Unless the context requires otherwise, references in this report to the “Company,” “we,” “us,” and “our” refer to OneWater Marine Inc. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed above in “Cautionary Statement Regarding Forward-Looking Statements” and described under the heading “Risk Factors” included in the Final Prospectus filed by OneWater Marine Inc. and in the other related OneWater Marine Inc. filings with the SEC, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
We believe that we are the largest and one of the fastest-growing premium recreational boat retailers in the United States with 63 stores comprising 21 dealer groups in 11 states. Our dealer groups are located in highly attractive markets throughout the Southeast, Gulf Coast, Mid-Atlantic and Northeast, including Texas, Florida, Alabama, North Carolina, South Carolina, Georgia, Ohio and New York, which collectively comprise eight of the top twenty states for marine retail expenditures. We believe that we are a market leader by volume in sales of premium boats in 12 out of the 17 markets in which we operate. In fiscal year 2019, we sold over 8,500 new and pre-owned boats, of which we believe approximately 40% were sold to customers who had a trade-in or with whom we had otherwise established relationships. The combination of our significant scale, diverse inventory, access to premium boat brands and meaningful dealer group brand equity enable us to provide a consistently professional experience as reflected in the number of our repeat customers and same-store sales growth.
We were formed in 2014 as One Water Marine Holdings, LLC (“OneWater LLC”) through the combination of Singleton Marine and Legendary Marine, which created a marine retail platform that collectively owned and operated 19 stores. Since the combination in 2014, we have acquired a total of 40 additional stores through 17 acquisitions. Our current portfolio as of March 31,June 30, 2020 consists of 21 different local and regional dealer groups. Because of this, we believe we are the largest and one of the fastest-growing premium recreational boat retailers in the United States based on number of stores and total boats sold. While we have opportunistically opened new stores in select markets, we believe that it is generally more effective economically and operationally to acquire existing stores with experienced staff and established reputations.
The boat dealer market is highly fragmented and is comprised of over 4,000 stores nationwide. Most competing boat retailers are operated by local business owners who own three or fewer stores. We are one of the largest and fastest-growing premium recreational boat retailers in the United States. Despite our size, we comprise less than 2% of total industry sales. Our scale and business model allow us to leverage our extensive inventory to provide consumers with the ability to find a boat that matches their preferences (e.g., make, model, color, configuration and other options) and to deliver the boat within days while providing a personalized sales experience. We are able to operate with a comparatively higher degree of profitability than other independent retailers because we allocate support resources across our store base, focus on high-margin products and services, utilize floor plan financing and provide core back-office functions on a scale that many independent retailers are unable to match. We seek to be the leading boat retailer by total market share within each boating market and within the product segments in which we participate. To the extent that we are not, we will evaluate acquiring other local retailers in order to increase our sales, to add additional brands or to provide us with additional high-quality personnel.
The COVID-19 pandemic and its related effects may continue to interfere with the ability of our employees, contractors, customers, suppliers, and other business partners to perform our and their respective responsibilities and obligations with respect to the operation of our business. Additionally, current economic conditions andTo date, we have not experienced any shortages of inventory, but it is possible that such a shortage could occur as a result of the COVID-19 outbreak maypandemic and its effects on, among other things, supply chains, operations and consumer demand.
General economic conditions and consumer spending patterns can negatively impact our operating results. Unfavorable local, regional, national, or global economic developments or uncertainties, including the adverse economic effects of the COVID-19 pandemic or a prolonged economic downturn, could reduce consumer spending and adversely affect our business. Consumer spending on discretionary goods may also decline as a result of lower consumer confidence levels, even if prevailing economic conditions are otherwise favorable. Economic conditions in areas in which we operate stores, particularly in the Southeast, can have a major impact on our overall results of operations. Local influences, such as corporate downsizing and inclement weather such as hurricanes and other storms, environmental conditions, global public health concerns and events could adversely affect our operations in certain markets and in certain periods. Any extended period of adverse economic conditions or low consumer confidence is likely to have a negative effect on our business.
Although past economic conditions have adversely affected our operating results, we believe we are capable of responding in a manner that allows us to substantially outperform the industry and gain market share. We believe our ability to capture such market share enables us to align our retail strategies with the desires of customers. We expect our core strengths, including retail and acquisition strategies, will allow us to capitalize on growth opportunities as they occur, despite market conditions.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and understanding our results of operations, based on the high degree of judgment or complexity in their application.
Revenue from parts and service operations (boat maintenance and repairs) is recorded over time as services are performed. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a period of one year or less from contract inception. Prior to the adoption of ASU 2014-09 (as defined below), revenue from parts and service operations were recognized when the customer took delivery of the part or serviced boat. Due to the short period of time from contract inception to completion, the impact of recording labor and parts incurred but not billed at the end of the reporting period in accordance with the standard adoption was de minimis.
Deferred revenue from storage and marina operations is recognized on a straight-line basis over the term of the contract as services are completed. Revenue from arranging financing, insurance and extended warranty contracts to customers through various third-party financial institutions and insurance companies is recognized when the related boats are sold. We do not directly finance our customers’ boat, motor or trailer purchases. Subject to our agreements and in the event of early cancellation of such loans or insurance contracts by the customer, we may be assessed a charge back for a portion of the transaction price by the third-party financial institutions and insurance companies. We constrain our estimate of variable consideration associated with chargebacks based on our historical experience with repayments or defaults. Chargebacks were not material to the unaudited condensed consolidated financial statements for the three and sixnine months ended March 31,June 30, 2020 and March 31,June 30, 2019.
Consideration received from vendors is accounted for in accordance with FASB Accounting Standards Codification 330, ‘‘Inventory‘‘Inventory’’’’ (‘‘ASC 330’’). Pursuant to ASC 330, manufacturer incentives based upon cumulative volume of sales and purchases are recorded as a reduction of inventory cost and related cost of sales when the amounts are probable and reasonably estimable.
Inventories are stated at the lower of cost or net realizable value. The cost of new and pre-owned boat inventory is determined using the specific identification method. New and pre-owned boat sales histories indicated that the overwhelming majority of such boats are sold for, or in excess of, the cost to purchase those boats. In assessing the lower of cost or net realizable value, we consider the aging of the boats, historical sales of a particular product and current market conditions. Therefore, we generally do not maintain a reserve for boat inventory. The cost of parts and accessories is determined using the weighted average cost method. Inventory is reported net of write downs for obsolete and slow moving items of approximately$0.9 million and $0.5 million at both March 31,June 30, 2020 and September 30, 2019.2019, respectively.
Goodwill and intangible assets are accounted for in accordance with FASB Accounting Standards Codification 350, ‘‘Intangibles — Goodwill and Other’’ (‘‘ASC 350’’), which provides that the excess of cost over the fair value of the net assets of businesses acquired, including other identifiable intangible assets, is recorded as goodwill. ASC 350 also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative goodwill impairment test is unnecessary. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with ASC 350, goodwill is tested for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred.
In accordance with ASC 350, we review goodwill for impairment annually in the fourth fiscal quarter, or more often if events or circumstances indicate that impairment may have occurred. When evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of required goodwill impairment in accordance with ASC 350. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputs that would result in a lower valuation, it could cause the carrying value of the reporting unit to exceed its fair value and thus require the Company to record goodwill impairment. We electedAs of June 30, 2020, and based on upon our most recent quantitative assessment on March 31, 2020, we determined that it is not “more likely than not” that the fair value of our reporting unit is less than its carrying value. As a result, we were not required to perform a quantitative assessment for our March 31, 2020 goodwill impairment testing due to the decline in our market capitalization and possible reductions in cash flow as a result of COVID-19. Based on our interim impairment assessment, as of March 31, 2020, we have determined that our goodwill is not impaired. However, we are unable to predict how long these current conditions will persist and the impact any potential additional measures, including prolonged shelter in place orders, would have on our business.test.
We performed a qualitative assessment as of September 30, 2019, and we determined that it was not more“more likely than notnot” that the fair value of our reporting unit was less than its carrying amount.
Identifiable intangible assets consist of trade names related to the acquisitions we have completed. We have determined that trade names have an indefinite life, as there is no economic, contractual or other factors that limit their useful lives and they are expected to generate value as long as the trade name is utilized by the dealer group, and therefore, are not subject to amortization. Financial statement risk exists to the extent identifiable intangibles become impaired due to the decrease in the fair value of the identifiable assets. We elected to perform aAs of June 30, 2020, and based upon our most recent quantitative assessment for our March 31, 2020 trade names impairment testing due to the decline in our market capitalization and possible reductions in cash flow as a result of COVID-19. Basedassessments on our interim impairment assessments as of March 31, 2020, we have determined that it is not “more likely than not” that the fair values of our trade namesidentifiable intangible assets are less than their carrying values. As a result, we were not impaired. However, we are unablerequired to predict how long these current conditions will persist and the impact any potential additional measures, including prolonged shelter in place orders, would have on our business.perform quantitative identifiable intangible asset impairment tests.
In determining fair value, we use various valuation approaches including market, income and cost approaches. FASB Topic 820, Fair Value Measurements, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, developed based on market data obtained from independent sources. Unobservable inputs are those that reflect our expectation of the assumptions that market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
The grant date fair value of equity-based compensation and the fair value of certain warrants previously held by affiliates of Goldman Sachs & Co. LLC and certain of its affiliates (collectively, “Goldman”) and affiliates of The Beekman Group (“Beekman”) (such warrants, the “LLC Warrants”) were both based upon inputs that are unobservable and significant to the overall fair value measurement. Our valuation considered both a market approach and an income approach in determining fair value. While both approaches resulted in similar values, the market approach was weighted 25% and the income approach was weighted 75% since there are very few comparable marine related market participants. For the income approach, we projected long-term growth rates and cash flows and then discounted such values using a weighted average cost of capital. Such fair value measurements are highly complex and subjective in nature. Accordingly, a significant degree of judgment is required to estimate these fair value measurements.
One Water Marine Holdings, LLC (“OneWater LLC”) is and has been organized as a pass-through entity for U.S. federal income tax purposes and is therefore not subject to entity-level U.S. federal income taxes. OneWater Marine Inc. (“OneWater Inc”) was incorporated as a Delaware corporation on April 3, 2019 and therefore, after the consummation of the initial public offering (the “Offering”), is subject to U.S. federal income taxes and additional state and local taxes with respect to its allocable share of any taxable income of OneWater LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, OneWater Inc also will incur expenses related to its operations, plus payment obligations under the Tax Receivable Agreement, which are expected to be significant. To the extent OneWater LLC has available cash and subject to the terms of any current or future debt instruments, the Amended and Restated Limited Liability Company Agreement of OneWater LLC (the ‘‘OneWater LLC Agreement’’) will require OneWater LLC to make pro rata cash distributions to OneWater Unit Holders (as defined below), including OneWater Inc, in an amount sufficient to allow OneWater Inc to pay its taxes and to make payments under the Tax Receivable Agreement. In addition, the OneWater LLC Agreement will require OneWater LLC to make non-pro rata payments to OneWater Inc to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under the OneWater LLC Agreement. See ‘‘—Tax Receivable Agreement’’ and ‘‘Certain Relationships and Related Party Transactions—Tax Receivable Agreement’’ in our Final Prospectus.
In addition, we expect to incur incremental, non-recurring costs related to our transition to a publicly traded corporation, including the costs of the Offering and the costs associated with the initial implementation of our internal control reviews and testing pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the ‘‘Sarbanes-Oxley Act’’). We also expect to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with compliance under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.
