, the fair value of other investment funds
in our merchandise trusts and perpetual care trusts represented 88.4% and
91.8%, respectively, of the fair value of total trust assets. The fair market
value of the holdings in these funds was $534.7 million and $320.4 million in
our merchandise trusts and perpetual care trusts, respectively, as of June 30,
2022, based on net asset value quotes.
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ITEM 4.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
(the Exchange Act), that are designed to ensure that information required to
be disclosed in our reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such information
is accumulated and communicated to our management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, evaluated the design and operation
of our disclosure controls and procedures pursuant to Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of June 30, 2022. Based on such
evaluation, our CEO and CFO concluded the disclosure controls and procedures
were not effective due to the on-going remediation associated with the
material weaknesses in internal control over financial reporting described
below.
Notwithstanding these material weaknesses, based on the additional analysis
and other post-closing procedures performed, management believes that the
financial statements included in this report fairly present in all material
respects our financial position, results of operations and cash flows for the
periods presented in conformity with accounting principles generally accepted
in the United States of America (GAAP).
Material Weaknesses in Internal Control over Financial Reporting
A
material weakness
(as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement in our
annual or interim financial statements will not be prevented or detected on a
timely basis.
Management previously identified and reported material weaknesses in its
Annual Report on Form 10-K for the Year Ended December 31, 2021. We conducted
an evaluation of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2021 based on the criteria set forth in
Internal ControlIntegrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on our assessment, we concluded that the Company did not
maintain effective internal control over financial reporting as of December
31, 2021 as a result of the material weaknesses described below:
A.
Control environment, control activities and monitoring:
The Company did not design and maintain effective internal controls over
financial reporting related to control environment, control activities and
monitoring based on the criteria established in the COSO framework. More
specifically, management did not implement effective oversight to support
deployment of control activities due to lack of clear and consistent
accountability for the performance of internal control over financial
reporting responsibilities in certain areas important to financial reporting
and implementation of related corrective actions in a timely manner.
B.
Establishment and review of certain accounting policies and corresponding
recognition of income statement impacts:
The Companys controls applicable to establishment, periodic review for ongoing
relevance and consistent application of material accounting policies in
conformity with GAAP relating to revenue recognition were not designed
appropriately and thus failed to operate effectively. More specifically:
"
Management did not maintain effective controls over sales contract origination
occurring at its site locations. Specifically, there was no subsequent review
of contract entry at site locations or corporate, as well as consistent
approvals for pricing deviations.
"
Management did not have effective review and monitoring controls over revenue
recognition with respect to the Accounting Standards Codification 606,
Revenues from Contracts with Customers, to timely detect misstatements in
income statement and balance sheet accounts. There was no oversight monitoring
at corporate for contract cancellations and the timely and accurate servicing
of contracts for proper revenue recognition. Additionally, the Company
concluded that it did not design effective controls that would lead to a
timely identification of a material error in deferred revenues.
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C.
Evaluation of historical deferred revenue adjustment:
The Companys internal controls designed to prevent a material misstatement in
the recorded amount of deferred revenues as of the balance sheet date were not
designed appropriately. Management did not have effective review and
monitoring controls over historical contract servicing and revenue recognition
at a sufficient level of precision to detect potential misstatements of the
related balance sheet accounts.
D.
Identification and disclosure of Related Party transactions:
The Companys internal controls over the identification and disclosure of
related party transactions were not designed appropriately and thus failed to
operate effectively. More specifically, as noted in Note 17
Related Parties
to our consolidated financial statements as of and for the year ended December
31, 2021, the Company identified various related party transactions in
connection with its year-end financial closing procedures, which had not been
timely identified by Cornerstone, the Companys investment advisory subsidiary,
or disclosed in our prior quarterly periods because Cornerstone did not have
effective procedures in place to ensure that the information needed to analyze
whether investment transactions it was recommending for our trusts constituted
related party transactions was obtained and reviewed in a timely fashion.
Our management communicated the results of its assessment to the Audit
Committee of the Board of Directors.
STATUS OF REMEDIATION OF MATERIAL WEAKNESSES
While we continue to make improvements to our internal control over financial
reporting related to the material weaknesses described above, material
weaknesses continue to exist, and we believe that material weaknesses A
through C referenced above accurately reflect the material weaknesses in our
internal control over financial reporting as of June 30, 2022. Management,
with oversight from our Audit Committee, has identified and planned actions
that we believe will remediate the material weaknesses A through C described
above once fully implemented and operating for a sufficient period of time,
and we will continue to devote significant time and attention, including
internal and external resources, to these remedial efforts. For material
weakness D, Management, in conjunction with the Trust and Compliance
Committee, has implemented the following, as the primary remediation of this
material weakness (subject to control operating effectiveness testing over a
sufficient period of time):
"
Terminated the Subadvisor Agreement with Axar,
"
Developed a specific certification for Axar regarding affiliation or ownership
in connection with any Cornerstone investment recommendations,
"
Appointed StoneMors Chief Compliance Officer and General Counsel as the second
officer of Cornerstone who is required to review and approve all recommendations
for investments over a certain dollar threshold, and
"
Provided training for Cornerstone employees.
For a more comprehensive discussion of Managements remediation action plans
refer to Item 9A., Disclosure Controls and Procedures, of our 2021 Annual
Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended June 30, 2022, we continued to make improvements
to our internal control over financial reporting with respect to material
weaknesses that had been present at that time, and those remediation efforts
remain ongoing. Other than as described above and in greater detail in the
Item 9A.,
Disclosure Controls and Procedures
, of our 2021 Annual Report on Form 10-K, there were no changes in our
internal control over financial reporting as defined in Rules 13a-15(d) and
15d-15(d) of the Exchange Act during the three months ended June 30, 2022 that
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
For information regarding our significant pending administrative and judicial
proceedings involving regulatory, operating, transactional, environmental, and
other matters, see Part 1. Item 1.