We have a diversified revenue profile that is comprised of new boat sales, pre-owned boat sales, F&I products, repair and maintenance services, and parts and accessories. Although non-boat sales contributed approximately 10.0%8.7% and 9.8%10.2% to revenue in the three months ended March 31,June 30, 2020 and 2019, respectively, and 10.7%9.6% and 11.8%11.0% in the sixnine months ended March 31,June 30, 2020 and 2019, respectively, due to the higher gross margin on these product and service lines, non-boat sales contributed 29.8%27.5% and 28.7%31.3% to gross profit in the three months ended March 31,June 30, 2020 and 2019, respectively, and 30.4%28.8% and 30.8%31.1% to gross profit in the sixnine months ended March 31,June 30, 2020 and 2019, respectively. During different phases of the economic cycle, consumer behavior may shift away from new boats; however, we are well-positioned to benefit from revenue from pre-owned boats, repair and maintenance services, and parts and accessories, which have all historically increased during periods of economic uncertainty. We generate pre-owned sales from boats traded-in for new and pre-owned boats, boats purchased from consumers, brokerage transactions, consignment sales and wholesale sales. We have also diversified our business across geographies and dealership types (e.g., fresh water and salt water) in order to reduce the effects of seasonality. In addition to seasonality, revenue and operating results may also be significantly affected by quarter-to-quarter changes in economic conditions, manufacturer incentive programs, adverse weather conditions and other developments outside of our control.
We calculate gross profit as revenue less cost of sales. Cost of sales consists of actual amounts paid for products, costs of services (primarily labor), transportation costs from manufacturers to our retail stores and vendor consideration. Gross profit excludes depreciation and amortization, which is presented separately in our consolidated statements of operations.
Our overall gross profit margin varies with our revenue mix. Sales of new and pre-owned boats, which have comparable margins, generally result in a lower gross profit margin than our non-boat sales. As a result, when revenue from non-boat sales increases as a percentage of total revenue, we expect our overall gross profit margin to increase.
Selling, general, and administrative (‘‘SG&A’’) expenses consist primarily of salaries and incentive-based compensation, advertising, rent, insurance, utilities, and other customary operating expenses. A portion of our cost structure is variable (such as sales commissions and incentive compensation), or controllable (such as advertising), which we believe allows us to adapt to changes in the retail environment over the long term. We typically evaluate our variable expenses, selling expenses and all other SG&A expenses in the aggregate as a percentage of total revenue.
We assess the organic growth of our revenue on a same-store basis. We believe that our assessment on a same-store basis represents an important indicator of comparative financial results and provides relevant information to assess our performance. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership and revenues are only included for identical months in the same-store base periods. Stores relocated within an existing market remain in the comparable store base for all periods. Additionally, amounts related to closed stores are excluded from each comparative base period. Because same-store sales may be defined differently by other companies in our industry, our definition of this measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
The comparability of our results of operations between the periods discussed below is naturally affected by the acquisitions we have completed during such periods. We are also continuously evaluating and pursuing acquisitions on an ongoing basis, and such acquisitions, if completed, will continue to impact the comparability of our financial results. While we expect continued growth and strategic acquisitions in the future, our acquisitions may have materially different characteristics than our historical results, and such differences in economics may impact the comparability of our future results of operations to our historical results.
Effective May 1, 2019, OneWater LLC acquired substantially all of the assets of Caribee Boat Sales and Marina, Inc., a dealer group based in Florida with one store.
Effective August 1, 2019, OneWater LLC acquired substantially all of the assets of Central Marine, a dealer group based in Florida with three stores.
We refer to the fiscal year 2019 acquisitions described above collectively as the ‘‘2019 Acquisitions.’’ The 2019 Acquisitions are fully reflected in our unaudited condensed consolidated financial statements for the three and sixnine months ended March 31,June 30, 2020 and will be fully reflected in our consolidated financial statements for the fiscal year ending September 30, 2020 but are only partially reflected in our unaudited condensed consolidated financial statements for the three and sixnine months ending March 31,June 30, 2019.
Other Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial results discussed below may not be comparable to our future financial results for the reasons described below.
OneWater Inc is subject to U.S. federal, state and local income taxes as a corporation. Our accounting predecessor, OneWater LLC, was and is treated as a partnership for U.S. federal income tax purposes, and as such, was generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income is passed through to its members. Accordingly, the financial data attributable to our predecessor contains no provision for U.S. federal income taxes or income taxes in any state or locality. We currently estimate that OneWater Inc will be subject to U.S. federal, state and local taxes at a blended statutory rate of 24.6% of pre-tax earnings for periods after the Offering.
As of September 30, 2019, the outstanding balance of the preferred units in One Water Assets & Operations, LLC (“Opco”OWAO”) held by Goldman and Beekman in the aggregate was $87.3 million, exclusive of $1.3 million in issuance costs. In connection with the Offering, we used the net proceeds therefrom, together with cash on hand and borrowings under the Amended and Restated Credit and Guaranty Agreement (the “Term and Revolver Credit Facility”) by and among OneWater Inc, OneWater LLC and its subsidiaries, with Goldman Sachs Specialty Lending Group, L.P., to fully redeem these preferred units, which eliminates the amount recorded as Redeemable Preferred Interest in Subsidiary in our balance sheet and also eliminates any future dividends related to the preferred units for all periods after the Offering.
As of September 30, 2019, Goldman and Beekman held the LLC Warrants, which contained conversion features that caused them to be accounted for as a liability on our balance sheet. Changes in this liability were recognized as income or expense on our statements of operations and increased or reduced our net income in historical periods. In connection with the Offering, Goldman and Beekman exercised all of the LLC Warrants for common units of OneWater LLC. Giving effect to the Offering and the exercise of the LLC Warrants for common units of OneWater LLC held by Goldman and Beekman, we have eliminated the fair value adjustment for the LLC Warrants for all periods after the Offering, which eliminates the corresponding impact on our statements of operations.
As we further implement controls, processes and infrastructure applicable to companies with publicly traded equity securities, it is likely that we will incur additional SG&A expenses relative to historical periods. See ‘‘—Post-Offering Taxation and Public Company Costs.’’
Our future results will depend on our ability to efficiently manage our combined operations and execute our business strategy.
Results of Operations
Three Months Ended March 31,June 30, 2020, Compared to Three Months Ended March 31,June 30, 2019
| | For the three months ended June 30, 2020 | | | For the three months ended June 30, 2019 | | | | | | | |
| | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | ($ in thousands) | |
Revenues | | | | | | | | | | | | | | | | | | |
New boat sales | | $ | 286,984 | | | | 70.3 | % | | $ | 180,668 | | | | 65.7 | % | | $ | 106,316 | | | | 58.8 | % |
Pre-owned boat sales | | | 85,907 | | | | 21.0 | % | | | 66,114 | | | | 24.1 | % | | | 19,793 | | | | 29.9 | % |
Finance & insurance income | | | 16,639 | | | | 4.1 | % | | | 10,007 | | | | 3.6 | % | | | 6,632 | | | | 66.3 | % |
Service, parts and other sales | | | 18,743 | | | | 4.6 | % | | | 18,035 | | | | 6.6 | % | | | 708 | | | | 3.9 | % |
Total revenues | | | 408,273 | | | | 100.0 | % | | | 274,824 | | | | 100.0 | % | | | 133,449 | | | | 48.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
New boat gross profit | | | 53,607 | | | | 13.1 | % | | | 32,441 | | | | 11.8 | % | | | 21,166 | | | | 65.2 | % |
Pre-owned boat gross profit | | | 15,041 | | | | 3.7 | % | | | 10,637 | | | | 3.9 | % | | | 4,404 | | | | 41.4 | % |
Finance & insurance gross profit | | | 16,639 | | | | 4.1 | % | | | 10,007 | | | | 3.6 | % | | | 6,632 | | | | 66.3 | % |
Service, parts & other gross profit | | | 9,398 | | | | 2.3 | % | | | 9,646 | | | | 3.5 | % | | | (248 | ) | | | -2.6 | % |
Total gross profit | | | 94,685 | | | | 23.2 | % | | | 62,731 | | | | 22.8 | % | | | 31,954 | | | | 50.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 43,152 | | | | 10.6 | % | | | 34,713 | | | | 12.6 | % | | | 8,439 | | | | 24.3 | % |
Depreciation and amortization | | | 824 | | | | 0.2 | % | | | 691 | | | | 0.3 | % | | | 133 | | | | 19.2 | % |
Transaction costs | | | 31 | | | | 0.0 | % | | | 419 | | | | 0.2 | % | | | (388 | ) | | | -92.6 | % |
Gain on settlement of contingent consideration | | | - | | | | 0.0 | % | | | (19 | ) | | | 0.0 | % | | | 19 | | | | -100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income from operations | | | 50,678 | | | | 12.4 | % | | | 26,927 | | | | 9.8 | % | | | 23,751 | | | | 88.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense - floor plan | | | 2,298 | | | | 0.6 | % | | | 2,734 | | | | 1.0 | % | | | (436 | ) | | | -15.9 | % |
Interest expense - other | | | 3,082 | | | | 0.8 | % | | | 1,869 | | | | 0.7 | % | | | 1,213 | | | | 64.9 | % |
Change in fair value of warrant liability | | | - | | | | 0.0 | % | | | (10,373 | ) | | | -3.8 | % | | | 10,373 | | | | -100.0 | % |
Other (income) expense, net | | | (61 | ) | | | 0.0 | % | | | 17 | | | | 0.0 | % | | | (78 | ) | | | -458.8 | % |
Income before income tax expense | | | 45,359 | | | | 11.1 | % | | | 32,680 | | | | 11.9 | % | | | 12,679 | | | | 38.8 | % |
Income tax expense | | | 4,737 | | | | 1.2 | % | | | - | | | | 0.0 | % | | | 4,737 | | | | 100.0 | % |
Net income | | | 40,622 | | | | 9.9 | % | | | 32,680 | | | | 11.9 | % | | | 7,942 | | | | 24.3 | % |
Less: Net income attributable to non-controlling interest | | | - | | | | | | | | (772 | ) | | | | | | | 772 | | | | -100.0 | % |
Net income attributable to One Water Marine Holdings, LLC | | | | | | | | | | $ | 31,908 | | | | | | | | | | | | | |
Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC | | | (26,255 | ) | | | | | | | | | | | | | | | | | | | | |
Net income attributable to One Water Marine Inc. | | $ | 14,367 | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, 2020 | | | For the three months ended March 31, 2019 | | | | | | | |
| | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | ($ in thousands) | |
Revenues | | | | | | | | | | | | | | | | | | |
New boat sales | | $ | 127,913 | | | | 67.3 | % | | $ | 126,928 | | | | 70.2 | % | | $ | 985 | | | | 0.8 | % |
Pre-owned boat sales | | | 42,992 | | | | 22.6 | % | | | 36,015 | | | | 19.9 | % | | | 6,977 | | | | 19.4 | % |
Finance & insurance income | | | 8,083 | | | | 4.3 | % | | | 6,354 | | | | 3.5 | % | | | 1,729 | | | | 27.2 | % |
Service, parts and other sales | | | 10,975 | | | | 5.8 | % | | | 11,474 | | | | 6.3 | % | | | (499 | ) | | | -4.3 | % |
Total revenues | | | 189,963 | | | | 100.0 | % | | | 180,771 | | | | 100.0 | % | | | 9,192 | | | | 5.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | |
New boat gross profit | | | 24,125 | | | | 12.7 | % | | | 22,148 | | | | 12.3 | % | | | 1,977 | | | | 8.9 | % |
Pre-owned boat gross profit | | | 7,183 | | | | 3.8 | % | | | 6,177 | | | | 3.4 | % | | | 1,006 | | | | 16.3 | % |
Finance & insurance gross profit | | | 8,083 | | | | 4.3 | % | | | 6,354 | | | | 3.5 | % | | | 1,729 | | | | 27.2 | % |
Service, parts & other gross profit | | | 5,193 | | | | 2.7 | % | | | 5,046 | | | | 2.8 | % | | | 147 | | | | 2.9 | % |
Gross profit | | | 44,584 | | | | 23.5 | % | | | 39,725 | | | | 22.0 | % | | | 4,859 | | | | 12.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 32,146 | | | | 16.9 | % | | | 27,548 | | | | 15.2 | % | | | 4,598 | | | | 16.7 | % |
Depreciation and amortization | | | 791 | | | | 0.4 | % | | | 585 | | | | 0.3 | % | | | 206 | | | | 35.2 | % |
Transaction costs | | | 2,925 | | | | 1.5 | % | | | 444 | | | | 0.2 | % | | | 2,481 | | | | 558.8 | % |
Gain on settlement of contingent consideration | | | - | | | | 0.0 | % | | | (1,655 | ) | | | -0.9 | % | | | 1,655 | | | | -100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income from operations | | | 8,722 | | | | 4.6 | % | | | 12,803 | | | | 7.1 | % | | | (4,081 | ) | | | -31.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense - floor plan | | | 2,525 | | | | 1.3 | % | | | 2,210 | | | | 1.2 | % | | | 315 | | | | 14.3 | % |
Interest expense - other | | | 2,457 | | | | 1.3 | % | | | 1,294 | | | | 0.7 | % | | | 1,163 | | | | 89.9 | % |
Change in fair value of warrant liability | | | - | | | | 0.0 | % | | | 12,295 | | | | 6.8 | % | | | (12,295 | ) | | | -100.0 | % |
Other expense (income), net | | | 289 | | | | 0.2 | % | | | (45 | ) | | | 0.0 | % | | | 334 | | | | -742.2 | % |
Pretax income (loss) | | | 3,451 | | | | 1.8 | % | | | (2,951 | ) | | | -1.6 | % | | | 6,402 | | | | -216.9 | % |
Income taxes | | | 472 | | | | 0.2 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Net income (loss) | | | 2,979 | | | | 1.6 | % | | | (2,951 | ) | | | -1.6 | % | | | 5,930 | | | | -200.9 | % |
Less: Net income attributable to non-controlling interest | | | (103 | ) | | | | | | | (270 | ) | | | | | | | 167 | | | | -61.9 | % |
Net loss attributable to One Water Marine Holdings, LLC | | | | | | | | | | $ | (3,221 | ) | | | | | | | | | | | | |
Less: Net loss attributable to non-controlling interests of One Water Marine Holdings, LLC | | | (1,791 | ) | | | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to One Water Marine Inc. | | $ | 1,085 | | | | | | | | | | | | | | | | | | | | | |
Revenue
Overall, revenue increased by $9.2$133.4 million, or 5.1%48.6%, to approximately $190.0$408.3 million for the three months ended March 31,June 30, 2020 from $180.8$274.8 million for the three months ended March 31,June 30, 2019. Revenue generated from same-store sales decreased 2.7%increased 43.9% for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019, primarily due to decreasedincreased sales due to the uncertainty and impact on the macroeconomic environment of the COVID-19 pandemic.pandemic as many summer activities that have historically competed with time on the water have been canceled. Boating provides a safe, outdoor leisure activity that allows for maintenance of social distance policies. The decreaseincrease was primarily driven by a reductionboth an increase in the number of boatsnew and pre-owned units sold partially offset byas well as an increase in the average sellingunit price of new and pre-owned boats.boats sold. Overall revenue increased by $9.2$133.4 million as a result of a $13.9$119.3 million increase in same store sales and a $14.1 million increase from stores not eligible for inclusion in the same-store sales base, partially offset by a $4.7 million dollar decrease in same-store sales.base. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership and revenues are only included for identical months in the same-store base periods. During the fiscal year ended SeptemberAs of June 30, 2019 we had acquired 10 stores.seven stores in fiscal year 2019, including one store in the three months ended June 30, 2019. We have not made any acquisitions in fiscal year 2020.
New Boat Sales
New boat sales increased by $1$106.3 million, or 0.8%58.8%, to approximately $127.9$287.0 million for the three months ended March 31,June 30, 2020 from $126.9$180.7 for the three months ended March 31,June 30, 2019. The increase was primarily attributable to our same-store sales growth and the increased unit sales attributable to the impact of our 2019 Acquisitions. During the three months ended March 31,June 30, 2020 we experienced a decreasean increase in unit sales of approximately 4.9%43.6% and an increase in average unit prices of approximately 7.0%10.4% over the three months ended March 31,June 30, 2019. We believe the decreaseincrease in units sold was primarily due to the uncertainty and impact on the macroeconomic environment of the COVID-19 pandemic.pandemic had on many summer activities that we have historically competed against for time. The increase in average sales price was due in part to the mix of boat brands and models sold and product improvements in the functionality and technology of boats, which continues to be a driver of consumer demand.
Pre-owned Boat Sales
Pre-owned boat sales increased by $7.0$19.8 million, or 19.4%29.9%, to approximately $43.0$85.9 million for the three months ended March 31,June 30, 2020 from $36.0$66.1 million for the three months ended March 31,June 20, 2019. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consigned and wholesale), which causes periodic and seasonal fluctuations in the average sales price. Pre-owned boat sales for the three months ended March 31,June 30, 2020 benefited from a 6.2%22.9% increase in the number of units sold and a 25.9%2.6% increase in average unit price largely due to the mix of pre-owned products and the composition of the brands and models sold during the period. Pre-owned boatperiod, the increase in same-store sales, for the three months ended March 31, 2020 were less impacted byimpact of 2019 acquisitions and the impact of COVID-19 pandemic, as consumers tend to shift toon the more affordable pre-owned boat market in times of uncertainty.recreational boating market.
Finance & Insurance Income
We generate revenue from arranging finance & insurance products, including financing, insurance and extended warranty contracts, to customers through various third-party financial institutions and insurance companies. Finance & insurance income increased by $1.7$6.6 million, or 27.2%66.3%, to approximately $8.1$16.6 million for the three months ended March 31,June 30, 2020 from $6.4$10.0 million for the three months ended March 31,June 30, 2019. The increase was primarily due to process improvements and the additional new and pre-owned sales revenue, which were primarily attributable to the fiscal year 2019 Acquisitions.same-store sales growth. We remain very focused on improving sales of finance & insurance products throughout our dealer network and implementing best practices at acquired dealer groups and existing stores. Finance & insurance products increased as a percentage of total revenue to 4.3%4.1% in the three months ended March 31,June 30, 2020 from 3.5%3.6% for the three months ended March 31,June 30, 2019. Since finance & insurance income is fee-based, we do not incur any related cost of sale. Finance & insurance income is recorded net of related fees, including fees charged back due to any early cancellation of loan or insurance contracts by a customer.
Service, Parts & Other Sales
Service, parts & other sales
decreasedincreased by
$0.5$0.7 million, or
4.3%3.9%, to
approximately $11.0$18.7 million for the three months ended
March 31,June 30, 2020 from
$11.5$18.0 million for the three months ended
March 31,June 30, 2019.
The decrease wasThis increase in service, parts & other sales is primarily due to
lower volumes relatedancillary sales generated from our increase in new and pre-owned boat sales and sales attributable to
our same-store sales growth, partially offset by the
uncertainty surroundingimpact of shelter in place orders during the
COVID-19 pandemic as volume droppedperiod which impacted our ability to transact retail service and
we experienced partial store closures in the latter half of March 2020.parts sales.Gross Profit
Overall, gross profit increased by $4.9$32.0 million, or 12.2%50.9%, to approximately $44.6$94.7 million for the three months ended March 31,June 30, 2020 from $39.7$62.7 million for the three months ended March 31,June 30, 2019. This increase was primarily due to our overall increase in same-store sales, primarily driven by an increase in new and pre-owned boat sales, as well as higherthe Company’s focus on dynamic pricing and the increase in finance & insurance income. Overall gross margins increased 15040 basis points to 23.5%23.2% for the three months ended March 31,June 30, 2020 from 22.0%22.8% for the three months ended March 31,June 30, 2019 due to the factors noted below.
New Boat Gross Profit
New boat gross profit increased by $2.0$21.2 million, or 8.9%65.2%, to approximately $24.1$53.6 million for the three months ended March 31,June 30, 2020 from $22.1$32.4 million for the three months ended March 31,June 30, 2019. This increase was primarily due to our overall increase in same-store sales. New boat gross profit as a percentage of new boat revenue was 18.9%18.7% for the three months ended March 31,June 30, 2020 as compared to 17.4%18.0% in the three months ended March 31,June 30, 2019. The increase in new boat gross profit and gross profit margin is due primarily to a shift in the mix and size of boat models sold, the margin profile of recently acquired locations and our emphasis on expanding new boat gross profit margins, while continuing to leverage the progress we have made in previous quarters on finance and insurance.
Pre-owned Boat Gross Profit
Pre-owned boat gross profit increased by $1.0$4.4 million, or 16.3%41.4%, to approximately $7.2$15.0 million for the three months ended March 31,June 30, 2020 from $6.2$10.6 million for the three months ended March 31,June 30, 2019. The increase in pre-owned gross profit was driven by the increase in pre-owned revenue.revenue primarily as a result of our same-store sales growth. Pre-owned boat gross profit as a percentage of pre-owned boat revenue was 16.7%17.5% and 17.2%16.1% for the three months ended March 31,June 30, 2020 and 2019, respectively. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consignment and wholesale), which may cause periodic and seasonal fluctuations in pre-owned boat gross profit as a percentage of revenue. In the three months ended March 31,June 30, 2020 as compared to the three months ended June 30, 2019, we experienced an increase in our gross profit on boats purchased or traded-in and wholesale sales. This was offset by a shift inpre-owned sales mix due in part to an increase in wholesalefor each of the different sales which have a lower profit margin and a decrease in brokerage sales.arrangements.
Finance & Insurance Gross Profit
Finance & insurance gross profit increased by $1.7$6.6 million, or 27.2%66.3%, to approximately $8.1$16.6 million for the three months ended March 31,June 30, 2020 from $6.4$10.0 million for the three months ended March 31,June 30, 2019. Finance & insurance income is fee-based revenue for which we do not recognize incremental cost of sale.
Service, Parts & Other Gross Profit
Service, parts & other gross profit
increasedremained relatively flat, decreasing by
$0.1$0.2 million, or
2.9%2.6%, to
approximately $5.2$9.4 million for the three months ended
March 31,June 30, 2020 from
$5.0$9.6 million for the three months ended
March 31,June 30, 2019. Service, parts & other gross profit as a percentage of service, parts & other revenue was
47.3%50.1% and
44.0%53.5% for the three months ended
March 31,June 30, 2020 and 2019, respectively. This
increase in gross profit margindecrease was the result of
increases inthe mix of products sold and services provided. Additionally, service, parts
gross profit margin and storage and& other gross profit
margin,was partially
offsetimpacted by
a decreaseshelter in
place orders during the period which limited our ability to transact retail service
gross profit margin.and parts sales early in the period.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased by $4.6$8.4 million, or 16.7%24.3%, to approximately $32.1$43.2 million for the three months ended March 31,June 30, 2020 from $27.5$34.7 million for the three months ended March 31,June 30, 2019. This increase was primarily due to the impact of acquisitions and expenses incurred to support the overall increase in revenues and gross profit. The increase primarily consisted of $3.2an $8.4 million related to an increase in personnel expenses, $0.2 million related to an increase in selling and administrative expenses, and $1.2 million related to an increase in fixed expenses. Selling, general & administrative expenses as a percentage of revenue increaseddecreased to 16.9%10.6% from 15.2%12.6% for the three months ended March 31,June 30, 2020 and 2019, respectively. The increasereduction in selling, general & administrative expenses as a percentage of revenue was primarily related to higher personnel costs, as a result of increased headcountmainly due to the 2019 Acquisitionsincreased volume of units sold and a rise in commissions expense due to the increase in gross profit margin. Selling, general & administrative expenses forcost reduction actions enacted following the three months ended March 31, 2020 were not significantly reduced in the second quarter by the quick and decisive actions we took to reduce costs across the Company in response to the COVID-19 global pandemic.acceleration of COVID-19.
Depreciation and Amortization
Depreciation and amortization expense increased $0.2$0.1 million, or 35.2%19.2%, to $0.8 million for the three months ended March 31,June 30, 2020 compared to $0.6$0.7 million for the three months ended March 31,June 30, 2019. The increase in depreciation and amortization expense for the three months ended March 31,June 30, 2020 compared to the three months ended March 31,June 30, 2019 was primarily attributable to an increase in property and equipment with shorter useful lives.