Financial Statements (Unaudited)Notes to the Unaudited Condensed Consolidated
Financial StatementsNote 11 Commitments and Contingencies
of this Quarterly Report.
We and certain of our subsidiaries are parties to legal proceedings that have
arisen in the ordinary course of business. We do not expect such matters to
have a material adverse effect on our unaudited condensed consolidated
financial position, results of operations or cash flows. We carry insurance
with coverage and coverage limits that we believe to be customary in the
cemetery and funeral home industry. Although there can be no assurance that
such insurance will be sufficient to protect us against such contingencies, we
believe that our insurance protection is reasonable in view of the nature and
scope of our operations.
ITEM 1A.
RISK FACTORS
You should carefully consider the risks described in Part I, Item 1A.
Risk Factors
of our Annual Report. The ongoing coronavirus (COVID-19) pandemic may also
have the effect of heightening many of the risks we face, such as those
relating to our substantial level of indebtedness, our future capital needs,
our need to generate sufficient cash to service our indebtedness and our
ability to comply with the covenants contained in the 2029 Indenture. The
risks and uncertainties described in our Annual Report are not the only risks
and uncertainties that we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of those risks actually occurs, our business,
financial condition and results of operations would suffer.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Period (a) (b) (c) (d)
Total Average Total Number of Shares Maximum Number (or Approximate
Number of Price Purchased as Part Dollar Value) of Shares
Shares Paid per of Publicly Announced that May Yet Be Purchased
Purchased Share Plans or Programs Under the Plans or Programs
(1) (2)
April 205,311 $ 2.55 $
26,
2022
May 26, 209,588 $ 3.42 $
2022
June 2, 58,548 $ 3.43 $
2022
Total 473,446 $ 3.04 $
(1)
Represents shares withheld upon the exercise of options to purchase shares of
the Companys common stock under the Plan to satisfy exercise price and tax
obligations in connection with such exercise and which thus may be deemed to
have been repurchased by the Company.
(2)
The value of the shares withheld was the closing price of the Companys common
stock on the last trading day before the date on which such shares were
withheld.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAF
ETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
None.
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ITEM 6.
EXHIBIT INDEX
The documents listed in the Exhibit Index of this Quarterly Report on Form
10-Q are filed with this Quarterly Report on Form 10-Q (numbered in accordance
with Item 601 of Regulation S-K).
Incorporated by Reference
Exhibit Description Form Exhibit Filing Date
Number
2.1 Agreement and Plan of Merger, dated 8-K 2.1 May 25, 2022
as of May 24, 2022, by and among
StoneMor Inc., Axar Cemetery Parent
Corp., and Axar Cemetery Merger Corp.
31.1 Certification pursuant to
Exchange Act Rule 13a-14(a) of
Joseph M. Redling, President
and Chief Executive Officer
31.2 Certification pursuant to Exchange
Act Rule 13a-14(a) of Jeffrey
DiGiovanni, Chief Financial
Officer and Senior Vice President
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. (s) 1350)
and Exchange Act Rule 13a-14(b) of Joseph M.
Redling, President and Chief Executive Officer
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. (s) 1350) and
Exchange Act Rule 13a-14(b) of Jeffrey DiGiovanni,
Chief Financial Officer and Senior Vice President
101.INS Inline XBRL Instance Document - the instance
document does not appear in the Interactive
Data File because its XBRL tags are
embedded within the Inline XBRL document.
101.SCH Inline XBRL
Taxonomy
Extension Schema
Documents.
101.CAL Inline XBRL
Taxonomy Extension
Calculation
Linkbase Document.
101.DEF Inline XBRL
Taxonomy Extension
Definition
Linkbase Document.
101.LAB Inline XBRL
Taxonomy Extension
Label Linkbase
Document.
101.PRE Inline XBRL
Taxonomy Extension
Presentation
Linkbase Document.
104 Cover Page Interactive
Data File (formatted
as inline XBRL and
contained in Exhibit 101)
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SIGNAT
URES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STONEMOR INC.
Date: August 12, 2022 By: /s/
Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
Date: August 12, 2022 By: /s/
Jeffrey DiGiovanni
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
61
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Exhibit 31.1
CERTIFICATION
I, Joseph M. Redling, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of StoneMor Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting.
Date: August 12, 2022 By: /s/
Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
(Principal Executive Officer)
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Exhibit 31.2
CERTIFICATION
I, Jeffrey DiGiovanni, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of StoneMor Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting.
Date: August 12, 2022 By: /s/
Jeffrey DiGiovanni
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code), the undersigned officer of
StoneMor Inc. (the "Company"), does hereby certify with respect to the
Quarterly Report of the Company on Form 10-Q for the quarter ended June 30,
2022 (the "Report") that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 12, 2022 By: /s/
Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of
the United States Code) and is not being filed as part of the Report or as a
separate disclosure document.
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Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code), the undersigned officer of
StoneMor Inc. (the "Company"), does hereby certify with respect to the
Quarterly Report of the Company on Form 10-Q for the quarter ended June 30,
2022 (the "Report") that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 12, 2022 By: /s/
Jeffrey DiGiovanni
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of
the United States Code) and is not being filed as part of the Report or as a
separate disclosure document.
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