Transaction Costs
The increasedecrease in transaction costs of $2.5$0.4 million, or 558.8%92.6%, to $2.9 million$30,650 for the three months ended March 31,June 30, 2020 compared to $0.4 million for the three months ended March 31,June 30, 2019 was primarily attributable to $2.3 million of expenses recognized in conjunctionthe acquisition completed during the three months ended June 30, 2019 with no acquisition occurring during the Offering that were not able to be capitalized.three months ended June 30, 2020.
Gain on Settlement of Contingent Consideration
Gain on settlement of contingent consideration of $1.7 million forDuring the three months ended March 31,June 30, 2019, was due to an adjustmentwe reduced our estimate of the acquisition contingent consideration arising fromrelated to the 2019 Acquisitions, asTexas Marine, Grande Yachts, and USA Marine Sales, Inc. acquisitions in the performance target to receive the full payout were not fully achieved.amount of $19,199. There was no gain/(loss)gain on settlement of contingent consideration for the three months ended March 31,June 30, 2020.
Operating Income from Operations
Operating income decreased $4.1Income from operations increased $23.8 million, or 31.9%88.2%, to $8.7$50.7 million for the three months ended March 31,June 30, 2020 compared to $12.8$26.9 million for the three months ended March 31,June 30, 2019. The decreaseincrease was primarily attributable to the $2.5$32.0 million increase in transaction costsgross profit for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019, as well as the $1.7 million gain on settlement of contingent consideration recorded in the three months ended March 31, 2019. The increase in gross profit for the quarter ended March 31, 2020 waspartially offset by the increasesa $8.4 million increase in selling, general & administrative expenses and depreciation and amortization expenses during the same period.periods.
Interest Expense – Floor Plan
Interest expense – floor plan increased $0.3decreased $0.4 million, or 14.3%15.9%, to $2.5$2.3 million for the three months ended March 31,June 30, 2020 compared to $2.2$2.7 million for the three months ended March 31,June 30, 2019 and was primarily attributable to falling interest rates as well as a $31.0$58.9 million increasedecrease in the outstanding borrowings on our sixth amendedSixth Amended and restatedRestated Inventory Financing Agreement (the “Inventory Financing Facility”) as of March 31,June 30, 2020 compared to March 31,June 30, 2019.
Interest Expense – Other
The increase in interest expense – other of $1.2 million, or 89.9%64.9%, to $2.5$3.1 million for the three months ended March 31,June 30, 2020 compared to $1.3$1.9 million for the three months ended March 31,June 30, 2019 was primarily attributable to a $49.7$42.4 million increase in our long-term debt as of June 30, 2020 compared to June 30, 2019, which was primarily increased to fully redeem the preferred interest in subsidiary.subsidiary in conjunction with the Offering.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability of $12.3$10.4 million for the three months ended March 31,June 30, 2019 was attributable to an overall change in the enterprise value of the Company. No charge was recorded for the three months ended March 31,June 30, 2020 as the warrants were exercised in conjunction with the Offering.
Other (Income) Expense, (Income), Net
The decrease in otherOther income of $0.3 million(expense) remained relatively flat, increasing to $61,310 for the three months ended March 31,June 30, 2020 compared to $(16,773) for the three months ended March 31, 2019 was primarily attributable to a $0.3 million increase in loss related to the disposal of property and equipment during the three months ended March 31, 2020 as compared to the three months ended March 31,June 30, 2019.
Income Tax Expense
The $0.5$4.7 million increase in income tax expense for the three months ended March 31,June 30, 2020 as compared to the three months ended March 31,June 30, 2019 was the result of the Offering and the taxability of OneWater Inc as a corporation.
Net Income (Loss)
Net income increased by $5.9$7.9 million to $3.0$40.6 million for the three months ended March 31,June 30, 2020 compared to a net lossincome of $3.0$32.7 million for the three months ended March 31,June 30, 2019. The increase was primarily attributable to the $12.3$32.0 million increase in gross profit for the three months ended June 30, 2020 compared to June 30, 2019. The increase was partially offset by the $10.4 million charge for the change in fair value of warrant liability for the three months ended March 31,June 30, 2019 compared to the three months ended March 31,June 30, 2020, in which no charge was taken. The increase was partially offset bytaken, the $2.5$8.4 million increase in transaction costsselling, general and a $1.2administrative expenses and the $4.7 million increase in interest expense – other for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Additionally, we recorded $0.5 million in income tax expense for the three months ended March 31,June 30, 2020 our first period with taxability as a corporation.compared to the three months ended June 30, 2019.
SixNine Months Ended March 31,June 30, 2020, Compared to SixNine Months Ended March 31,June 30, 2019
| | For the six months ended March 31, 2020 | | | For the six months ended March 31, 2019 | | | | | | | | | For the nine months ended June 30, 2020 | | | For the nine months ended June 30, 2019 | | | | | | |
| | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | | | Amount | | | % of Revenue | | | Amount | | | % of Revenue | | | $ Change | | | % Change | |
| | ($ in thousands) | | |
| | | | | | ($ in thousands) | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
New boat sales | | $ | 226,015 | | | 65.8 | % | | $ | 194,492 | | | 68.5 | % | | $ | 31,523 | | | 16.2 | % | | $ | 512,999 | | | 68.2 | % | | $ | 375,160 | | | 67.1 | % | | $ | 137,839 | | | 36.7 | % |
Pre-owned boat sales | | 80,813 | | | 23.5 | % | | 55,929 | | | 19.7 | % | | 24,884 | | | 44.5 | % | | 166,720 | | | 22.2 | % | | 122,043 | | | 21.8 | % | | 44,677 | | | 36.6 | % |
Finance & insurance income | | 12,408 | | | 3.6 | % | | 8,518 | | | 3.0 | % | | 3,890 | | | 45.7 | % | | 29,047 | | | 3.9 | % | | 18,525 | | | 3.3 | % | | 10,522 | | | 56.8 | % |
Service, parts and other sales | | | 24,425 | | | 7.1 | % | | | 25,110 | | | 8.8 | % | | | (685 | ) | | -2.7 | % | | | 43,168 | | | 5.7 | % | | | 43,144 | | | 7.7 | % | | | 24 | | | 0.1 | % |
Total revenues | | | 343,661 | | | 100.0 | % | | | 284,049 | | | 100.0 | % | | | 59,612 | | | 21.0 | % | | | 751,934 | | | 100.0 | % | | | 558,872 | | | 100.0 | % | | | 193,062 | | | 34.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
New boat gross profit | | 40,626 | | | 11.8 | % | | 34,390 | | | 12.1 | % | | 6,236 | | | 18.1 | % | | 94,233 | | | 12.5 | % | | 66,831 | | | 12.0 | % | | 27,402 | | | 41.0 | % |
Pre-owned boat gross profit | | 12,784 | | | 3.7 | % | | 9,210 | | | 3.2 | % | | 3,574 | | | 38.8 | % | | 27,825 | | | 3.7 | % | | 19,847 | | | 3.6 | % | | 7,978 | | | 40.2 | % |
Finance & insurance gross profit | | 12,408 | | | 3.6 | % | | 8,518 | | | 3.0 | % | | 3,890 | | | 45.7 | % | | 29,047 | | | 3.9 | % | | 18,525 | | | 3.3 | % | | 10,522 | | | 56.8 | % |
Service, parts & other gross profit | | | 10,955 | | | 3.2 | % | | | 10,926 | | | 3.8 | % | | | 29 | | | 0.3 | % | | | 20,353 | | | 2.7 | % | | | 20,571 | | | 3.7 | % | | | (218 | ) | | -1.1 | % |
Gross profit | | 76,773 | | | 22.3 | % | | 63,044 | | | 22.2 | % | | 13,729 | | | 21.8 | % | |
Total gross profit | | | 171,458 | | | 22.8 | % | | 125,774 | | | 22.5 | % | | 45,684 | | | 36.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | 60,586 | | | 17.6 | % | | 49,177 | | | 17.3 | % | | 11,409 | | | 23.2 | % | | 103,738 | | | 13.8 | % | | 83,890 | | | 15.0 | % | | 19,848 | | | 23.7 | % |
Depreciation and amortization | | 1,551 | | | 0.5 | % | | 1,192 | | | 0.4 | % | | 359 | | | 30.1 | % | | 2,375 | | | 0.3 | % | | 1,883 | | | 0.3 | % | | 492 | | | 26.1 | % |
Transaction costs | | 3,362 | | | 1.0 | % | | 742 | | | 0.3 | % | | 2,620 | | | 353.1 | % | | 3,393 | | | 0.5 | % | | 1,161 | | | 0.2 | % | | 2,232 | | | 192.2 | % |
Gain on settlement of contingent consideration | | | - | | | 0.0 | % | | | (1,655 | ) | | -0.6 | % | | | 1,655 | | | -100.0 | % | | | - | | | 0.0 | % | | | (1,674 | ) | | -0.3 | % | | | 1,674 | | | -100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income from operations | | 11,274 | | | 3.3 | % | | 13,588 | | | 4.8 | % | | (2,314 | ) | | -17.0 | % | | 61,952 | | | 8.2 | % | | 40,514 | | | 7.2 | % | | 21,438 | | | 52.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense - floor plan | | 5,184 | | | 1.5 | % | | 3,997 | | | 1.4 | % | | 1,187 | | | 29.7 | % | | 7,482 | | | 1.0 | % | | 6,730 | | | 1.2 | % | | 752 | | | 11.2 | % |
Interest expense - other | | 4,310 | | | 1.3 | % | | 2,522 | | | 0.9 | % | | 1,788 | | | 70.9 | % | | 7,392 | | | 1.0 | % | | 4,391 | | | 0.8 | % | | 3,001 | | | 68.3 | % |
Change in fair value of warrant liability | | (771 | ) | | -0.2 | % | | 7,600 | | | 2.7 | % | | (8,371 | ) | | -110.1 | % | | (771 | ) | | -0.1 | % | | (2,773 | ) | | -0.5 | % | | 2,002 | | | -72.2 | % |
Other expense (income), net | | | 167 | | | 0.0 | % | | | (90 | ) | | 0.0 | % | | | 257 | | | -285.6 | % | | | 106 | | | 0.0 | % | | | (73 | ) | | 0.0 | % | | | 179 | | | -245.2 | % |
Pretax income (loss) | | 2,384 | | | 0.7 | % | | (441 | ) | | -0.2 | % | | 2,825 | | | -640.6 | % | |
Income taxes | | | 472 | | | 0.1 | % | | | - | | | 0.0 | % | | | - | | | 0.0 | % | |
Net income (loss) | | 1,912 | | | 0.6 | % | | (441 | ) | | -0.2 | % | | 2,353 | | | -533.6 | % | |
Income before income tax expense | | | 47,743 | | | 6.3 | % | | 32,239 | | | 5.8 | % | | 15,504 | | | 48.1 | % |
Income tax expense | | | 5,209 | | | 0.7 | % | | - | | | 0.0 | % | | 5,209 | | | 100.0 | % |
Net income | | | | 42,534 | | | 5.7 | % | | | 32,239 | | | 5.8 | % | | | 10,295 | | | 31.9 | % |
Less: Net income attributable to non-controlling interest | | (350 | ) | | | | | | (546 | ) | | | | | 196 | | | -35.9 | % | | (350 | ) | | | | | | (1,318 | ) | | | | | 968 | | | -73.4 | % |
Net loss attributable to One Water Marine Holdings, LLC | | | | | | | | $ | (987 | ) | | | | | | | | | | |
Less: Net loss attributable to non-controlling interests of One Water Marine Holdings, LLC | | | (477 | ) | | | | | | | | | | | | | | | | |
Net income (loss) attributable to One Water Marine Inc. | | $ | 1,085 | | | | | | | | | | | | | | | | | |
Net income attributable to One Water Marine Holdings, LLC | | | | | | | | | $ | 30,921 | | | | | | | | | | |
Less: Net income attributable to non-controlling interests of One Water Marine Holdings, LLC | | | | (26,732 | ) | | | | | | | | | | | | | | | |
Net income attributable to One Water Marine Inc. | | | $ | 15,452 | | | | | | | | | | | | | | | | |
Revenue
Overall, revenue increased by $59.6$193.1 million, or 21.0%34.5%, to approximately $343.7$751.9 million for the sixnine months ended March 31,June 30, 2020 from $284.0$558.9 million for the sixnine months ended March 31,June 30, 2019. Revenue generated from same-store sales increased 4.7%24.1% for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019, primarily due to an increase in the average selling price of new and pre-owned boats, the model mix of boats sold and an increase in the number of new and pre-owned boats sold. We believe that COVID-19 has had a positive overall impact on the recreational boating market during a portion of the nine months ended June 30, 2020. Overall revenue increased by $13.2$133.1 million as a result of our increase in same-store sales and $46.4$59.9 million from stores not eligible for inclusion in the same-store sales base. New and acquired stores become eligible for inclusion in the comparable store base at the end of the store’s thirteenth month of operations under our ownership, and revenues are only included for identical months in the same-store base periods. DuringFor the fiscal yearnine months ended SeptemberJune 30, 2019, we acquired 10seven stores. We have not made any acquisitions in fiscal yearthe nine months ended June 30, 2020.
New Boat Sales
New boat sales increased by $31.5$137.8 million, or 16.2%36.7%, to approximately $226.0$513.0 million for the sixnine months ended March 31,June 30, 2020 from $194.5$375.2 for the sixnine months ended March 31,June 30, 2019. The increase was the result of our same-store sales growth during the twelve month period and the increased unit sales attributable to the 2019 Acquisitions. During the sixnine months ended March 31,June 30, 2020, we experienced an increase in unit sales of approximately 4.1%24.4% and an increase in average unit prices of approximately 13.5%10.5% over the sixnine months ended March 31,June 30, 2019. The increase in both units sold and average sales price was due in part to the mix of boat brands and models sold and product improvements in the functionality and technology of boats, which continues to be a driver of consumer demand. Additionally, we believe the increase in units sold was enhanced due to the impact the COVID-19 pandemic had on many summer activities that we have historically competed against for time.
Pre-owned Boat Sales
Pre-owned boat sales increased by $24.9$44.7 million, or 44.5%36.6%, to approximately $80.8$166.7 million for the sixnine months ended March 31,June 30, 2020 from $55.9$122.0 million for the sixnine months ended March 31,June 30, 2019. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consigned and wholesale), which causes periodic and seasonal fluctuations in the average sales price. Pre-owned boat sales for the sixnine months ended March 31,June 30, 2020 benefited from a 20.4%21.8% increase in the number of units sold due to the increase in same-store sales and the impact of the fiscal year 2019 Acquisitions. The average sales price per pre-owned unit in the sixnine months ended March 31,June 30, 2020 increased 24.6%11.2% largely due to the mix of pre-owned products and the composition of the brands and models sold during the period. Additionally, we believe the increase in units sold was enhanced due to the impact the COVID-19 pandemic had on many summer activities that we have historically competed against for time.
Finance & Insurance Income
We generate revenue from arranging finance & insurance products, including financing, insurance and extended warranty contracts, to customers through various third-party financial institutions and insurance companies. Finance & insurance income increased by $3.9$10.5 million, or 45.7%56.8%, to approximately $12.4$29.0 million for the sixnine months ended March 31,June 30, 2020 from $8.5$18.5 million for the sixnine months ended March 31,June 30, 2019. The increase was primarily a result of the increase in same-store sales, process improvements and additional revenue attributable to the fiscal year 2019 Acquisitions. We remain very focused on improving sales of finance & insurance products throughout our dealer network and implementing best practices at acquired dealer groups and existing stores. Finance & insurance products increased as a percentage of total revenue to 3.6%3.9% in the sixnine months ended March 31,June 30, 2020 from 3.0%3.3% for the sixnine months ended March 31,June 30, 2019. Since finance & insurance income is fee-based, we do not incur any related cost of sale. Finance & insurance income is recorded net of related fees, including fees charged back due to any early cancellation of loan or insurance contracts by a customer.
Service, Parts & Other Sales
Service, parts & other sales decreased by $0.7 million, or 2.7%,remained relatively flat, increasing to approximately $24.4$43.2 million for the sixnine months ended March 31,June 30, 2020 from $25.1$43.1 million for the sixnine months ended March 31,June 30, 2019. The decrease wasThis increase in service, parts & other sales is primarily due to increases in parts, fuel and storage sales, partially offset by a decrease in labor sales which was driven by the uncertainty surrounding the COVID-19 pandemic as volume dropped and we experienced partial store closures in the latter half of March 2020.sales.
Gross Profit
Overall, gross profit increased by $13.7$45.7 million, or 21.8%36.3%, to approximately $76.8$171.5 million for the sixnine months ended March 31,June 30, 2020 from $63.0$125.8 million for the sixnine months ended March 31,June 30, 2019. This increase was mainly due to our overall increase in same-store sales, primarily driven by an increase in new boat sales, as well as higher pre-owned boat sales and finance & insurance income. The increase in gross profit was also a result of an increase in the number of stores due to the fiscal year 2019 Acquisitions. Overall gross margins remained relatively flat, increasing 1030 basis points to 22.3%22.8% for the sixnine months ended March 31,June 30, 2020 from 22.2%22.5% for the sixnine months ended March 31,June 30, 2019 due to the factors noted below.
New Boat Gross Profit
New boat gross profit increased by $6.2$27.4 million, or 18.1%41.0%, to approximately $40.6$94.2 million for the sixnine months ended March 31,June 30, 2020 from $34.4$66.8 million for the sixnine months ended March 31,June 30, 2019. This increase was due to our overall increase in same-store sales and acquired stores during fiscal year 2019. New boat gross profit as a percentage of new boat revenue was 18.0%18.4% for the sixnine months ended March 31,June 30, 2020 as compared to 17.7%17.8% in the sixnine months ended March 31,June 30, 2019. The increase in new boat gross profit and gross profit margin is due primarily to a shift in the mix and size of boat models sold, the margin profile of recently acquired locations and our emphasis on expanding new boat gross profit margins, while continuing to leverage the progress we have made in previous quarters on finance and insurance.
Pre-owned Boat Gross Profit
Pre-owned boat gross profit increased by $3.6$8.0 million, or 38.8%40.2%, to approximately $12.8$27.8 million for the sixnine months ended March 31,June 30, 2020 from $9.2$19.8 million for the sixnine months ended March 31,June 30, 2019. This increase was primarily due to an overall increase in our same-store sales and acquired stores during fiscal year 2019. Pre-owned boat gross profit as a percentage of pre-owned boat revenue was 15.8%16.7% and 16.5%16.3% for the sixnine months ended March 31,June 30, 2020 and 2019, respectively. We sell a wide range of brands and sizes of pre-owned boats under different types of sales arrangements (e.g., trade-ins, brokerage, consignment and wholesale), which may cause periodic and seasonal fluctuations in pre-owned boat gross profit as a percentage of revenue. In the sixnine months ended March 31,June 30, 2020 as compared to the nine months ended June 30, 2019, we experienced a declinean increase in our gross profit margin on boats purchased or traded-in as well as consignment sales. This was partially offset by an increase in gross profit margin on wholesalepre-owned sales and a shift in product mix due in part to an increase in brokerage sales.for each of the different sales arrangements.
Finance & Insurance Gross Profit
Finance & insurance gross profit increased by $3.9$10.5 million, or 45.7%56.8%, to approximately $12.4$29.0 million for the sixnine months ended March 31,June 30, 2020 from $8.5$18.5 million for the sixnine months ended March 31,June 30, 2019. Finance & insurance income is fee-based revenue for which we do not recognize incremental expense.
Service, Parts & Other Gross Profit
Service, parts & other gross profit remained relatively flat, at $11.0decreasing by $0.2 million, or 1.1%, to $20.4 million for the sixnine months ended March 31,June 30, 2020 as compared to $10.9from $20.6 million for the sixnine months ended March 31,June 30, 2019. Service, parts & other gross profit as a percentage of service, parts & other revenue was 44.9%47.1% and 43.5%47.7% for the sixnine months ended March 31,June 30, 2020 and 2019, respectively. This increasedecrease in gross profit margin was the result of a decrease in parts gross profit margin, partially offset by increases in partsservice gross profit margin and storage and other gross profit margin, partially offset by a decrease in service gross profit margin.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased by $11.4$19.8 million, or 23.2%23.7%, to approximately $60.6$103.7 million for the sixnine months ended March 31,June 30, 2020 from $49.2$83.9 million for the sixnine months ended March 31,June 30, 2019. This increase was primarily due to the impact of acquisitions and expenses incurred to support the overall increase in same-store sales. Selling,The increase in selling, general & administrative expenses primarily consisted of a $7.5$16.0 million increase in personnel expenses $1.6 million increase in selling and administrative expenses, and $2.3a $3.4 million increase in fixed expenses. Selling, general & administrative expenses as a percentage of revenue increaseddecreased to 17.6%13.8% from 17.3%15.0% for the sixnine months ended March 31,June 30, 2020 and 2019, respectively. The increasereduction in selling, general & administrative expenses as a percentage of revenue was primarily due to increased personnel expensesmainly due to the companies acquired inincreased volume of units sold and the second halfcost reduction actions enacted following the acceleration of 2019 and commission expense, which rose with an increase in gross profit margin for the six months ended March 31, 2020 as compared to March 31, 2019. Selling, general & administrative expenses for the six months ended March 31, 2020 were not significantly reduced by the quick and decisive actions we took to reduce costs across the Company in response to the COVID-19 global pandemic.COVID-19.
Depreciation and Amortization
Depreciation and amortization expense increased $0.4$0.5 million, or 30.1%26.1%, to $1.6$2.4 million for the sixnine months ended March 31,June 30, 2020 compared to $1.2$1.9 million for the sixnine months ended March 31,June 30, 2019. The increase in depreciation and amortization expense for the sixnine months ended March 31,June 30, 2020 compared to the sixnine months ended March 31,June 30, 2019 was primarily attributable to an increase in property and equipment with shorter useful lives.
Transaction Costs
The increase in transaction costs of $2.6$2.2 million, or 353.1%192.2%, to $3.4 million for the sixnine months ended March 31,June 30, 2020 compared to $0.7$1.2 million for the sixnine months ended March 31,June 30, 2019 was primarily attributable to $2.3 million of expenses recognized in conjunction with the Offering that were not able to be capitalized.
Gain on Settlement of Contingent Consideration
Gain on settlementDuring the nine months ended June 30, 2019, we reduced our estimate of contingent consideration related to the Texas Marine, Grande Yachts, and USA Marine Sales, Inc. acquisitions in the amount of $1.7 million for the six months ended March 31, 2019 was due to an adjustment of the acquisition contingent consideration arising from a 2019 acquisition, as the performance target to receive the full payout was not fully achieved.million. There was no gain/(loss)gain on settlement of contingent consideration for the sixnine months ended March 31,June 30, 2020.
Operating Income from Operations
Operating income decreased $2.3Income from operations increased $21.4 million, or 17.0%52.9%, to $11.3$62.0 million for the sixnine months ended March 31,June 30, 2020 compared to $13.6$40.5 million for the sixnine months ended March 31,June 30, 2019. The decreaseincrease was primarily attributable to a $2.6the $45.7 million increase in transaction costsgross profit for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019, partially offset by our overall growth due to both increasesa $19.8 million increase in same-store sales andselling, general & administrative expenses during the fiscal year 2019 Acquisitions.same period.
Interest Expense – Floor Plan
Interest expense – floor plan increased $1.2$0.8 million, or 29.7%11.2%, to $5.2$7.5 million for the sixnine months ended March 31,June 30, 2020 compared to $4.0$6.7 million for the sixnine months ended March 31,June 30, 2019 and was primarily attributable to a $31.0$22.8 million increase in the average outstanding borrowings on our Inventory Financing Facility as of March 31,for the nine months ended June 30, 2020 compared to March 31, 2019 as a result of our same-store sales growth and stores acquired in fiscal yearthe nine months ended June 30, 2019.
Interest Expense – Other
The increase in interest expense – other of $1.8$3.0 million, or 70.9%68.3%, to $4.3$7.4 million for the sixnine months ended March 31,June 30, 2020 compared to $2.5$4.4 million for the sixnine months ended March 31,June 30, 2019 was primarily attributable to a $49.7$42.4 million increase in our long-term debt which was primarily increased to fully redeem the preferred interest in subsidiary.subsidiary in conjunction with the Offering.
Change in Fair Value of Warrant Liability
The decrease in change in fair value of warrant liability of $8.4$2.0 million, or 110.1%72.2%, to $(0.8) million income for the sixnine months ended March 31,June 30, 2020 compared to $7.6$(2.8) million expenseincome for the sixnine months ended March 31,June 30, 2019 was primarily attributable to an overall change in the enterprise value of the Company due to a declinechange in the implied value of other market participants.
Other (Income) Expense, (Income), Net
The decrease in other income of $0.3$0.2 million for the sixnine months ended March 31,June 30, 2020 compared to the sixnine months ended March 31,June 30, 2019 was primarily attributable to a $0.2$0.1 million increase in loss on disposal of property and equipment for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019.
Income Tax Expense
The $0.5$5.2 million increase in income tax expense for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019 was the result of the Offering and the taxability of OneWater Inc as a corporation.
Net Income (Loss)
Net income increased by $2.4$10.3 million to net income of $1.9$42.5 million for the sixnine months ended March 31,June 30, 2020 compared to a net loss of $(0.4)$32.2 million for the sixnine months ended March 31,June 30, 2019. The increase was primarily attributable to the $8.4$45.7 million decreaseincrease in change in fair value ofgross profit for the warrant liability in the sixnine months ended March 31,June 30, 2020 compared to the six months ended March 31,June 30, 2019. The increase was partially offset by increasesa $19.8 million increase in interest expense – floor plan, interest expense-otherselling, general and transactions costs. Additionally, we recorded $0.5administrative expenses for the nine months ended June 30, 2020 compared to the nine months ended June 30, 2019, as well as a $5.2 million increase in income tax expense and a $3.0 million increase in interest expense - other for the six months ended March 31, 2020, our first period with taxability as a corporation.same period.
Comparison of Non-GAAP Financial Measure
We view Adjusted EBITDA as an important indicator of performance. We define Adjusted EBITDA as net income (loss) before interest expense – other, income taxes, depreciation and amortization and other (income) expense, further adjusted to eliminate the effects of items such as the change in the fair value of warrants, gain (loss) on settlement of contingent consideration and transaction costs.
Our board of directors,Board, management team and lenders use Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and other items (such as the fair value adjustment of the warrants, gain (loss) on settlement of contingent consideration and transaction costs) that impact the comparability of financial results from period to period. We present Adjusted EBITDA because we believe it provides useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Adjusted EBITDA is not a financial measure presented in accordance with GAAP. We believe that the presentation of this non-GAAP financial measure will provide useful information to investors and analysts in assessing our financial performance and results of operations across reporting periods by excluding items we do not believe are indicative of our core operating performance. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Our non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. You are encouraged to evaluate each of these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
The following tables present a reconciliation of net income (loss) to Adjusted EBITDA, which is the most directly comparable GAAP measure for the periods presented.
Three Months Ended March 31,June 30, 2020, Compared to Three Months Ended March 31,June 30, 2019
| | Three months ended March 31 | | | Three months ended June 30 | |
Description | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | ($ in thousands) | | | ($ in thousands) | |
Net income (loss) | | $ | 2,979 | | | $ | (2,951 | ) | |
Net income | | | $ | 40,622 | | | $ | 32,680 | |
Interest expense – other | | 2,457 | | | 1,294 | | | 3,082 | | | 1,869 | |
Income taxes | | 472 | | | - | | | 4,737 | | | - | |
Depreciation and amortization | | 791 | | | 585 | | | 824 | | | 691 | |
Gain on settlement of contingent consideration | | - | | | (1,655 | ) | | - | | | (19 | ) |
Transaction costs (1) | | 2,925 | | | 444 | | | 31 | | | 419 | |
Change in fair value of warrant liability (2) | | - | | | 12,295 | | | - | | | (10,373 | ) |
Other expense (income), net | | | 289 | | | | (45 | ) | |
Other (income) expense, net | | | | (61 | ) | | | 17 | |
Adjusted EBITDA | | $ | 9,913 | | | $ | 9,967 | | | $ | 49,235 | | | $ | 25,284 | |
| (1) | Consists of transaction costs related to the fiscal year 2019 Acquisitions and costs related to the Offering. |
| (2) | Represents the non-cash expense recognized during the period for the change in the fair value of the LLC Warrants, which were accounted for as a liability on our balance sheets. |
Adjusted EBITDA remained relatively flat at $9.9 million for the three months ended March 31, 2020 compared to $10.0 million for the three months ended March 31, 2019. The decrease in Adjusted EBITDA resulted from an increase in selling, general & administrative expense and interest expense – floor plan, partially offset by an increase in gross profit.
Six Months Ended March 31, 2020, Compared to Six Months Ended March 31, 2019
| | Six months ended March 31 | |
Description | | 2020 | | | 2019 | |
| | ($ in thousands) | |
Net income (loss) | | $ | 1,912 | | | $ | (441 | ) |
Interest expense – other | | | 4,310 | | | | 2,522 | |
Income taxes | | | 472 | | | | - | |
Depreciation and amortization | | | 1,551 | | | | 1,192 | |
Gain on settlement of contingent consideration | | | - | | | | (1,655 | ) |
Transaction costs (1) | | | 3,362 | | | | 742 | |
Change in fair value of warrant liability (2) | | | (771 | ) | | | 7,600 | |
Other expense (income), net | | | 167 | | | | (90 | ) |
Adjusted EBITDA | | $ | 11,003 | | | $ | 9,870 | |
| (1) | Consists of transaction costs related to the fiscal year 2019 Acquisitions and costs related to the Offering. |
| (2) | Represents the non-cash expense recognized during the period for the change in the fair value of the LLC Warrants, which were accounted for as a liability on our balance sheets. |
Adjusted EBITDA was
$11.0$49.2 million for the
sixthree months ended
March 31,June 30, 2020 compared to
$9.9$25.3 million for the
sixthree months ended
March 31,June 30, 2019. The increase in Adjusted EBITDA resulted
primarily from our
4.7%43.9% increase in same-store sales growth for the
sixthree months ended
March 31,June 30, 2020 as compared to the
sixthree months ended
March 31,June 30, 2019, combined with the results of the fiscal year 2019
Acquisitions.Acquisitions and our ability to increase gross profit margins and control selling, general and administrative expenses.Nine Months Ended June 30, 2020, Compared to Nine Months Ended June 30, 2019
| | Nine months ended June 30 | |
Description | | 2020 | | | 2019 | |
| | ($ in thousands) | |
Net income | | $ | 42,534 | | | $ | 32,239 | |
Interest expense – other | | | 7,392 | | | | 4,391 | |
Income taxes | | | 5,209 | | | | - | |
Depreciation and amortization | | | 2,375 | | | | 1,883 | |
Gain on settlement of contingent consideration | | | - | | | | (1,674 | ) |
Transaction costs (1) | | | 3,393 | | | | 1,161 | |
Change in fair value of warrant liability (2) | | | (771 | ) | | | (2,773 | ) |
Other expense (income), net | | | 106 | | | | (73 | ) |
Adjusted EBITDA | | $ | 60,238 | | | $ | 35,154 | |
(1) | Consists of transaction costs related to the fiscal year 2019 Acquisitions and costs related to the Offering. |
(2) | Represents the non-cash expense recognized during the period for the change in the fair value of the LLC Warrants, which were accounted for as a liability on our balance sheets. |
Adjusted EBITDA was $60.2 million for the nine months ended June 30, 2020 compared to $35.2 million for the nine months ended June 30, 2019. The increase in Adjusted EBITDA resulted from our 24.1% increase in same-store sales growth for the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019, combined with the results of the fiscal year 2019 Acquisitions and our ability to increase gross profit margins and control selling, general and administrative expenses.
Seasonality
Our business, along with the entire recreational boating industry, is highly seasonal, and such seasonality varies by geographic market. With the exception of Florida, we generally realize significantly lower sales and higher levels of inventories, and related floor plan borrowings, in the quarterly periods ending December 31 and March 31. Revenue generated from our stores in Florida serves to offset generally lower winter revenue in our other states and enables us to maintain a more consistent revenue stream. The onset of the public boat and recreation shows in January stimulates boat sales and typically allows us to reduce our inventory levels and related floor plan borrowings throughout the remainder of the fiscal year. The impact of seasonality on our results of operations could be materially impacted based on the location of our acquisitions. For example, our operations could be substantially more seasonal if we acquire dealer groups that operate in colder regions of the United States. Our business is also subject to weather patterns, which may adversely affect our results of operations. For example, prolonged winter conditions, reduced rainfall levels or excessive rain, may limit access to boating locations or render boating dangerous or inconvenient, thereby curtailing customer demand for our products and services. In addition, unseasonably cool weather and prolonged winter conditions may lead to a shorter selling season in certain locations. Hurricanes and other storms could result in disruptions of our operations or damage to our boat inventories and facilities, as has been the case when Florida and other markets were affected by hurricanes. We believe our geographic diversity is likely to reduce the overall impact to us of adverse weather conditions in any one market area.
Liquidity and Capital Resources
Overview
Our cash needs are primarily for growth through acquisitions and working capital to support our retail operations, including new and pre-owned boat and related parts inventories and off-season liquidity. We routinely monitor our cash flow to determine the amount of cash available to complete acquisitions of dealer groups and stores. We monitor our inventories, inventory aging and current market trends to determine our current and future inventory and related floorplan financing needs. We expect to take a temporary pause on acquisitions until the current macroeconomic environment stabilizes. Additionally, we are temporarily pausing any non-essential capital expenditures. Based on current facts and circumstances, we believe we will have adequate cash flow coupled with available borrowing capacity,from operations, borrowings under our credit facilities and proceeds from any future issuances of debt or equity, to fund our current operations and essential capital expenditures for the next twelve months.
Cash needs for acquisitions have historically been financed with our Term and Revolver Credit Facility and cash generated from operations. Our ability to utilize the Term and Revolver Credit Facility to fund operations depends upon Adjusted EBITDA and compliance with covenants of the Term and Revolver Credit Facility. We expect to continue to be subject to financial covenants under the Term and Revolver Credit Facility. Cash needs for inventory have historically been financed with our Inventory Financing Facility. Our ability to fund inventory purchases and operations depends on the collateral levels and our compliance with the covenants of the Inventory Financing Facility. As of March 31,June 30, 2020, we were in compliance with all covenants under the Term and Revolver Credit Facility and the Inventory Financing Facility.
Effective July 22, 2020 (the “Closing Date”), we and certain of our subsidiaries terminated and repaid all indebtedness outstanding under the Term and Revolver Credit Facility in accordance with its terms and entered into the Credit Agreement (the “Refinanced Credit Facility”) with Truist Bank as administrative agent, collateral agent, swingline lender and issuing bank, SunTrust Robinson Humphrey, Inc. and Synovus Bank as joint lead arrangers and joint bookrunners, Synovus Bank as documentation agent, and the lenders from time to time party thereto (collectively, the “Refinancing”). The proceeds of the term loan portion of the Refinanced Credit Facility, together with cash on the Company’s balance sheet, have been used (i) to pay for the Refinancing, (ii) to pay the fees and expenses incurred in connection with the Refinancing and (iii) for working capital and general corporate purposes. We are subject to certain financial and non-financial covenants under the Refinanced Credit Facility.
Cash Flows
Analysis of Cash Flow Changes Between the SixNine Months Ended March 31,June 30, 2020 and 2019
The following table summarizes our cash flows for the periods indicated:
Description | | Six Months ended March 31, | | |
| | Nine Months ended June 30, | |
| | | | | | | | | | |
Description | | 2020 | | | 2019 | | | Change | | | 2020 | | | 2019 | | | Change | |
($ in thousands) | | ($ in thousands) | |
Net cash used in operating activities | | $ | (47,080 | ) | | $ | (78,470 | ) | | $ | 31,390 | | |
Net cash provided by (used in) operating activities | | | $ | 152,596 | | | $ | (23,024 | ) | | $ | 175,620 | |
Net cash used in investing activities | | (1,818 | ) | | (5,573 | ) | | 3,755 | | | (2,307 | ) | | (7,989 | ) | | 5,682 | |
Net cash provided by financing activities | | | 58,374 | | | | 85,307 | | | | (26,933 | ) | |
Net cash (used in) provided by financing activities | | | | (70,712 | ) | | | 41,690 | | | | (112,402 | ) |
Net change in cash | | $ | 9,476 | | | $ | 1,264 | | | $ | 8,212 | | | $ | 79,577 | | | $ | 10,677 | | | $ | 68,900 | |
Operating Activities. Net cash provided by operating activities was $152.6 million for the nine months ended June 30, 2020 compared to net cash used in operating activities was $47.1of $23.0 million for the sixnine months ended March 31, 2020 compared to $78.5 million for the six months ended March 31,June 30, 2019. The $31.4$175.6 million decreaseincrease in cash used inprovided by operating activities was primarily attributable to a $30.8$149.2 million decreaseincrease in the change in inventory, and a $10.4$14.7 million decreaseincrease in the change in accounts receivablepayable, a $8.7 million increase in the change in other payables and accrued expenses and a $10.3 million increase in net income for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 20, 2019. These amounts were partially offset by an $8.4a $22.2 million decrease in the change in fair value of the warrant liabilityaccounts receivable for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019.
Investing Activities. Net cash used in investing activities was $1.8$2.3 million for the sixnine months ended March 31,June 30, 2020 compared to $5.6$8.0 million for the sixnine months ended March 31,June 30, 2019. The $3.8$5.7 million decrease in cash used forin investing activities was primarily attributable to a $2.1 million decrease in cash used in acquisitions, a $2.0 million decrease in purchases of property and equipment and construction in process and a $1.5 million increase in proceeds on disposal of property and equipment for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019.
Financing Activities. Net cash used in financing activities was $70.7 million for the nine months ended June 30, 2020 compared to net cash provided by financing activities was $58.4of $41.7 million for the sixnine months ended March 31, 2020 compared to $85.3 million for the six months ended March 31,June 30, 2019. The $26.9$112.4 million decrease in financing cash flow was primarily attributable to an $89.7$88.0 million increase in the distributions to redeemable preferred interest members, and a $12.4$98.6 million decrease in net borrowings on our Inventory Financing Facility and a $12.4 million increase in payments on long-term debt, partially offset by $59.2 million in proceeds from issuance of Class A common stock sold in the Offering, net of offering costs, and a $28.2$37.2 million increase in proceeds on long-term debt for the sixnine months ended March 31,June 30, 2020 as compared to the sixnine months ended March 31,June 30, 2019.
Debt Agreements
Term and Revolver Credit Facility
On October 28, 2016, OneWater LLC and certain of our subsidiaries entered into a Credit and Guaranty Agreement with OWM BIP Investor, LLC, as a lender, Goldman Sachs Specialty Lending Group, L.P., as a lender, administrative agent and collateral agent, and various lender parties thereto (as amended, the “GS/BIP Credit Facility”). The as amended terms of the GS/BIP Credit Facility immediately preceding the Offering consisted of an up to $60.0 million multi-draw term loan facility and a $5.0 million revolving line of credit.
On February 11, 2020, in connection with the Offering, OneWater Inc entered into the Term and Revolver Credit Facility which, among other things, modified the terms of the GS/BIP Credit Facility to (i) increase the Revolving Facility from $5.0 million to $10.0 million, (ii) increase the maximum available under the Multi-Draw Term Loan from $60.0 million to $100.0 million, (iii) provide an uncommitted and discretionary multi-draw term loan accordion feature of up to $20.0 million, (iv) amend the repayment schedule of the Multi-Draw Term Loan to commence on March 31, 2022 (v) amend the scheduled maturity date of the Revolving Facility and Multi-Draw Term Loan to be February 11, 2025 and (vi) remove OWM BIP Investor, LLC as a lender. The Term and Revolver Credit Facility will bearbore interest at a rate that is equal to, at OneWater Inc’s option, (a) LIBOR for such interest period (subject to a 1.50% floor) plus an applicable margin of up to 7.00%, subject to step-downs to be determined based on certain financial leverage ratio measures, or (b) a base rate (subject to a 4.50% floor) plus an applicable margin of up to 6.00%, subject to step-downs to be determined based on certain financial leverage ratio measures. Interest will bewas payable quarterly for base rate borrowings and up to quarterly for LIBOR borrowings. The Term and Revolver Credit Facility includes the option for the Company to defer cash payments of interest for twelve months and add the accrued interest to the outstanding principal of the note payable. The election of this feature was made forduring the periodthree months ended March 31, 2020, and as a result,the interest rate will be increased by 2.0% for the corresponding twelve months.
The Company immediately upon closing of the agreement borrowed an additional $35.3 million on the Multi-Draw Term Loan immediately upon closing of the agreement to bring our total indebtedness to $100 million. Additionally, during the three months ended March 31, 2020, the Company elected the option to defer cash interest payments for twelve months. As of March 31,June 30, 2020, we had not drawn down on our Revolving Facility. We were in compliance with all covenants under the Term and Revolver Credit Facility as of June 30, 2020.
On July 22, 2020, the Company and certain of its subsidiaries repaid in full all indebtedness outstanding under the then-existing credit facility evidenced by the Term and Revolver Credit Facility, and in connection with such repayment, all commitments thereunder were terminated and all guarantees and security interests granted in connection therewith were released. See “—Refinanced Credit Facility” for additional information.
Refinanced Credit Facility
Effective July 22, 2020, we and certain of our subsidiaries entered into the Refinanced Credit Facility. The Refinanced Credit Facility provides for a $30.0 million revolving credit facility that may be used for revolving credit loans (including up to $5.0 million in swingline loans) and up to $5.0 million in letters of credit from time to time, and a $80.0 million term loan, which was advanced in full on July 22, 2020. Subject to certain conditions, the available amount under the revolving credit facility and the term loans may be increased by $50.0 million in the aggregate. The revolving credit facility matures on July 22, 2025. The term loan is repayable in installments beginning on March 31, 2020.2021, with the remainder due on July 22, 2025. There were no borrowings outstanding under the revolving credit facility on the Closing Date.
Borrowings under the Refinanced Credit Facility bear interest, at the Company’s option, at either (a) a base rate (the “Base Rate”) equal to the highest of (i) the prime rate (as announced by Truist Bank from time to time), (ii) the Federal Funds Rate, as in effect from time to time, plus 0.50%, (iii) the Adjusted LIBO Rate (defined below) determined on a daily basis for an interest period of one month, plus 1.00%, or (iv) 1.75%, plus an applicable margin of up to 2.00%, or (b) the rate per annum obtained by dividing (i) the London Interbank Offered Rate for such interest period by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage (the “Adjusted LIBO Rate”) plus an applicable margin of up to 3.00%. Interest on swingline loans shall be the Base Rate plus an applicable margin of up to 2.00%. All applicable interest margins are subject to stepdowns based on certain consolidated leverage ratio measures.
The Refinanced Credit Facility is subject to certain financial covenants related to the maintenance of a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio.
The proceeds of the term loan portion of the Refinanced Credit Facility, together with cash on the Company’s balance sheet, have been used (i) to pay for the Refinancing, (ii) to pay the fees and expenses incurred in connection with the Refinancing and (iii) for working capital and general corporate purposes.
Inventory Financing Facility
On June 14, 2018, OneWater LLC and certain of our subsidiaries entered into the Fourth Amended and Restated Inventory Financing Agreement with Wells Fargo Commercial Distribution Finance, LLC and various lender parties thereto (“Wells Fargo”) (as subsequently amended and restated, the ‘‘Inventory Financing Facility’’ and, together with the Term and Revolver Credit Facility, the ‘‘Credit Facilities’’). On September 21, 2018, OneWater LLC and certain of our subsidiaries entered into the First Amendment to the Fourth Amended and Restated Inventory Financing Agreement which, among other things, increased the maximum amount of borrowing available under the Inventory Financing Facility from $200.0 million to $275.0 million. On April 5, 2019, OneWater LLC and certain of its subsidiaries further amended the Inventory Financing Facility to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from $275.0 million to $292.5 million. On November 26, 2019, OneWater LLC and certain of its subsidiaries entered into the Fifth Amended and Restated Inventory Financing Agreement with Wells Fargo to, among other things, increase the maximum amount of borrowing available under the Inventory Financing Facility from $292.5 million to $392.5 million.
Effective February 11, 2020, in connection with the Offering, the Company and certain of its subsidiaries entered into the Sixth Amended and Restated Inventory Financing FacilityAgreement with Wells Fargo which amended and restated the Fifth Amended and Restated Inventory Financing Agreement, dated as of November 26, 2019, to, among other things, permit certain payments and transactions contemplated by or in connection with the Offering, including payments under the Tax Receivable Agreement. The maximum amount of borrowing available, interest rates and the termination date of the Inventory Financing Facility remained unchanged.
The interest rate for amounts outstanding under the Inventory Financing Facility is calculated using the one month LIBOR plus an applicable margin of 2.75% to 5.00% for new boats and at the new boat rate plus 0.25% for pre-owned boats. Loans will be extended from time to time to enable us to purchase inventory from certain manufacturers and to lease certain boats and related parts to customers. The applicable financial terms, curtailment schedule and maturity for each loan will be set forth in separate program terms letters entered into from time to time. The collateral for the Inventory Financing Facility consists primarily of our inventory that is financed through the Inventory Financing Facility and related assets, including accounts receivable, bank accounts, and proceeds of the foregoing, and excludes the collateral that underlies the Term and Revolver Credit Facility.
As of March 31,June 30, 2020 and September 30, 2019, our indebtedness associated with financing our inventory under the Inventory Financing Facility totaled approximately $294.3$176.1 million and $225.4 million, respectively. Certain of our manufacturers enter into independent agreements with the lenders to the Inventory Financing Facility, which results in a lower effective interest rate charged to us for borrowings related to the products by such manufacturer. As of March 31,June 30, 2020 and September 30, 2019, the effective interest rate on the outstanding short-term borrowings under the Inventory Financing Facility was approximately 3.5%4.1% and 4.9%, respectively. As of March 31,June 30, 2020 and September 30, 2019, our additional available borrowings under our Inventory Financing Facility were approximately $98.2$216.4 million and $67.1 million, respectively, based upon the outstanding borrowings and the maximum facility amount. The aging of our inventory limits our borrowing capacity as defined curtailments reduce the allowable advance rate as our inventory ages. As of March 31,June 30, 2020, we were in compliance with all covenants under the Inventory Financing Facility.
On July 22, 2020, the Company entered into the First Amendment (the “First Amendment”) to the Inventory Financing Facility. The First Amendment amended the Inventory Financing Facility, to, among other things, address the Refinancing, permit the amount of indebtedness allowed under the Refinanced Credit Facility to be $160.0 million (which includes the $50.0 increase facility under the Refinanced Credit Facility), permit the payment of fees and expenses in connection with the termination of the Term and Revolver Credit Facility and the payment of present and future transaction costs incurred in connection with the negotiation, closing and ongoing administration of the Refinanced Credit Facility.
OWAO Preferred Units
On October 28, 2016, Goldman and Beekman entered into a Subscription Agreement with us and certain of our subsidiaries, pursuant to which Goldman and Beekman purchased preferred units in OpcoOWAO (“OpcoOWAO Preferred Units”).
Goldman and Beekman purchased 45,000 and 23,000 OpcoOWAO Preferred Units, representing 66.2% and 33.8% of the total OpcoOWAO Preferred Units outstanding for purchase prices of approximately $44.4 million and $22.7 million, respectively. The holders of the OpcoOWAO Preferred Units (“OpcoOWAO Preferred Holders”) were entitled to (i) a ‘‘preferred return’’ at a rate of 10% per annum, compounded quarterly, on (a) the aggregate amount of capital contributions made, minus any prior distributions (the ‘‘unreturned preferred amount’’), plus (b) any unpaid preferred returns for prior periods, and (ii) a ‘‘preferred target distribution’’ at a rate of 10% per annum on the unreturned preferred amount multiplied by (a) 40% for the calendar quarters ending December 31, 2018, March 31, 2019, June 30, 2019 and September 30, 2019, (b) 60% for each calendar quartersquarter ending December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020, and (c) 80% for each calendar quarter thereafter. The preferred target distribution proportionally adjusts the amount of capital contribution of each OpcoOWAO Preferred Holder. OpcoOWAO and certain affiliates were required to meet certain financial covenants, including maintenance of certain leverage ratios. Failure by OpcoOWAO to pay the preferred return and preferred target distribution, failure to meet certain financial covenants, or repayment in full or acceleration of the obligations under the GS/BIP Credit Facility would permit a majority of the OpcoOWAO Preferred Holders to require us to purchase all OpcoOWAO Preferred Units equal to the unreturned preferred amount plus any unpaid preferred returns (the ‘‘redemption amount’’). As of September 30, 2019, the redemption amount of the OpcoOWAO Preferred Units held by Goldman and Beekman in the aggregate was $87.3 million, exclusive of $1.3 million in issuance costs.
On February 11, 2020, in connection with the Offering, we used the net proceeds from the Offering, together with cash on hand and borrowings under the Term and Revolver Credit Facility, to redeem all of the shares of OpcoOWAO Preferred Units held by Goldman and Beekman for $89.2 million.For the three months ended March 31, 2020, we recorded $1.1 million in accretion of the discount and amortization of the issuance costs associated with redeemable preferred interest in subsidiary, which includes an acceleration of the remaining discount and issuance costs balances outstanding at the redemption date.
Notes Payable
Acquisition Notes Payable. In connection with certain of our acquisitions of dealer groups, we have entered into notes payable agreements with the acquired entities to finance these acquisitions. As of March 31,June 30, 2020, our indebtedness associated with our 98 acquisition notes payable totaled an aggregate of $13.9$13.0 million with a weighted average interest rate of 5.7%5.8% per annum. As of March 31,June 30, 2020, the principal amount outstanding under these acquisition notes payable ranged from $0.8 million to $3.1 million, and the maturity dates ranged from JuneJuly 1, 2020 to February 1, 2022.
Commercial Vehicles Notes Payable. Since 2015, we have entered into multiple notes payable with various commercial lenders in connection with our acquisition of certain vehicles utilized in our retail operations. Such notes bear interest ranging from 0.0% to 8.9% per annum, require monthly payments of approximately $77,000,$75,000, and mature on dates between AprilJuly 2020 to February 2025.May 2026. As of March 31,June 30, 2020, we had $2.3$2.5 million outstanding under the commercial vehicles notes payable.
SBA Loans
Between April 20, 2020 and April 22, 2020, certain subsidiaries of the Company entered into separate promissory notes with Hancock Whitney Bank providing for loans under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), administered by the U.S. Small Business Administration (each, an “SBA Loan” and collectively, the “SBA Loans”). Total amounts received were approximately $14.1 million in the aggregate.
Based on its operating results through April 30, 2020, the Company determined that the impact of COVID-19 was not affecting its performance to the extent expected. While the future impact of COVID-19 remains unknown, initial sales trends suggest the impact on the Company will not be as severe as initially believed at this time. Accordingly, the Company elected to return the money received under the CARES Act on May 6, 2020.
Tax Receivable Agreement
The Tax Receivable Agreement generally provides for the payment by OneWater Inc to certain of the OneWater Unit Holders (as defined below) of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) that OneWater Inc actually realizes (or is deemed to realize in certain circumstances) in periods after the Offering as a result of certain tax basis increases and certain tax benefits attributable to imputed interest. OneWater Inc will retain the benefit of the remaining 15% of these net cash savings. To the extent OneWater LLC has available cash and subject to the terms of any current or future debt or other agreements, the OneWater LLC Agreement will require OneWater LLC to make pro rata cash distributions to OneWater Unit Holders, including OneWater Inc, in an amount sufficient to allow OneWater Inc to pay its taxes and to make payments under the Tax Receivable Agreement. We generally expect OneWater LLC to fund such distributions out of available cash. However, except in cases where OneWater Inc elects to terminate the Tax Receivable Agreement early, the Tax Receivable Agreement is terminated early due to certain mergers or other changes of control or OneWater Inc has available cash but fails to make payments when due, generally OneWater Inc may elect to defer payments due under the Tax Receivable Agreement if it does not have available cash to satisfy its payment obligations under the Tax Receivable Agreement or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest. In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, OneWater Inc realizes in respect of the tax attributes subject to the Tax Receivable Agreement. In the case of such an acceleration, where applicable, we generally expect the accelerated payments due under the Tax Receivable Agreement to be funded out of the proceeds of the change of control transaction giving rise to such acceleration. OneWater Inc intends to account for any amounts payable under the Tax Receivable Agreement in accordance with ASC Topic 450, Contingencies.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements, except for operating leases and purchase commitments under supply agreements entered into in the normal course of business.
Recent Accounting Pronouncements
As an ‘‘emerging growth company’’ (‘‘EGC’’), the Jumpstart Our Business Startups Act (‘‘JOBS Act’’) allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.
In May 2014, the FASB issued Accounting Standards Update (‘‘ASU’’) No. 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606)’’ (‘‘ASU 2014-09’’), as subsequently amended, a converged standard on revenue recognition. The new pronouncement requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfil a contract with a customer, as well as enhanced disclosure requirements. ASU 2014-09 is effective for a public company’s annual reporting periods beginning after December 15, 2017. As an EGC the Company has elected to adopt ASU 2014-09 following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company adopted this update on October 1, 2019 using the modified retrospective approach applied only to contracts not completed as of the date of adoption, with no restatement of comparative periods. No adjustment was made to retained earnings as of the adoption date and no adjustments were made to the Company’s condensed consolidated financial statements as the adoption of the update did not have a material impact.
In August 2016, the FASB issued ASU 2016-15, ‘‘Statement of Cash Flows (Topic 230)’’ (‘‘ASU 2016-15’’). Additionally, in November 2016, the FASB issued ASU 2016-18, ‘‘Statement of Cash Flows (Topic 230)’’ (‘‘ASU 2016-18’’). These updates require organizations to reclassify certain cash receipts and cash payments within the Statement of Cash Flows and modify the classification and presentation of restricted cash. These ASU’s are effective for a public company’s annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. As an EGC, the Company has elected to adopt these ASU’s following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, including interim reporting periods within fiscal years beginning after December 15, 2019. The Company adopted this update on October 1, 2019 and it did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, ‘‘Business Combinations (Topic 805)’’ (‘‘ASU 2017-01’’). This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. As an EGC the Company has elected to adopt ASU 2017-01 following the effective dates for private companies beginning with annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company adopted this update on October 1, 2019 and it did not impact the consolidated financial statements.
Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
Interest Rate Risk
Our Inventory Financing Facility exposes us to risks caused by fluctuations in interest rates. The interest rate on our Inventory Financing Facility for new boats is calculated using the one-month LIBOR rate plus an applicable margin. Based on an outstanding balance of $294.3$176.1 million as of March 31,June 30, 2020, a change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $2.9$1.8 million. We do not currently hedge our interest rate exposure. This hypothetical increase does not take into account a corresponding increase to the programs that we may receive from our manufacturers or management’s ability to curtail inventory and related floor plan balances, both of which would reduce the impact of the interest rate increase.
Foreign Currency Risk
We purchase certain of our new boat and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. dollars, our business is subject to foreign exchange rate risk that may influence manufacturers’ ability to provide their products at competitive prices in the United States. To the extent that we cannot recapture this volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the three months ended March 31,June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Due to the nature of our business, we are, from time to time, involved in other routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. In the opinion of our management, none of the pending litigation, disputes or claims against us, if decided adversely, would have a material adverse effect on our financial condition, cash flows or results of operations.
In addition to the risks discussed below and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Final Prospectus, which could materially affect our businesses, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. There have been no material changes in our risk factors from those described in the Final Prospectus, other than as discussed below.
The ongoing COVID-19 pandemic may adversely affect our operations and our revenues, results of operations and financial condition.
Our business and operations could be materially adversely affected by the widespread outbreak of a contagious disease, including the recent COVID-19 pandemic. COVID-19 has spread in many of the geographic areas in which we operate. National, state and local governments in affected regions have implemented and may continue to implement safety precautions, including shelter in place orders, travel restrictions, business closures, cancellations of public gatherings, including boat shows, and other measures. These measures have affected our ability to sell and service boats, required us to temporarytemporarily close or partially close certain locations, decrease staffing in certain locations, and may require additional closures or staffing changes in the future. Organizations and individuals are also taking additional steps to avoid or reduce infection, including limiting travel, staying home, working from home and limiting participation in certain leisure activities.
We continue to monitor federal, state and local government recommendations and have made modifications to our normal operations as a result of COVID-19. IfWhile demand for our products has generally increased throughout the course of the COVID-19 pandemic to date, which we believe is due to the cancellation of travel and other activities that traditionally compete with boating and due to consumers’ desire for outdoor, socially-distanced recreational activities, if the negative economic effects of COVID-19 continue for a prolonged period of time, it could lead to a reduction in demand for our products, which wouldproducts. Such reductions in demand could adversely affect our results of operations. Additionally, disruptions in the capital markets, as a result of the pandemic, may also adversely affect our ability to access capital and additional liquidity. Theliquidity.The COVID-19 pandemic may also lead to disruptions in our supply chain, including our ability to obtain boats and parts from our suppliers, and labor shortages. DueIt is possible that an inventory shortage could also occur as a result of the COVID-19 pandemic and its effects on, among other things, operations and consumer demand. While we previously announced our decision to pause our acquisition strategy due to the current macroeconomic environment,COVID-19 pandemic, given our financial results for the three months ended June 30, 2020, we are temporarily pausing acquisitionsrecommencing our acquisition strategy and non-essential capital expenditures. These measures are disrupting normal business operations and have had, and may continue to have, significant negative impacts on our business, other businesses and financial markets worldwide. While we are implementing changes to mitigate the impact of COVID-19 on our business, itopportunistically evaluating future acquisitions. It is not possible, at this time, to estimate the entirety of the effect that COVID-19 will have on our business, customers, suppliers or other business partners.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Not Applicable.
None.The Board has determined that it intends to hold the Company’s Annual Meeting of Stockholders (the “2021 Annual Meeting”) on February 23, 2021 or shortly thereafter, at a time and location to be specified in the Company’s proxy statement for the 2021 Annual Meeting (the “Proxy Statement”). The record date for determining stockholders eligible for notice of, and to vote at, the 2021 Annual Meeting has not yet been set by the Board and will also be included in the Proxy Statement.
Pursuant to Rule 14a-8 (“Rule 14a-8”) under the Exchange Act, stockholders of the Company who wish to have a proposal considered for inclusion in the Company’s proxy materials for the 2021 Annual Meeting pursuant to Rule 14a-8 must ensure that their proposal is received by the Secretary of the Company at 6275 Lanier Islands Parkway, Buford, Georgia 30518 by September 15, 2020, which the Company has determined to be a reasonable time before it expects to begin to print and send its proxy materials. Rule 14a-8 proposals must also comply with the requirements of Rule 14a-8 and other applicable laws in order to be eligible for inclusion in the Company’s proxy materials for the 2021 Annual Meeting. The September 15, 2020 deadline will also apply in determining whether notice of a stockholder proposal is timely for purposes of exercising discretionary voting authority with respect to proxies under Rule 14a-4(c) under the Exchange Act.
In addition, in accordance with the requirements contained in the Company’s Amended and Restated Bylaws (the “Bylaws”), stockholders who wish to bring business before the 2021 Annual Meeting outside of Rule 14a-8 or to nominate a person for election as a director must ensure that written notice of such proposal (including all of the information specified in the Bylaws) is received by the Secretary of the Company at the address specified above no earlier than close of business on October 9, 2020 and no later than the close of business on November 8, 2020. Any such proposal must meet the requirements set forth in the Bylaws in order to be brought before the 2021 Annual Meeting.